The Indiana General Assembly is considering a bill (House Bill 1008) that would reinstate the retirement security of Indiana’s citizens as the paramount consideration in the management of the state’s pension plans.
During the last decade, the country has seen a growing movement among money managers to partly divert attention from achieving financial returns for clients when evaluating investments and to consider political factors — namely, the environmental, social and governance (ESG) characteristics of companies — when making important decisions for clients. Woke fund managers are now considering whether companies are sufficiently activist in catering to liberal demands to implement net zero carbon emissions and diversity quotas. Furthermore, these fund managers contract with states to help manage the state’s pension assets but then use that money to promote their radical political agenda. In doing so, these fund managers are depriving those workers of a say in whether their retirement security should be sacrificed for liberal ideology.
Another concerning result of these actions is that they are limiting portfolio investments in key industries such as energy, defense, firearms and agriculture. Research has shown the underperformance of such investments by establishing that when vital, profitable industries are omitted or underweighted from investment funds, they will tend to be under-diversified and perform worse. The year 2022 was a case in point. Much of the stock market performed poorly following the Federal Reserve’s aggressive interest rate policy to tackle inflation. However, both defense and energy stocks outperformed. Thus, ESG-managed funds that actively avoided defense and energy stocks saw poorer returns than well-diversified portfolios.
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The General Assembly is now seeking to address this mismanagement of Indiana’s pension funds. HB 1008 requires that the investment managers contracting with the state’s pensions “discharge the fiduciary’s duties solely in the financial interest of the participants and beneficiaries of the public pension system.” Additionally, it specifies that objectives must be limited to “providing financial benefits” and “defraying reasonable expenses of administering the public pension system.” In other words, this legislation calls on pension investments to maximize returns while managing financial risk and minimizing administrative costs. The bill explicitly states that “a fiduciary shall consider only financial factors when discharging the fiduciary’s duties.” Such actions will go a long way toward ensuring that Hoosiers realize the benefits they have been promised.
At the same time, the bill prohibits making investment decisions based on the pension system’s contractors’ political motives. For example, the bill precludes these contractors from divesting from or reducing investment in companies because they:
- Will not implement environmental standards beyond what is required by federal or state law;
- Participate in economic activity related to the “lawful use of firearms”;
- Work with the United States Immigration and Customs Enforcement to assist in the implementation of federal immigration laws; or
- Conduct economic activity in industries such as “fossil fuel-based energy, timber, mining, agriculture, and food animal production.”
Liberal fund managers want to use the money invested on behalf of Indiana pensioners to impose an agenda that will impair economic security, retirement security, personal security, energy security, national security and food security. It is entirely appropriate, and in fact essential, that state legislators safeguard our security. The benefits of the proposed law would be twofold. First, this legislation would enhance access to capital for the companies providing our food, energy, housing and personal security that improve our lives. At the same time, it would allow today’s workers and seniors to have the comfortable retirement they earned from working.
Why might someone oppose such commonsense legislation? Opponents argue that the state would incur costs by moving away from its current financial services providers, and those providers claim that they do not engage in the activities the bill would preclude.
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But if fund managers and financial services providers are not boycotting energy, defense and agriculture (despite their explicit statements seeking to achieve net zero carbon footprints), then this legislation gives them nothing to fear. The state would not preclude them from competitive bidding to participate in the management of state pension funds, and the state would incur no additional costs because they would not be changing financial providers.
Their opposition to this legislation reveals that these woke money managers are using other people’s money to try to achieve their political objectives outside the normal political process. In light of this activity, how much should Hoosiers forgo in pension returns and declining security to keep working with those weakening the state?
For Hoosiers, the costs articulated by the opposition pale in comparison to the cost of ESG elites continuing to undermine our economy and our democracy. To effectively safeguard Indiana’s retirement and economic security, state lawmakers must ensure that pension assets are managed based solely on financial considerations.
Michael Faulkender is a finance professor at the University of Maryland, the chief economist at the America First Policy Institute and former assistant secretary for economic policy at the Department of the Treasury.
Aaron Hedlund is an economics professor at Purdue University, the director of research at the America First Policy Institute and formerly served as the chief domestic economist and senior adviser at the White House Council of Economic Advisers.
This article originally appeared on Indianapolis Star: Op/Ed: Protect Indiana’s pension plans by keeping ‘woke’ politics out