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What Steps Can You Take?
Model 1: Take Immediate Action
• Clarify Fiduciary Rules and Responsibilities
Require pension and state trust fiduciaries only base investment decisions on pecuniary factors like investment performance and risk, not nonpecuniary factors like politics, ESG, etc. See the full-text of this section
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<h4>STATE GOVERNMENT EMPLOYEE RETIREMENT PROTECTION ACT</h4>
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<p class="first-indent">1. Definitions.</p>
<p class="second-indent">a. The term “defined pension benefit plan” or “plan” shall mean any plan, fund or program which was heretofore or is hereafter established, maintained, or offered by [the State] or any subdivision, county, municipality, agency or instrumentality thereof, or any school, college, university, administration, authority, or other enterprise operated by the State (collectively “the State”), to the extent that by its terms or as a result of surrounding circumstances –</p>
<p class="third-indent">(i) Provides retirement income or other retirement benefits to employees or former employees, or</p>
<p class="third-indent">(ii) Results in a deferral of income by such employees for period extending to the termination of covered employment or beyond.</p>
<p class="second-indent">b. The term “fiduciary” means a person who with respect to a defined pension benefit plan (i) exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) has any discretionary authority or discretionary responsibility in the administration of such plan, including making recommendations or voting a plan’s shares or proxies.</p>
<p class="second-indent">c. When used to qualify a risk or return, the term ‘material’ means a risk or return regarding which there is a substantial likelihood that a reasonable investor would attach importance when –</p>
<p class="third-indent">(i) evaluating the potential financial return and financial risks of an existing or prospective investment, or</p>
<p class="third-indent">(ii) exercising, or declining to exercise, any rights appurtenant to securities.</p>
<p class="third-indent">(iii) When used to qualify a risk or return, the term “material” does not include:–</p>
<p class="fourth-indent">(a) furthering non-pecuniary, environmental, social, political, ideological, or other goals or objectives, or</p>
<p class="fourth-indent">(b) any portion of a risk or return that primarily relates to events that –</p>
<p class="fifth-indent">(A) involve a high degree of uncertainty regarding what may or may not occur in the distant future, and</p>
<p class="fifth-indent">(B) are systemic, general, or not investment-specific in nature.</p>
<p class="second-indent">d. The term “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.</p>
<p class="second-indent">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. A fiduciary purpose may be reasonably determined by evidence, including, but not limited to, a fiduciary’s statements indicating its purpose in selecting investments, engaging with portfolio companies, or voting shares or proxies, or any such statements by any coalition, initiative, or organization that the fiduciary has joined, participated in, or become a signatory to, in its capacity as a fiduciary.</p>
<p class="first-indent">2. Sole Interest and Prudent man standard of care.</p>
<p class="second-indent">a. 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 –</p>
<p class="third-indent">(i) providing pecuniary benefits to participants and their beneficiaries; and</p>
<p class="third-indent">(ii) defraying reasonable expenses of administering the plan;</p>
<p class="second-indent">b. and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;</p>
<p class="second-indent">c. by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and,</p>
<p class="second-indent">d. in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this chapter.</p>
<p class="first-indent">3. Consideration of Non-Pecuniary Factors Prohibited. <span style="font-weight: 400;">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. Environmental, social, corporate governance, or other similarly oriented considerations are pecuniary factors only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. The weight given to those factors should solely reflect a prudent assessment of their impact on risk and return. Fiduciaries considering environmental, social, corporate governance, or other similarly oriented factors as pecuniary factors are also required to examine the level of diversification, degree of liquidity, and the potential risk-return in comparison with other available alternative investments that would play a similar role in their plans’ portfolios. Any pecuniary consideration of environmental, social, or governance factors must necessarily include evaluating whether greater returns can be achieved through investments that rank poorly on such factors.</span></p>
<p class="first-indent">4. Voting Ownership Interests. <span style="font-weight: 400;">[Bracketed portions may be adjusted for the needs of each state]</span></p>
<p class="second-indent">a. 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.</p>
<p class="second-indent">b. [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.</p>
<p class="second-indent">c. [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.</p>
<p class="second-indent">d. 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].</p>
<p class="second-indent">e. All proxy votes shall be tabulated and reported annually to the [Board]. For each vote, the report shall contain a vote caption, the plan’s vote, the recommendation of company management, and, if applicable, the proxy advisor’s recommendation. These reports shall be posted on a publicly available webpage on the Board’s website.</p>
<p class="first-indent">5. Enforcement</p>
<p class="second-indent">a. This [article] may be enforced by the attorney general.</p>
<p class="second-indent">b. 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:</p>
<p class="third-indent">(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.</p>
<p class="third-indent">(ii) Examine under oath any person in connection with the violation.</p>
<p class="third-indent">(iii) Examine any record, book, document, account, or paper as he may deem necessary.</p>
<p class="third-indent">(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.</p>
<p class="first-indent">Severability. <span style="font-weight: 400;">Should a court of competent jurisdiction hold any provision(s) of this chapter to be invalid, such action will not affect any other provision of this chapter.</span></p>
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<span style="font-style: italic; font-size: 14px;">(Adapted from American Legislative Exchange Council’s “State Government Employee Retirement Protection Act” model legislation, available <a target="_blank" href="https://alec.org/model-policy/state-government-employee-retirement-protection-act/">here</a>)</span>
`• Require Advance Proxy Vote Notice and Annual Reporting
Surface activism in proxy voting by allowing the public to view proxy votes well in advance of being cast, as well as requiring a compiled annual report of all proxy votes annually. See the full-text of this section
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(Additional Statutory Section) All proxy votes shall be posted on the public retirement system’s website no later than 30 business days in advance of votes being submitted. All proxy votes shall be aggregated and reported annually to the [applicable government entity or official] to be publicly archived. For each vote, the report shall contain a vote caption, the plan’s vote, the recommendation of company management, and, if applicable, the proxy advisor’s recommendation.</p>
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`• Require Limited Partner Status Reporting
Help mitigate activism through alternative asset managers like private equity and hedge funds by requiring the annual reporting of limited partners and all committed and allocated capital. See the full-text of this section
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(Additional Statutory Section) All limited partnerships shall be tabulated and reported annually to the [applicable government entity or official]. For each limited partnership, the report shall contain the name of each vehicle, when the investment was made, the amount of capital committed, the amount of capital contributed, the amount of the capital distributed, any cost or fees associated with the limited partnership, and a measure of the annualized return on capital invested. These reports shall be posted on a publicly available webpage on the [applicable government entity or official] website.
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`• Require Investment Fee Reporting
Reporting of investment fees will allow for more transparency around the cost and benefit of generally-higher-risk alternative investments like private equity and hedge funds. See the full-text of this section
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(Additional Statutory Section) All investments, investment management and investment consulting services shall be listed and reported annually to the department of treasury. For all investments, investment management and investment consulting services, the report shall contain, in dollars, net asset value, gross fiscal year performance, net fiscal year performance any related management fees, performance fees or any other fees charged. These reports shall be posted on the [applicable government entity or official] website.
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`• Require Pension/Trust Board Meeting Transparency
Ensure taxpayers and stakeholders have access to major planning and investment decisions by requiring materials and meetings are broadcast, published and granted open access to all stakeholders. See the full-text of this section
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(Additional Statutory Section) Except as otherwise provided in statute, all meetings of fiduciaries shall be open to the public. Each meeting shall be publicly broadcast in audio and video at the time it is conducted and archived on the web site of the system for future public access and use for no less than ten years.
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`html`<a style="font-size: 18px; padding: 0; margin-top: -5px;" href="${await FileAttachment("./pdfs/Reason Anti-ESG Model Bill (Part 1).pdf").url()}" download>
<i class="bi bi-filetype-pdf"></i> Download Model 1 Full-Text</a>`Model 2: Set Up Systemic Oversight
• Institute a Pension Oversight Board
Mandated an agency to oversee all public retirement systems in your state, both state and local, regarding their actuarial soundness and compliance with state reporting requirements. See the full-text of this section
• Require XBRL Reporting Standards
Because government financial reports are mostly published in PDF format and hard to analyze, compare and aggregate, transitioning to more data friendly XBRL format makes government finance more transparent. See the full-text of this section
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<span style="font-style: italic;">
<p>THE OPEN FINANCIAL STATEMENT ACT</p>
<p>Whereas state and local governments are filing their audited financial statements in outmoded PDF formats,</p>
<p>Whereas local governments are required to file both audited PDFs and unaudited Annual Financial Reports containing duplicative or contradictory information,</p>
<p>Whereas many pension systems, fiduciary trusts and component units also file audited financial statements in outmoded PDF formats,</p>
<p>Whereas transitioning these documents to machine readable formats will ease the identification of fiscally distressed local governments and will increase liquidity in the municipal bond market,</p>
<p>Therefore, the State will undertake this transition.</p>
<p class="first-indent">(1) Local Government, Pension Systems, Fiduciary Trusts and Component Unit Financial Statement Format</p>
<p class="second-indent">(1) It is the intent of the legislature to replace PDF-formatted audited financial statements with filings utilizing Interactive eXtensible Business Reporting Format (iXBRL). It is also the intent of the legislature to establish these iXBRL audited financial statements as the only annual financial filing required from public agencies by the state. To implement this change:</p>
<p class="third-indent">(i) The governor shall appoint a seven-member commission including (1) a representative from the State Controller’s Office, (2) a representative from the State Auditor’s Office, (3) a representative of a city or county, (4) a representative of a special district, (5) a government accounting researcher affiliated with a state university, (6) a municipal bond investor and (7) an information technology professional employed in the private sector. This body shall be named the “Open Financial Statement Commission” or OFSC.</p>
<p class="third-indent">(ii) The legislature appropriates $_______to the OFSC with the following restrictions: (1) none of the appropriation may be spent on member or staff salaries and (2) no more than $_______ of the appropriation may be spent on committee meetings.</p>
<p class="third-indent">(iii) The commission shall choose contractors to (1) build one or more XBRL taxonomies suitable for state, county, municipal and special district financial filings and (2) create a software tool that enables financial statement filers to easily create iXBRL documents consistent with the taxonomy or taxonomies. Contractors shall be recruited and selected through an open Request for Proposals process. The OFSC may require the use of existing taxonomy(ies) when prudent to reduce costs and increase comparability between entries.</p>
<p class="third-indent">(iv) The commission shall evaluate the contractors’ prototype taxonomy and filing software and specify any changes it deems appropriate. It shall require that all work be completed no later than <<Date0>>.</p>
<p class="third-indent">(v) The commission shall submit a report to the legislature no later than <<Date1>> describing the work products and advising of its decision as to whether to implement the taxonomy or taxonomies.</p>
<p class="third-indent">(vi) If the OFSC deems the work products adequate, all governmental financial statements pertaining to fiscal years ending on or after <<Date2>> must be filed in iXBRL format and must meet the validation requirements of the relevant taxonomy.</p>
<p class="third-indent">(vii) If the OFSC deems the work products unacceptable, it shall instruct its contractors to make necessary revisions or replace the original contractors with new ones capable of making the necessary revisions. The commission will then make a second implementation decision no later than <<Date3>> and provide a second report to the legislature no later than <<Date4>>. If the commission fails to recommend an implementation by <<Date5>>, it will be dissolved, and the filings will remain in their current formats.</p>
<p class="third-indent"><(viii) Once a government commences filing in iXBRL it will no longer be required to file a PDF, submit an Excel-based AFR or complete any online forms requesting annual financial statistics. If any state agency is unable to use iXBRL financial statements by <<Date5>>, it will be the Department’s responsibility to convert the iXBRL filing into PDF for its internal use./p>
<p class="third-indent">(ix) The OFSC will be tasked with identifying changes to reporting requirements that bring AFR into alignment with CAFR to facilitate the latter satisfying the requirements for the former.</p>
<p class="first-indent">(2) State Government Report Format</p>
<p class="second-indent">For fiscal years ending on <<Date 5>> and thereafter, the State Controller shall submit the comprehensive annual financial report in Interactive eXtensible Business Reporting Format (iXBRL) format if the Open Financial Statement Commission described above has mandated the use of this format by local governments.</p>
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<span style="font-style: italic; font-size: 14px;">(Source: American Legislative Exchange Council’s “THE OPEN FINANCIAL STATEMENT ACT” model legislation, available at <a target="_blank" href="https://alec.org/model-policy/the-open-financial-statement-act/">here</a>)</span>
`• Require Public Trustees be Insured
Unlike 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.See the full-text of this section
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(Additional Statutory Section) Except as otherwise provided in statute, all trustees serving as fiduciaries for public pension trusts are required to carry personal liability insurance covering areas such as, but not limited to, breaches of trust, breaches of duty, breaches of statutory provision, negligence, errors and omissions, miss-statements, and misleading statements, and maladministration or any other wrongful act committed or allegedly committed.
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`html`<a href="${await FileAttachment("./pdfs/Reason Anti-ESG Model Bill (Part 2).pdf").url()}" download>
<i class="bi bi-filetype-pdf"></i> Download Model 2 Full-Text</a>`Model 3: Install Protective Policies
• Remove Investment and Actuarial Management Privileges
Return important fund management duties to taxpayers by suspending management privileges until sound funding policies and metrics are achieved. See the full-text of this section
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(Additional Statutory Section) Any 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.
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`• Mandate “Excess Value” Compensation
Developed by Landmark Partners and the Public Employees Retirement Association of New Mexico, this limited partnership compensation method replaces 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. See the full-text of this section
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For more information see “Calculating Outperformance in Dollars: Introducing the Excess Value Method” by Avi Turetsky, Matthew Pyrz, Barry Griffiths, Joaquin Lujan and Isaac Beckel (Available Upon Request). A summary can be found <a target="_blank" href="https://knowledge.insead.edu/economics-finance/introducing-excess-value-metric-private-market-outperformance">here</a>.
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`html`<a href="${await FileAttachment("./pdfs/Reason Anti-ESG Model Bill (Part 3).pdf").url()}" download>
<i class="bi bi-filetype-pdf"></i> Download Model 3 Full-Text</a>`Combine All Three for a Holistic Approach
By combining all three models, you can create a comprehensive approach to pension reform that will help protect your state from the negative consequences of politicized ESG investing and a more sustainable retirement system.
This approach includes:
html`<ol>
<li><a href="${await FileAttachment("./pdfs/Reason Anti-ESG Model Bill (Part 1).pdf").url()}" download>
Model 1: Take Immediate Action <i class="bi bi-filetype-pdf"></i> </a></li>
<li><a href="${await FileAttachment("./pdfs/Reason Anti-ESG Model Bill (Part 2).pdf").url()}" download>
Model 2: Set Up Systemic Oversight <i class="bi bi-filetype-pdf"></i> </a></li>
<li><a href="${await FileAttachment("./pdfs/Reason Anti-ESG Model Bill (Part 3).pdf").url()}" download>
Model 3: Install Protective Policies <i class="bi bi-filetype-pdf"></i> </a></li>
</ol>`html`<a href="${await FileAttachment("./pdfs/Reason Anti-ESG Model Bill.pdf").url()}" download>
<i class="bi bi-filetype-pdf"></i> Download Full-Text of All Three Models</a>`Model 4: Comprehensive Model