Nebraska Investment Council takes step to ensure investments are made for financial goals only

LINCOLN — The Nebraska Investment Council, in response to concerns about so-called “environmental, social and governance” (ESG) investing, is taking more control over its voting on shareholder issues.

At a meeting in June, the council — which manages $40 billion in state retirement and trust funds — authorized the hiring of a third-party “proxy service provider” to cast proxy votes on behalf of the state.

The decision means that the state will no longer defer to BlackRock, the state’s chief financial adviser, to make votes on the state’s behalf on hundreds of decisions by corporate boards.

“We wanted to make sure, to the extent we are able, that our proxy votes for our stockholdings are made solely on the basis of financial materiality,” Michael Walden-Newman, the state investment officer, said Monday.

The hiring of a proxy consultant, which is expected to cost up to $100,000, is the latest development in the debate in Nebraska over ESG. The controversy gained fuel after a critical report in December by then-Attorney General Doug Peterson and the introduction of two bills in the Nebraska Legislature banning consideration of ESG.

BlackRock, the world’s largest investment manager, has become a target for criticism — and investigations and divestment in conservative states like Texas and Florida — after its CEO Larry Fink declared that a company’s stance on environmental, social and governance issues should be considered in making investments.

Conservatives have seized on the statement, making it a culture wars issue. They maintain that ESG investing means divestment in fossil fuels in favor of green energy and firms with emission and diversity goals. It’s a way, they assert, for the corporate world to advance a liberal agenda, diverting from the proper focus on investing for the highest investment returns.

Some blue states, meanwhile, have pushed back, setting goals of “decarbonizing” their investment portfolios due to concerns about climate change.

Fink, at a recent conference in Aspen, defended consideration of ESG, arguing that climate risk and investment risk are related. However, he said he wasn’t using the term “ESG” any longer.

ESG has been ‘weaponized’

“I don’t use the word ESG any more, because it’s been entirely weaponized … by the far left and weaponized by the far right,” said, Fink, according to a story by Reuters.

Peterson, in his report, called ESG “a threat to our democratic form of government.” Meanwhile, two University of Nebraska-Lincoln professors labeled the report “political theater” and an attempt to create a “boogie man” where none existed.

The report followed criticism of ESG by a national state treasurers’ organization then headed by Nebraska State Treasurer John Murante, who is a non-voting member of the Investment Council.

The two bills introduced in the Legislature this spring failed to advance, but the Banking, Commerce and Insurance Committee is conducting an interim study, requested by State Sen. Kathleen Kauth and four other senators, on the ESG issue.

Kauth, who introduced Legislative Bill 743 to ensure that public funds are not being invested to further any social, political or ideological goals, said Monday that hiring a third party to make proxy votes on behalf of the state sounds like an improvement over allowing BlackRock to do it.

But, she added, proxy voting will be an issue to be addressed in the interim study.

National, conservative groups backed bill

Proponents of Kauth’s bill included national conservative groups like the Pro-Family Legislative Network, National Shooting Sports Foundation and Heritage Action for America, whose adjunct, the Heritage Foundation, drafted LB 743. They said that it was necessary to ensure that public investments are aimed at fiduciary goals, and not advancing ESG or divesting in firearm companies.

But opponents of LB 743, which including Nebraska bankers and insurance groups and the Sierra Club, called the bill vague, unnecessary and one that sent “mixed messages.”

Walden-Newman, who has served as state investment officer for nine years, testified neutral on the legislative bills, a stance taken by many state agencies when testifying on proposed legislation.

But he said that state law, passed when the Investment Council was created in 1969, already blocks the council from investing when the “sole or primary investment objective is for economic development or social purposes or objectives.”

Walden-Newman said he’s seen both sides of the ESG issue — in 2016, a bill was introduced to divest the state in fossil fuel companies.

Manage money with a ‘financial goal’

“We’re not here to make decisions based on, in this case, climate change,” he said. “We’re here to manage the money with a financial goal, not a social goal.”

But, he added, it’s up to the Legislature to decide which laws to pass.

Still, Walden-Newman said introduction of the bills inspired the council to look at an issue related to the ESG controversy, which is whether to allow an investment adviser, in this case BlackRock, to cast votes by proxy on matters before boards running companies that the state has invested in.

50,000 to 100,000 proxy votes a year

He said that between 50,000 and 100,00o such votes are required each year, mostly during “proxy season,” generally April through June.

Hiring a third-party provider to cast proxy votes on behalf of the state, Walden-Newman said, was a more reasonable way to handle the issue than “staffing up” his agency for the three-month proxy season.

At a meeting in June, he, along with the chair of the Investment Council, Gail Werner-Robinson, were authorized to hire the provider (the council is not subject to state procurement laws).

Walden-Newman said he conferred with three legislative committees — Retirement, Banking and Appropriations — before obtaining a $100,000 addition to the Investment Council’s spending authority. The council operates on revenue from its investments, not state tax dollars.

More and more states, he said, are moving toward hiring third-party firms to handle proxy votes.

The Investment Council, Walden-Newman added, will resume its discussion over whether or not it should divest some of its business with BlackRock.

Fink, the BlackRock CEO, told Reuters in January that the controversy over ESG had cost the firm about $4 billion in managed assets. That, the news agency reported, is only “a tiny sliver” of the $9 trillion of investments under BlackRock’s management.

Fink told the Aspen conference that overall, there had been no material impact on the company’s business.