By Ross Kerber
(Reuters) -Legislation pending in the U.S. state of Kansas to stop the use of environmental, social or governance (ESG) considerations by public contractors would reduce state pension system returns by $3.6 billion over 10 years, a new fiscal analysis shows.
The note issued by the state's Division of the Budget on March 7 is the latest to show the challenges facing Republican politicians looking to block or slow the growing use of ESG considerations by businesses and investors.
Similar to Republican-sponsored bills in other states, the "Protection of Pensions and Businesses Against Ideological Interference Act" before the Kansas senate would require the Kansas Public Employees Retirement System (KPERS) to divest from financial companies found to engage in "ideological boycotts."
In other states where such laws have already passed, Republican officials have accused top banks and Wall Street firms like BlackRock Inc (NYSE:BLK) of boycotting the energy industry over the investors' treatment of issues like climate change. The financial firms say they are only seeking to maximize returns and account for things like the risks rising global temperatures could pose to company operations
The March 7 budget note says that KPERS has indicated it would have to restructure its portfolio "because the current investment managers would be disqualified as fiduciaries and replaced by alternative investment managers that would meet the bill’s requirements."
With expected returns cut by 0.85%, "the KPERS general investment consultant projects that the investment portfolio returns would reduce by $3.6 billion over the next ten years when compared to the current investment portfolio," the note states.
Early divestment costs in private markets would cost $1.14 billion, the note also said. Other costs would include early divestment fees of new employees for the Kansas state Treasurer to monitor potential boycott activity.
At a public hearing on Wednesday about the bill and related legislation, KPERS Executive Director Alan Conroy said his agency would be forced to drop fund managers even if they were not running state assets with an ESG mandate, such as if their CEO had shared views about ESG investments.
"We think that would be a tripwire, we'd have to get out" Conroy said.
Kansas state senator Mike Thompson, sponsor of the bill that was analyzed, called the $3.6 billion figure "overstated" in a telephone interview on Wednesday, since the system would be able to find other managers. At the hearing, Thompson said he intended to address concerns and to "allay anyone's fears" about the potential impact of the legislation.