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'ESG' investment practices to be banned under bill affecting state retirement systems

Multiple smokestacks release exhaust into the sky.
Ryan Van Velzer
Emissions from the coal stacks at LG&E's Mill Creek Generating Station.

Authorities in charge of the state’s retirement systems would see their decision-making curtailed under legislation a Ky. House committee passed Thursday.

The House Natural Resources and Energy Committee passed House Bill 236 requiring state investment managers limit their decisions to the financial risk or financial return of investment.

The measure from Republican Rep. Scott Sharp, of Ashland, is the latest push from Republican elected officials to limit the influence of “environmental, social, governance” (ESG) investment practices in the state’s retirement systems."

“A lot of these big investing companies that manage large amounts of money are using this,” Sharp said. “When you think about ‘ESG,’ think socialism, because that’s what it basically comes down to.”

Some of the country’s largest investment management firms such as Vanguard and BlackRock use ESG standards as another means to evaluate the future financial performance of companies and industries they want to invest in.

While these standards are often considered non-financial indicators, they do help investors better understand companies’ bottom lines by examining their impact on the environment, people and power structures, said Jordan Haedtler of the Sunrise Project, a climate think tank.

“ESG investing is just a practical and sensible business practice,” Haedtler said. "These sort of forced fossil fuel financing laws compel them to ignore risks that federal regulators are already increasingly asking them to be mindful of and to manage.

Both the U.S. Department of Labor and the Financial Stability Oversight Council -- created in the wake of the Great Recession -- have issued reports identifying climate change as an emerging and increasing risk to national financial stability.

Groups like Net-Zero Asset Managers initiative have, for example, committed to aligning their investments to reach net-zero emissions by 2050.

At least 17 states including Kentucky have proposed or passed legislation to prevent ESG investment practices.

Last year, Kentucky passed legislation requiring the state treasurer to keep a list of financial institutions that do business with the state and engage in energy company boycotts.

State agencies are supposed to divest from businesses they find engaging in boycotts, however the law includes a number of loopholes that basically allow them to ignore the law so long as it is consistent with their financial responsibilities.

One study from Econsult Solutions Inc.Inc. found that if similar legislation in Texas was applied to Kentucky, it would cost the state between $26 and $70 million.

In the committee hearing, Democratic Rep. Lindsey Burke of Lexington pushed back on Sharp’s assertion that ESG principles were akin to socialism.

“So wouldn't propping up the coal industry by directing our investing to support the coal industry be socialism?” Burke asked.

“What we are trying to do here is ensure we have free markets,” Sharp replied.

The measure now moves to the House floor for a vote.

Ryan Van Velzer is the Kentucky Public Radio Managing Editor. Email Ryan at rvanvelzer@lpm.org.

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