Sole fiduciary reform approaches opposing environmental, social, and corporate governance (ESG)

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The term environmental, social, and corporate governance (ESG) can refer to an investment approach or an approach to corporate decision-making that conforms a company to ideas and goals that ESG investors generally accept. The ESG investment approach involves considering the extent to which corporations conform to certain environmental, social, and corporate governance standards (such as net carbon emission or corporate board diversity goals) and avoiding investments in or otherwise withholding funding from companies that do not meet the standard.

In the context of public policy, ESG refers to the use of non-financial ESG investing criteria in the regulation and management of public funds, including public pensions.

Opponents of ESG investing argue that it reduces investment diversification (which increases portfolio risk), harms financial performance, and contrasts with an investment approach that focuses on the likely maximization of financial returns to the investor. To learn more about the opposition to ESG investing, click here.[1][2][3]

Supporters of ESG investing argue that in the long run, ESG investing will lead to acceptable financial returns. ESG advocates also say that ESG and profit are not mutually exclusive and argue that corporations can and should improve communities and the environment through the adoption of ESG philosophies and approaches.[4][5]

This page outlines the sole fiduciary reform approaches to opposing ESG investing.

Sole fiduciary approaches

These reform proposals argue that the law should require fund managers, who have a legal and ethical (fiduciary) duty to act in the best interests of investors, to seek financial returns based only on financial factors like company balance sheets and fundamentals. Supporters of this reform argue that investment managers should not be able to use other people's money to invest in companies based on a political or ideological basis and that ESG investing strategies are not in the best interests of investors. This type of reform also includes proposals intended to raise or clarify fiduciary standards and legal obligations, incentivize fiduciaries to fulfill their duties, punish fiduciaries who fail to fulfill their obligations, and provide protection for governments and pension plan participants if a fiduciary does not meet legal expectations.

Ballotpedia has identified the following 11 reform proposals promoting sole fiduciary approaches:

Reform: Prohibit agencies and governments responsible for investing public money from considering ESG criteria and other non-financial factors

This approach argues that governments should prohibit public investment managers from considering ESG scores and other non-financial factors in their investment decisions.

  • Model legislation from the American Legislative Exchange Council (ALEC) contained text that said, "A fiduciary shall discharge his duties with respect to a plan solely in the pecuniary interest of the participants and beneficiaries for the exclusive purpose of - (i) providing pecuniary benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan ... A fiduciary’s evaluation of an investment, or evaluation or exercise of any right appurtenant to an investment, must take into account only pecuniary factors. Plan fiduciaries are not permitted to promote non-pecuniary benefits or any other non-pecuniary goals."[6]
  • Model legislation from Consumers Defense contained text that said, "In making and supervising investments of the reserve fund of a public retirement system, an [investment manager] [fiduciary] or [the governing body] shall discharge its duties solely in the financial interest of the participants and beneficiaries for the exclusive purposes of: providing financial benefits to participants and their beneficiaries; and defraying reasonable expenses of administering the system."[7][8]
  • The Foundation for Government Accountability (FGA) argued states should "[b]an ESG investing in state and local pensions, state contracts, and publicly funded postsecondary education."[9]
  • The Reason Foundation published model legislation that proposed requiring that "[a] fiduciary’s evaluation of an investment, or evaluation or exercise of any right appurtenant to an investment, must take into account only pecuniary factors. Plan fiduciaries are not permitted to promote non-pecuniary benefits or any other non-pecuniary goals."[10]
  • The Heritage Foundation published model legislation that proposed requiring that "[i]n making and supervising investments of the reserve fund of a public retirement system, an [investment manager] [fiduciary] or [the governing body] shall discharge its duties solely in the financial interest of the participants and beneficiaries for the exclusive purposes of: (A) providing financial benefits to participants and their beneficiaries; and (B) defraying reasonable expenses of administering the system."[11]
  • The Wyoming State Loan and Investment Board on August 2, 2023, enacted a new investment policy prohibiting ESG considerations in state investments.[12]
  • The U.S. House Committee on Education and the Workforce on September 14, 2023, advanced the Rollback ESG To Increase Retirement Earnings (RETIRE) Act (H.R. 5339), which proposed prohibiting ERISA-governed fiduciaries from considering non-pecuniary factors in their investment decisions.[13]


Reform: Define financial or pecuniary factors to ensure they are not based on ideological, political, or social reasoning

This approach argues that laws governing fiduciary financial obligations, which require certain asset managers to act in the best interests of investors, should narrowly define financial factors in the context of investing as relating to company balance sheets and fundamentals. Supporters of this reform argue that some investment managers invest in companies based on political and ideological agreement or shared values and that an ESG investing strategy does not financially benefit investors.[14]

  • Model legislation from the FGA said, "'Pecuniary' means having been prudently determined by a fiduciary to have a material effect on the financial risk or the financial return of an investment. ... 'Pecuniary' does not include any action taken, or factor considered, by a fiduciary with any purpose whatsoever to further social, political, or ideological interests."[15]
  • Model legislation from Consumers Defense said, "'Financial' means having been prudently determined by a fiduciary to have a material effect on the financial risk or the financial return of an investment. 'Financial' does not include any action taken, or factor considered, by a fiduciary with any purpose whatsoever to further social, political, or ideological interests."[7]
  • Model legislation from ALEC said, "'pecuniary factor' means a factor that has a material effect on the financial risk and/or financial return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and the funding policy. The term excludes non-pecuniary factors. ... The term 'non-pecuniary' includes any action taken or factor considered by a fiduciary with any purpose to further environmental, social, or political goals."[6]
  • The Reason Foundation published model legislation that said, "'pecuniary factor' means a factor that has a material effect on the financial risk and/or financial return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and the funding policy. The term excludes non-pecuniary factors. e. The term 'non-pecuniary' includes any action taken or factor considered by a fiduciary with any purpose to further environmental, social, or political goals."[10]
  • The Heritage Foundation published model legislation that said, "'Financial' means having been prudently determined by a fiduciary to have a material effect on the financial risk or the financial return of an investment. i) 'Financial' does not include any action taken, or factor considered, by a fiduciary with any purpose whatsoever to further social, political, or ideological interests."[11]

Reform: Require proxy advisors to act as fiduciaries

This approach argues that proxy advisors should have to comply with a government's definition of fiduciary duty and only make recommendations for votes on behalf of public investments based on material financial factors (not ESG considerations).

  • Model legislation from the FGA said, "'Fiduciary' includes any person acting on behalf of a state governmental entity as an investment manager, or proxy adviser."[15]
  • Model legislation from ALEC said, "The term 'fiduciary' means a person who with respect to a pension benefit plan ... has any discretionary authority or discretionary responsibility in the administration of such plan, including making recommendations or voting a plan’s shares or proxies."[6]
  • Model legislation from Consumers Defense said, "'Fiduciary' includes any person acting on behalf of the [state][pension board] as an investment manager, or proxy advisor."[7]
  • The Reason Foundation published model legislation that said, "The term 'fiduciary' means a person who with respect to a defined pension benefit plan ... has any discretionary authority or discretionary responsibility in the administration of such plan, including making recommendations or voting a plan’s shares or proxies."[10]
  • The Heritage Foundation published model legislation that said, "'Fiduciary' includes any person acting on behalf of the [state][pension board] as an investment manager, or proxy advisor."[11]

Reform: Require individuals or entities voting in shareholder meetings on behalf of public retirement systems to vote only in the financial interest of system participants

This approach argues that asset managers for public retirement systems should be legally obligated to vote in shareholder meetings based on financial factors and expected returns for pensioners. Supporters of this reform argue that investment managers should not be able to vote based on a political or ideological basis.[14][16]

  • Model legislation from the FGA said, "All shares held directly or indirectly by or on behalf of a governmental entity and/or the participants and their beneficiaries shall be voted solely in the pecuniary interest of plan participants and their beneficiaries."[15]
  • Model legislation from ALEC said, "All shares held directly or indirectly by or on behalf of a pension benefit plan and/or the beneficiaries thereof shall be voted solely in the pecuniary interest of plan participants. Voting to further non-pecuniary, environmental, social, political, ideological or other benefits or goals is prohibited."[6]
  • Model legislation from Consumers Defense said, "All shares held directly or indirectly by or on behalf of a public retirement system and/or the participants and their beneficiaries shall be voted solely in the financial interest of plan participants and their beneficiaries."[7]
  • The Reason Foundation published model legislation that said, "All shares held directly or indirectly by or on behalf of a defined pension benefit plan and/or the beneficiaries thereof shall be voted solely in the pecuniary interest of plan participants. Voting to further non-pecuniary, environmental, social, political, ideological or other benefits or goals is prohibited."[10]
  • The Heritage Foundation published model legislation that said, "All shares held directly or indirectly by or on behalf of a public retirement system and/or the participants and their beneficiaries shall be voted solely in the financial interest of plan participants and their beneficiaries."[11]
  • The U.S. House Committee on Education and the Workforce on September 14, 2023, advanced the Retirement Proxy Protection Act (H.R. 5337), which proposed prohibiting non-pecuniary considerations in proxy voting decisions.[13]


Reform: Prohibit individuals from proxy voting on behalf of state investments if they are not part of the state investment oversight entity and refuse to act solely on financial factors

This approach argues that only individuals who oversee public retirement systems (like pension board members or state treasurers in some states) should be able to vote on behalf of the state and its pensioners in corporate shareholder meetings unless a third-party representative (like a contracted asset manager) agrees to vote based only on financial factors and expected returns. Supporters of this reform argue that third-party asset managers should not be able to vote in shareholder meetings based on a political or ideological basis.[14][16]

  • Model legislation from the FGA said, "Unless no economically practicable alternative is available, a governmental entity may not grant proxy voting authority to any person who is not a part of the [governmental entity], unless that person has a practice of, and in writing commits to, following guidelines that match the governmental entity’s obligation to act solely upon pecuniary factors."[15]
  • Model legislation from ALEC said, "Authority to vote such shares should be in the hands of a State official politically accountable to the people of [State name]. As such, all current proxy voting authority with respect to any and all shares held directly or indirectly by or on behalf of a pension benefit plan and/or the plan participants is hereby revoked. All such voting authority shall reside with [the State Treasurer or appropriate board or committee], [except that the [state official or board ] may delegate such authority to a person who has a practice of, and in writing commits to, follow guidelines that match the [governmental entity’s] obligation to act based only on pecuniary factors]."[6]
  • Model legislation from Consumers Defense said, "[Unless no economically practicable alternative is available,] the [governmental entity] that establishes or maintains a public retirement system may not grant proxy voting authority to any person who is not a part of the [governmental entity], unless that person has a practice of, and in writing commits to, follow guidelines that match the [governmental entity’s] obligation to act solely upon financial factors."[7]
  • The Reason Foundation published model legislation that said, "[Unless no economically practicable alternative is available,] plan assets shall not be entrusted to a fiduciary, unless that fiduciary has a practice of, and in writing commits to, follow guidelines, when engaging with portfolio companies and voting shares or proxies, that match the [governmental entity’s] obligation to act based only on pecuniary factors."[10]
  • The Heritage Foundation published model legislation that said, "[Unless no economically practicable alternative is available,] the [governmental entity] that establishes or maintains a public retirement system may not grant proxy voting authority to any person who is not a part of the [governmental entity], unless that person has a practice of, and in writing commits to, follow guidelines that match the [governmental entity’s] obligation to act solely upon financial factors."[11]

Reform: Prohibit public investment managers, fiduciaries, or government entities overseeing pension funds from following the recommendations of proxy advisors unless suggestions align with a state's responsibility to consider only pecuniary factors

This approach argues that public investment managers, fiduciaries, and government entities overseeing pension funds should not be able to vote in line with proxy advisor recommendations in shareholder meetings unless the proxy advisor's recommendations only consider financial factors or otherwise align with a state's responsibility to consider only pecuniary factors.[17][16]

  • Model legislation from the FGA said, "Unless no economically practicable alternative is available, an [investment manager] [fiduciary] or [governmental entity] may not adopt a practice of following the recommendations of a proxy adviser or other service provider, unless such adviser or service provider has a practice of, and in writing commits to, follow proxy voting guidelines that match the governmental entity’s obligation to act solely upon pecuniary factors."[15]
  • Model legislation from ALEC said, "[Unless no economically practicable alternative is available,] a fiduciary may not adopt a practice of following the recommendations of a proxy advisory firm or other service provider unless such firm or service provider has a practice of, and in writing commits to, follow proxy voting guidelines that are consistent with the fiduciary’s obligation to act based only on pecuniary factors."[6]
  • Model legislation from Consumers Defense said, "[Unless no economically practicable alternative is available,] an [investment manager] [fiduciary] or [governmental entity] may not adopt a practice of following the recommendations of a proxy advisor or other service provider, unless such advisor or service provider has a practice of, and in writing commits to, follow proxy voting guidelines that match the [governmental entity’s] obligation to act solely upon financial factors."[7]
  • The Reason Foundation published model legislation that said, "[Unless no economically practicable alternative is available,] a fiduciary may not adopt a practice of following the recommendations of a proxy advisory firm or other service provider unless such firm or service provider has a practice of, and in writing commits to, follow proxy voting guidelines that are consistent with the fiduciary’s obligation to act based only on pecuniary factors."[10]
  • The Heritage Foundation published model legislation that said, "[Unless no economically practicable alternative is available,] an [investment manager] [fiduciary] or [governmental entity] may not adopt a practice of following the recommendations of a proxy advisor or other service provider, unless such advisor or service provider has a practice of, and in writing commits to, follow proxy voting guidelines that match the [governmental entity’s] obligation to act solely upon financial factors."[11]

Reform: Vest final fiduciary responsibility for proxy votes in the state treasurer or other elected officials

This approach suggests final fiduciary responsibility for all proxy votes should be vested in the elected state treasurer or relevant administrative board members. Proponents of this approach suggest that elected officials can be held responsible for how they vote shares and asset management companies cannot be held accountable to the public in the same way if they decide to consider ESG factors in their voting decisions.

  • The Reason Foundation published model legislation that said, "Authority to vote such shares should be in the hands of a State official politically accountable to the people of [State name]. As such, all current proxy voting authority with respect to any and all shares held directly or indirectly by or on behalf of a pension benefit plan and/or the plan participants is hereby revoked. All such voting authority shall reside with [the State Treasurer or appropriate board or committee], [except that the [state official or board ] may delegate such authority to a person who has a practice of, and in writing commits to, follow guidelines that match the [governmental entity’s] obligation to act based only on pecuniary factors]."[10]

Reform: Allow or require attorneys general to prosecute people and entities who consider non-pecuniary factors in public investments

This approach argues states should allow attorneys general to prosecute public investment managers, third-party asset managers who contract with the state, or government entities overseeing pension funds that consider non-financial factors in their investing decisions if an attorney general views the decision as a breach of fiduciary responsibility.

  • Model legislation from Consumers Defense said, "If the attorney general or [applicable executive branch official] has reasonable cause to believe that a person has engaged in, is engaging in, or is about to engage in, a violation of this article, he may: (A) Require such person to file on such forms as he prescribes a statement or report in writing, under oath, as to all the facts and circumstances concerning the violation, and (B) such other data and information as he may deem necessary."[7]
  • Model legislation from ALEC said, "If the attorney general has reasonable cause to believe that a person has engaged in, is engaging in, or is about to engage in, a violation of this article, he may: (i) Require such person to file on such forms as he prescribes a statement or report in writing, under oath, as to all the facts and circumstances concerning the violation, and such other data and information as he may deem necessary. (ii) Examine under oath any person in connection with the violation. (iii) Examine any record, book, document, account, or paper as he may deem necessary. (iv) Pursuant to an order of the [state trial court], impound any record, book, document, account, paper, or sample or material relating to such practice and retain the same in his possession until the completion of all proceedings undertaken under this article or in the courts."[6]
  • The Reason Foundation published model legislation that said, "If the attorney general has reasonable cause to believe that a person has engaged in, is engaging in, or is about to engage in, a violation of this article, he may: (i) Require such person to file on such forms as he prescribes a statement or report in writing, under oath, as to all the facts and circumstances concerning the violation, and such other data and information as he may deem necessary. (ii) Examine under oath any person in connection with the violation. (iii) Examine any record, book, document, account, or paper as he may deem necessary. (iv) Pursuant to an order of the [state trial court], impound any record, book, document, account, paper, or sample or material relating to such practice and retain the same in his possession until the completion of all proceedings undertaken under this article or in the courts."[10]
  • The Heritage Foundation published model legislation that said, "a) This article, or any contract subject to this article, may be enforced by the attorney general, or [applicable executive branch official]. b) If the attorney general or [applicable executive branch official] has reasonable cause to believe that a person has engaged in, is engaging in, or is about to engage in, a violation of this article, he may: (A) Require such person to file on such forms as he prescribes a statement or report in writing, under oath, as to all the facts and circumstances concerning the violation, and (B) such other data and information as he may deem necessary. c) In addition to any other remedies available at law or equity, a company who serves as a fiduciary and who violates Section 2 shall be obligated to pay damages to the [state] in an amount equal to three times all monies paid to the company by the [state] [pension board] for the company’s services."[11]

Reform: Require public fiduciaries and trustees to carry liability insurance

This approach argues that public fiduciaries, including elected or appointed trustees, should be required to carry liability insurance in case they fail to fulfill their legal obligations.

  • The Reason Foundation published model legislation arguing that "[u]nlike in the private sector, public pension trustees are not required to carry liability insurance. Requiring coverage against claims brought alleging a wrongful act in relation to their role as fiduciaries ensures the appropriate amount of accountability."[10]

Reform: Immediately suspend any trustee facing civil or criminal charges for breaching fiduciary duty

This approach argues that any public trustee facing litigation related to a breach of fiduciary duty should be suspended until all charges are cleared.

  • The Reason Foundation published model legislation arguing that governments should require "[a]ny trustee facing civil or criminal action for breach of fiduciary duty shall be suspended during litigation and a replacement appointed by the board to serve until either the current term expires, upon which the seat shall be considered vacant, or the trustee is cleared of any charges. Any interim appointee must be persons who have demonstrated financial expertise, who have worked in private business or industry, and who have broad investment experience, preferably in investment of pension funds. None of the members appointed under this subsection may be a member or annuitant of the retirement system."[10]

Reform: Pay fiduciary money managers based on how much their fund outperforms a benchmark or index

This approach argues that governments and pension boards should pay fiduciary asset management company partners based on how much their fund outperforms a benchmark or index, not based on assets held or total appreciation. Proponents of this reform approach argue that updating the pay incentive would encourage fiduciaries to seek maximized returns.

  • The Reason Foundation published model legislation arguing that governments should "[replace] the widely used carried interest compensation formula with one based on absolute returns, completely removing any consideration of the risk associated with such an asset."[10]

See also

Footnotes

  1. ↑ NPR, "How ESG investing got tangled up in America's culture wars", September 12, 2022
  2. ↑ Wall Street Journal, "ESG and the ‘Long-Run Interests’ Dodge", September 29, 2022
  3. ↑ Wall Street Journal, "An ESG Champion Stumbles: The California Public Employees’ Retirement System posts a decade of lackluster returns.", September 22, 2022
  4. ↑ CNBC, "Lauren Taylor Wolfe says it’s just too risky for investors to ignore ESG amid recent pushback", September 23, 2022
  5. ↑ CNBC, "There’s an ESG backlash inside the executive ranks at top corporations", September 29, 2022
  6. ↑ 6.0 6.1 6.2 6.3 6.4 6.5 6.6 ALEC, "STATE GOVERNMENT EMPLOYEE RETIREMENT PROTECTION ACT," accessed January 10, 2023
  7. ↑ 7.0 7.1 7.2 7.3 7.4 7.5 7.6 Consumers Defense, "STATE PENSION FIDUCIARY DUTY ACT," accessed January 10, 2023
  8. ↑ Consumer's Research, "ESG LEGISLATION TRACKER," accessed December 14, 2023
  9. ↑ Foundation for Government Accountability, "What is ESG?" accessed January 10, 2023
  10. ↑ 10.00 10.01 10.02 10.03 10.04 10.05 10.06 10.07 10.08 10.09 10.10 Cite error: Invalid <ref> tag; no text was provided for refs named reason
  11. ↑ 11.0 11.1 11.2 11.3 11.4 11.5 11.6 The Heritage Foundation, "State Pension Fiduciary Duty Act," accessed March 13, 2023
  12. ↑ Cowboy State Daily, "Wyoming Finalizes Rules Against ESG’s ‘Woke Clown Show’ In State Business," accessed August 13, 2023
  13. ↑ 13.0 13.1 Bloomberg Law, "Anti-ESG 401(k) Investing Measures Advanced by House Committee," accessed September 21, 2023
  14. ↑ 14.0 14.1 14.2 Cato Institute, "Policymakers’ ESG Concerns Should Not Override the Market’s Allocation of Resources," October 26, 2022
  15. ↑ 15.0 15.1 15.2 15.3 15.4 Foundation for Government Accountability, "Protecting Free Enterprise and Investments Act (2023) - Model Bill," accessed July 26, 2023
  16. ↑ 16.0 16.1 16.2 ALEC, "State Government Employee Retirement Protection Act," July 29, 2022
  17. ↑ Governor of Florida, "Governor Ron DeSantis Eliminates ESG Considerations from State Pension Investments," August 23, 2022
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