South Carolina is among a group of states investigating a major investment management and ratings company for potential violations connected to liberal environmental, social and governance (ESG) activities, The Nerve has confirmed.
Last week, Missouri Attorney General Eric Schmitt announced that 18 other state attorneys general had joined his state’s investigation of Chicago-based Morningstar Inc. and its subsidiary, Sustainalytics.
“These ESG investing firms are playing politics with pensions and real people’s livelihoods,” Schmitt said in a prepared statement.
The release didn’t identify the 18 other states. In a written statement last week to The Nerve, Robert Kittle, spokesman for Republican S.C. Attorney General Alan Wilson, said the S.C. Attorney General’s Office “signed onto that,” though he declined further comment, citing the pending investigation and referring The Nerve to Schmitt’s release.
Wilson also recently joined Republican state attorneys general in two other ESG-related matters, records show. Wilson is the current chairman of the national Republican Attorneys General Association.
Critics say ESG scores are being used by banks, investment and accounting firms, and credit rating agencies to grade companies on how well they have adopted certain liberal policies or values, such as reducing the effects of climate change, increasing diversity on their governing boards, and supporting social justice causes.
The Nerve in recent months has been investigating the ESG movement in South Carolina. Several S.C. lawmakers, including Sen. Josh Kimbrell, R-Spartanburg, introduced ESG-relatd bills earlier this year.
“Economic, social and governance (ESG) scores represent a great threat to free speech and free enterprise in South Carolina and across America,” Kimbrell, a former commercial banker, said in a written response Wednesday to The Nerve. “I intend to reintroduce legislation that will ban financial institutions from pursuing any form of ESG scoring matrix in their credit decisions, and to ensure economic incentives in our state are not allocated based on any form of ESG score.”
Asked by The Nerve about whether he would support any related legislative reforms, Wilson on Wednesday issued the following written statement through his spokesman:
“I am deeply concerned about ESG issues and I’ve been in touch with both RSIC (S.C. Retirement System Investment Commission) CEO Michael Hitchcock and State Treasurer Curtis Loftis about it. In general, I would support any efforts in the state legislature to address the problem, but I’ll wait to comment until I see specific legislation.”
In the Missouri-led investigation, Schmitt in his release said his office last month sent “civil investigative demands” to Morningstar and its subsidiary, Sustainalytics, for records related to Morningstar’s “perceived anti-Israel bias” in ESG ratings for products to investors.
The release said Schmitt’s office was looking into “alleged consumer fraud or unfair trade practices,” noting it was the “first investigation of its kind.”
Among other records, Schmitt’s office has asked Morningstar to provide “all documents and communications with any federal government or state government entity relating to ESG Services and BDS,” according to the release.
“BDS” stands for “boycott, divestment, sanctions,” a Palestinian-led movement that “upholds the simple principle that Palestinians are entitled to the same rights as the rest of humanity,” and “urges action to pressure Israel to comply with international law,” according to a BDS website.
In an open letter in June to “our Morningstar community,” Morningstar executive chairman Joe Mansueto and company CEO Kunal Kapoor said neither Morningstar nor Sustainalytics “supports the anti-Israel BDS campaign.” They acknowledged, though, that a separate investigation by an outside law firm identified “limited areas of bias that are outliers over the span of our work but, nevertheless, do not live up to Morningstar’s standards.”
Under its “ESG Investing Approaches” section on its website, Morningstar said its “foundational sustainable investing framework outlines the various paths investors can take to act on their sustainability objectives.”
Morningstar operates in 29 countries and, according to its latest quarterly federal Securities and Exchange Commission filing, oversees nearly $260 billion in “average assets under management and advisement.”
Besides joining Missouri in its investigation of Morningstar, South Carolina also has partnered with other states in an ongoing dispute with BlackRock, the world’s largest investment-asset manager, over state pension funds.
In an Aug. 4 letter to Larry Fink, who is the chairman and CEO of New York-based BlackRock, Wilson and 18 other Republican state attorneys general criticized an earlier BlackRock letter to states describing its position on energy investments involving state pension funds, contending that the earlier letter contains “many statements that appear to conflict with BlackRock’s previous public statements and commitments.”
“Based on the facts currently available to us, BlackRock appears to use the hard-earned money of our states’ citizens to circumvent the best possible return on investment, as well as their vote,” the attorneys general, led by Arizona Attorney General Mark Brnovich and Nebraska Attorney General Doug Peterson, said in their letter.
“Rather than being a spectator betting on the game, BlackRock appears to have put on a quarterback jersey and actively taken the field,” the letter continued. “As a firm, BlackRock has committed to implementing an ESG engagement and voting strategy across all assets under its management, and held over 2,300 company engagements on climate, the most of any category of engagements.”
The letter warned that BlackRock’s “actions on a variety of governance objectives may violate multiple state laws.”
In a May story, The Nerve revealed that BlackRock – which was overseeing $10 trillion in assets as of January – and Boston-based State Street Corporation, which reported $4 trillion in assets under its management at the end of 2021, collectively managed about $18.5 billion, or nearly half, of the approximately $39 billion total market value of all investments by South Carolina’s pension plan for state retirees in fiscal 2021, according to the S.C. Retirement Investment Commission’s (RSIC) year-end investment report.
The report for the fiscal year that ended June 30 of this year likely will not be published until “late fall,” RSIC CEO Hitchcock said in a written response last week to The Nerve.
Hitchcock earlier told The Nerve although there are state pension plans “interested in pursuing ESG-related investment theses, that’s not us.” He said neither BlackRock nor State Street makes “any investment decisions for us whatsoever,” noting the pension plan’s public-equity portfolio is “all passively invested” through an index, which is a way to measure the price performance of a group of securities over time.
In his latest written response to The Nerve about BlackRock’s and State Street’s performance for the fiscal year that just ended, Hitchcock said, “The returns for FY ’22 are in line with our expectations.”
An average total of 171,298 retirees in the state’s five retirement systems or their beneficiaries received pension benefits in fiscal 2021, according to an annual report by the S.C. Public Employee Benefit Authority.
Federal ESG fights
In another ESG matter, Wilson joined 20 other Republican state attorneys general in an Aug. 16 letter to the U.S. Securities and Exchange Commission protesting a proposed SEC rule that would require more ESG disclosures from investment managers.
“The Proposed Rule here continues the Commission’s recent attempt to transform itself from the federal regulator of securities into the regulator of broader social ills,” according to the attorneys general, led by West Virginia Attorney General Patrick Morrisey.
The letter contended that the proposed rule would “add onerous reporting requirements for investment funds with no rational justification,“ noting that “perhaps the most burdensome” proposal is a “familiar one now: required (greenhouse gas ) emissions disclosures.”
The Nerve in May detailed three other federal ESG-related efforts opposed by Republican state or federal officials in South Carolina, including:
*Public comments on ESG practices that were solicited by an obscure federal regulatory organization known as the Municipal Securities Rulemaking Board. In a March letter to the MSRB, a group of state officials from across the U.S, including Wilson and Treasurer Loftis, contended that regulators eventually plan to “require municipalities to make ESG-related disclosures.”
*A U.S. House bill passed last year that would require, among other things, publicly traded companies to disclose certain information related to ESG “performance metrics,” climate “change-related risks,” and expenditures of “certain political activities.” The bill passed over the objections of U.S. Rep. William Timmons of Greenville, who told The Nerve in a written statement that “ESG metrics in credit analysis and investment decisions are simply a political tool that have no impact on financial performance or risk.”
*A proposed U.S. Department of Labor rule change that would allow managers of private retirement plans to promote ESG factors in those plans. U.S. Sen. Tim Scott joined three other Republican senators in a December letter urging the DOL to withdraw the proposal.