Anti-ESG pension bill could drop state pension returns $6.7 billion in next decade

A bill mandating that Indiana’s public pension system divest from firms or funds that use certain non-financial investment criteria — a flashpoint in the state’s culture wars — could slash the system’s returns by nearly $7 billion over the next decade, according to a revised fiscal analysis.

Author Rep. Ethan Manning, R-Logansport, and supporters say the proposal would ensure that the Indiana Public Retirement System puts finances first. House Bill 1008 is part of a GOP effort to crack down on the environmental, social and governmental framework known as ESG investing.

But its restrictions and administrative requirements could mean a hefty price tag for the fund and its retirees.

And the conservative-leaning Indiana Chamber of Commerce reinforced its opposition in a tweet: “Safe to say we still oppose H.B. 1008. We’ll continue to voice our strong opposition to House members as well as key senators, who may receive the bill the second half of session.”

INPRS itself has been more measured in its responses, and Manning said he expects changes.

Returns down?

An updated fiscal analysis for the legislation shows that over the next decade, it could plunge investment returns on defined-benefit funds by $6.4 billion, and defined-contribution funds by $300 million.

That drop in returns would cut INPRS’ estimated annual return on investment from 6.25% to 5.05%. Indiana and communities with current and former employees in defined-benefit funds would likely pay higher contributions beginning in 2025, according to the analysis.

The new information comes from an estimate by INPRS.

The bill orders INPRS and its many external investment managers to stick to financial criteria in decision-making and avoid using ESG criteria. It defines ESG as pursuing a reduction in greenhouse gas emissions, assessing corporate boards or other aspects of governance and divesting from companies in a list of protected industries.

Those industries are firearms manufacturing and related services; oil, gas, lumber, mining, agriculture and meat production-related businesses; and companies that contract with U.S. Immigration and Customs Enforcement. Firms that boycott those industries — regardless of how they handle INPRS’ investments — could find themselves subject to a mandatory reverse-boycott from INPRS.

And the bill outlines a process for enforcement, headed by Republican State Treasurer Daniel Elliott.

At the end of that process, INPRS would have to divest from firms and funds violating the bill unless its board were to decide that such action would not be in the best economic interest of its members. Then, the board would have to make its rationale public.

Other effects

House Bill 1008’s specific definitions, requirements and enforcement mechanisms could have other consequences.

“The bill may effectively prohibit investment in private markets [like private equity] as well as the use of active public managers,” the new analysis says.

Without those managers, it adds, INPRS wouldn’t be able to run a stable value fund for defined-contribution accounts — which it’s currently required to offer under Indiana Code.

The bill also tasks INPRS with tracking and reporting all of its proxy votes: typically more than 200,000, annually. The votes are an opportunity for shareholders to influence an entity’s management.

That requirement could cost an additional $550,000 in administrative costs per year, paid out from the funds: $200,000 for custom proxy voting policy and infrastructure and $350,000 to hire additional investment staff to manage proxy voting.

The bill would also mean more work, more employees and thus more spending for the agencies involved, which include INPRS, the Treasurer of State, the Auditor of State and the Indiana State Police.

Reaction

After the Capital Chronicle reported the updated analysis, some Democrats called for the bill’s withdrawal from consideration.

“Under both Democratic and Republican leadership the General Assembly has worked for years to fully fund all our pensions,” Rep. Ed DeLaney, D-Indianapolis, said in a statement Monday. “This has required us to be open to a broad range of investments based on their likely return and safety. The present Republican super-majority wants to replace this successful and open strategy with an effort to favor a few industries they like, such as coal.”

“Our taxpayers and retirees will have to absorb this cost. We owe them better,” DeLaney added. “The super-majority should withdraw this bill and let our pensioners and taxpayers rest easy.”

Manning indicated there could be changes to “address” the projected costs.

“We’ll continue to work on the bill to address this issue, and I expect there will be further amendments as the bill moves along in the process,” he said through a spokesperson Monday afternoon.

INPRS itself was neutral before the analysis’ release. Asked about its position on Monday, the agency evaded.

In an email to the Capital Chronicle, a spokesperson said the system invests “for the sole and exclusive benefit [of] its members and beneficiaries” and “does not consider ESG factors” when investing.

“INPRS is sympathetic to the impact that ESG is having on certain Indiana businesses and individuals,” a spokesman wrote, seemingly in response to testimony from gun manufacturers and coal companies last week. “INPRS will continue to engage with the Indiana General Assembly on any financial impacts created by H.B. 1008 and work toward a solution.”

The House Committee on Financial Institutions passed the bill last week 9-4, along party lines.

It now goes to the Ways and Means Committee because of its financial impact.