Indiana. The Hoosier State. Inspiration for the “Hoosier Beach Boogie” line dance. Home of Larry Bird. The Hick from French Lick. Bird won three NBA championships (in 1981, 1984, and 1986) with the Boston Celtics and won two NBA Finals MVP Awards. Bird won three consecutive regular season MVP awards. As of 2020, the only other players to accomplish this feat are Bill Russell and Wilt Chamberlain. Just that is enough to make this lifelong Celtics fan positively predisposed to this distinguished Red state of 6.8 million people.
There’s more to be proud about. Indiana has made some major decisions over the past 90 years:
· In 1933 it adopted the Northern cardinal (Cardinalis cardinalis) as its state bird
· In 1952 it adopted the Peony (Paeonia) as its state flower
· In 2018 it adopted Say’s firefly (Pyractomena angulate) as its state insect
· In 2022 it adopted the Mastodon (Mammut americanum) as its state fossil
All excellent choices except for the fossil where there is a better one, but I’ll get to that later.
First, I want to acknowledge the brave and bold decision made in January of this year by passing the 12-page House Bill No. 1008 (HB 1008), effective July 1, 2023, whose intriguingly vague and innocuous short description is “Pension investments.” Credit for this nuanced rhetoric probably goes to the bill’s main author, Rep. Ethan Manning (R-District 23). In contrast, consider HB 1503 “Regulation of sexually oriented businesses” sponsored by Rep. Manning’s co-author Rep. Mike Speedy (R-District 90) and HB 1263 “Medical marijuana” sponsored by his other co-author, Rep. Shane Lindauer (R-District 63). Now these are bill names that leap out and grab your attention!
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But enough of the tease on why I’m so excited about “Pension investments.” By now I hope you share my enthusiasm for the Hoosier state and want to learn more about HB 1008. For those of you who haven’t heard of it, this bill is yet another valiant Red state effort to slay that nefarious, pesky, and hard-to-kill ESG Dragon. So hard to kill it could be the Alien .
You won’t get the boldness of this bill from the Synopsis. It’s just a bunch of anodyne legislative language. Like it says “Provides that a fiduciary, in making and supervising investments of a reserve fund of the public pension system, shall discharge the fiduciary’s duties solely in the financial interest of the participants and beneficiaries of the public pension system.” Ummm, that’s what all these fiduciaries are already doing today but why let this fact get in the way of an exciting new bill 🐥?!
The heart and soul of it is Chapter 15 “Fiduciary Duties.” Sec. 4 (a) clearly states that “’financial’ means a prudent determination by a fiduciary to have a material effect on the financial risk or the financial return of an investment.” (Duh, that’s what material ESG risk factors is all about.) It is directly followed by Sec. (b) which sternly proclaims that “The term does not include an action taken or a factor considered by a fiduciary with a purpose to further social, political, or ideological interests as set forth in Section 9 of this chapter.” I could not find a definition of social, political, or ideological and how these are different from each other. Nor did I find a single reference to “ESG.” Reps. Manning, Speedy, and Lindauer are clearly trying to break now acronymic ground with social, political, and ideological (SPI). Nice to see this verbal creativity coming into the now tiresome, but seemingly never ending, ESG debate.
I can’t tell you how pleased I was to learn about this bill! Sure, Texas passed its Section 809 Boycott provision but, as I have shown, it is filled with loopholes and built on a logic of quicksand. Thus I was VERY enthusiastic when I read about the model legislation for Red states being developed by the American Legislative Exchange Council (“America’s largest nonpartisan organization of state legislators dedicated to the principles of limited government, free markets and federalism.), led by CEO Lisa B. Nelson, for an “Eliminate Political Boycotts Act.” A Master Class in doublethink to interfere with America’s free markets. Sadly, ALEC’s board of 23 Republicans rejected this proposal in January of 2023 and the page showing a draft of the bill and explaining this act no longer exists.
It’s still winter here in New England, and I have a cold 🤧 so I’m not getting out much these days. This all leaves me feeling a little down in the dumps. Then along comes this bill to pep me up, especially because it goes so much further than the persistent inane argument by some Republicans that ESG is a sinister wraith attacking America and not simply taking account of material risk factors that matter to value creation. Like my Republican buddy Dan Crowley and I have explained in “Turning Down the Heat in the ESG Debate: Separating Material Risk Disclosures from Salient Political Issues” and “Rescuing ESG from the Culture Wars.” And will keep explaining to anyone willing to listen.
HB 1008 really ups the game here. It is breathtaking in its scope of inserting SPI views with the ostensible objective of keeping the chimera of SPI views out of investment decisions. Here are a few nuggets from Sec. 9 which lays out examples of how a fiduciary can be seen as furthering “social, political, or ideological interests…through portfolio company engagement, board or shareholder votes” by doing “any of the following beyond the applicable federal or state law”:
“(1) Eliminating, reducing, offsetting, or disclosing greenhouse gas emissions.”
If a company is doing this, in the Divine Wisdom of these esteemed Hoosiers how do they know if this is because the company wants to do it for its own economic benefit or is being “pressured” by a shareholder to do it? As I’ve noted, all of the top 10 holdings in Strive Asset Management’s “Strive U.S. Energy ETF” (DRLL) acknowledge that climate change is real, discuss net-zero targets and report on progress in meeting their emissions reduction targets, and align their climate disclosures with the framework developed by the Task Force on Climate-related Financial Reporting (TCFD). This includes ExxonMobil, Chevron, and ConocoPhillips. Do these Hoosiers really think such rich and massive oil companies are being pushed around by the SPI interests of asset managers? Who, by the way, can’t do this because of their fiduciary duty to their clients to maximize risk-adjusted returns.
“(2) Instituting or assessing
(A) corporate board;
(C) composition; or
Criteria that incorporate characteristics protected under IC 22-9.”
Gosh, this is pretty broad. To be honest, I’m really not sure what this is about. Seems like a catch all phrase that could cover most anything. Under His eye. Can’t evaluate the quality of the board? Can’t assess the company’s human capital strategy? Beats me on “composition.” Maybe assessing the grammar in the company’s 10-K? Can’t ask the company for information that is relevant to making an investment decision? Oh, and I looked up IC 22. Sec. 9 is titled “Civil Rights.” Gotta tell ya I find it a bit hard to believe that people ostensibly being driven by a SPI agenda are looking to violate anyone’s civil rights. Best as I can remember, it was pernicious progressives that pushed the civil rights agenda, not the Alt-Right.
“(3) Divesting from, limiting investment in, or limiting the activities or investments of a company that does any of the following:
(A) Fails to meet or does not commit to environmental standards or disclosures.
Again, how do these Hoosier Oracles know why an investor is limiting its investments in companies like this? Could be they’re just a bad stock. Or that failure to do this means operational and reputational risk that will come back to bite shareholder returns. Blessed be the fruit.
(B) Engages in, facilities, or supports the manufacture, import, distribution, marketing or advertising, sale, or lawful use of firearms, ammunition, or component parts and accessories of firearms or ammunition.”
This is a little more straightforward. It’s the classic and more straightforward exclusion thing but more on this below.
“(C) Contracts with the United States Immigration and Customs Enforcement for the provision of federal immigration detention centers or support services related to the implementation of federal immigration and border security laws, regulations, and policies.”
This is so bat 🦇 guano crazy I don’t even know what to make of it. Like I don’t see how an asset manager would ever “contract” to do this. They’re investors, not detention center contractors. But let’s say they’re doing this somehow. The state of Indiana thinks it can hold itself above federal laws and attack people and institutions that are upholding them? Praise be.
“(D) Engages in the exploration, production, utilization, transportation, sale, or manufacturing of fossil fuel based energy, timber, mining, agriculture, and food animal production.”
This is the usual blah, blah, blah from Texas Section 809 and ALEC. All these asset managers being accused of “boycotting” actually hold substantial positions in these kinds of stocks. To the consternation of the left. And we have the same problem as with (A). How do state officials who are not investors know the reasons for an asset manager’s investment decision?
This law applies to any asset manager working for the Indiana public retirement system. If Indiana pension assets are commingled in a fund where the asset manager is seen as misbehaving, they are in BIG TROUBLE and can go on the POTENTIAL EXCLUDED PERSONS LIST!! Stretching it further, perhaps an asset manager doing any of this stuff for another client in a separate fund who wants this will be in big trouble as well. Say an asset manager is managing a separate fund for a church group that doesn’t want to invest in guns. Is this a violation of HB 1008?
The big trouble is that the state treasurer can create all kinds of misery for the asset manager by asking for all kinds of data and beating them up in various ways. Like the state treasurer can give official notice and the person has 90 days to prove they haven’t been a bad boy or bad girl. Otherwise, they can be excluded!
But here’s the clever bit of this legislation where it has real bite, more so than the lame Section 809 and the now dead ALEC model bill. If the person or entity is found guilty, “the treasurer of state shall make available to the public the name of the person or specific fund offered by the person.” So even asking for disclosure is a non-no in this bill, it is perfectly fine for Indiana to publicly name and shame anyone who irks their ire. Former Vice President Mike Pence has likened ESG scores to the social credit scores issued by the Chinese Communist Party. Chinese President Xi Jinping ain’t got nuthin’ on Indiana state treasurer Daniel Elliott! May the Lord open.
And now to the economic punch line. An analysis by Indiana’s “Legislative Services Agency: Office of Fiscal and Management Analysis” notes that:
“Based on an estimate by the Indiana Public Retirement System (INPRS), the bill could result in reduced aggregated investment returns for defined benefit and defined contribution funds managed by INPRS by $6.7 B over the next 10 years ($6.4 B for defined benefit funds, $0.3 B for defined contribution funds). Such a decrease would reduce the estimated annual return on investment for defined benefit pensions managed by INPRS from 6.25% to 5.05%. This would likely result in increased expenditures for state employers for pension contributions.”
And this is on a pension fund that currently has $43.7 billion in AUM. Run the numbers. $6.7 billion/$43.7 billion=15.3 percent. Very impressive 🤓!
It is now time to throw some major respect to these distinguished legislators. Sure, there are the green investing wokey types who might be willing to give up a bit of return to make the world a better place. But this is small beer compared to being willing to absorb a $6.7 billion dollar hit over a decade in service of Indiana’s SPI interests. This is real commitment. The kind of commitment that would get people thrown into the hoosegow if they lived in a Blue state.
Words alone cannot express my perplexed admiration for this legislative piece of legerdemain. An own goal if there ever was one. Something Larry Bird never did.
Recognition of the staggering sheer stupidity of HB 1008 deserves something richly and symbolically evocative. So as an out-of-stater I’d like to humbly suggest that Indiana adopt a new state fossil, the Ethan (Ethanius manniningium). What honor could be more fitting for a man poised to take $6.7 billion dollars out of the mouths of unsuspecting Hoosiers?