The S.C. Senate this week unanimously passed a bill (H.3690) to ensure that South Carolina’s pension funds are invested based on financial criteria to maximize shareholder value, not advance ESG (environmental, social, and governance) objectives. The bill, having passed the S.C. House last year in near-unanimous fashion, heads to Gov. Henry McMaster’s desk, who is expected to sign it.
Last year, SCPC described how many large financial institutions are abandoning traditional investment considerations in favor of ESG factors when making investments and offering services. We argued that protecting the state retirement system from this pervasive trend must be a top legislative priority, and highlighted H.3690 as a worthy bill for consideration. We commend lawmakers on both sides of the aisle for taking action on this issue and looking after South Carolina's retirees.
What the bill does
The bill requires the S.C. Retirement System Investment Commission – which manages state pension assets – to make investment decisions solely based on “pecuniary factors”. That means factors affecting risk and return (intended to maximize shareholder value), and excludes considerations that promote ESG or political goals. Shareholder proxy votes must also be cast based on pecuniary factors.
In addition, the bill limits when shareholder proxy-voting rights can be delegated to other parties. For example, the commission must retain proxy-voting rights for shares owned on behalf of the system to the extent that it is economically practicable. And while the commission can hire a proxy firm for assistance, the firm must certify that it will make decisions based on pecuniary factors.
In general, the commission can only allocate capital to an outside investment manager if the manager commits to using pecuniary factors – a great move. However, if this were not economically practicable, or if the commission needs to avoid concentrating assets among investment managers, this rule would not apply. For a manager that doesn't commit to pecuniary factors, the commission has to include a summary of the terms, fees and performance of the investment in its annual online report.
The bill allows the S.C. attorney general to bring court action to enforce these provisions.
We are thrilled to see senators take swift action on this matter. The move is timely, as protecting South Carolina's retirement system was noted as a priority on our 2024 Roadmap to Reform. While further steps may be needed to limit the harmful impacts of ESG on taxpayers and businesses, H.3690 is an excellent start as it protects public assets. We will continue to work with legislators, provide timely research, and educate the public throughout the session to secure policy victories.