State Capitol Week in Review

March 06, 2024

From Senator Ronald Caldwell

LITTLE ROCK – Arkansas is one of several states that have restricted their public retirement systems from investing in funds that refuse to trade in the stock of fossil fuel companies, energy companies, ammunition manufacturers and firearms makers.

Texas, Oklahoma, Kentucky and West Virginia have drawn up a list of financial institutions that are restricted from handling investments for retirement systems.

The attorney general of Tennessee recently filed a lawsuit against BlackRock, an investment firm with assets of about $10 trillion. The lawsuit alleges that BlackRock misled its customers who live in Tennessee by downplaying the extent to which its investment strategy emphasizes ESG factors. The acronym refers to environmental, social and governance related factors.

For example, there are mutual funds that promote themselves as focusing on clean or renewable energy. Other funds may say to investors that they won’t purchase stock in a business that doesn’t have a strong inclusion and diversity policy.

Act 411 of 2023 creates a process for the Arkansas Teacher Retirement System and the state Public Employees Retirement System to remove its holdings in restricted companies. Texas has a law similar to Act 411 and so far has listed 15 companies whose energy divisions will be restricted from Texas public investments.

Kentucky has 11 companies on its restricted list. Oklahoma has six and West Virginia has five.

At a recent meeting of the Joint Performance Review Committee, the director of the Arkansas Teacher Retirement System updated lawmakers on the progress of divestment efforts mandated by Act 411.

The act created a five-member ESG Oversight Committee, which will make the decisions about whether Arkansas public systems should take its money out of specific investment funds. It should make divestment decisions in a few months.

The Teacher Retirement System has about $1.2 billion in three funds managed by BlackRock. The largest is about $1 billion in an index fund, which is set up to track the movements of enormous national and worldwide stock market indexes. It has investments in a large variety of businesses.

The teacher retirement system has $260 million in a bond fund and $13.8 million in a private infrastructure fund that has financed fossil fuel production, pipelines and power companies.

The lawsuit by the Tennessee attorney general specifically identifies 27 investment products offered by BlackRock. The Arkansas Teacher Retirement System has no investments in any of those 27 products. The Public Employees Retirement System has no investments in BlackRock funds, nor does the Local Police and Fire Retirement System.

If ESG Oversight Committee identifies a BlackRock fund that Arkansas is prohibited from doing business with, the teacher retirement system would take out its money and place it elsewhere. The director estimated that the administrative costs of divesting would not exceed $10 million, which would not affect the overall financial health of the system because of its size.

The Arkansas Teacher Retirement System has assets of about $21.4 billion and the Arkansas Public Employees Retirement System has assets of more than $11 billion. Their investment managers will have to certify every month that they’re in compliance with Act 411, and that their investment decisions are based on monetary factors, with no consideration of political factors.