October 7, 2022

Louisiana Treasury to Divest Over Adviser's ESG Policies

Steven Lofchie Commentary by Steven Lofchie

The Louisiana State Treasury notified one of its advisers that it will liquidate investments with the adviser by the end of 2022 over concerns that the adviser's support of ESG policies would be detrimental to the state's economy. The State said that it has already divested $560 million to date, and plans to divest the remaining $234 million before year's end, for a total of $794 million.

In a letter to the adviser, the State said that it will "strategically divest" its investments because the adviser's support of ESG policies is anti-fossil fuel and Louisiana's economy relies heavily on the fossil fuel industry. The State said that the adviser's support of ESG policy contradicts its own interests given its investment in oil and gas companies, and the adviser previously admitted that an "ESG agenda of forcing behaviors will not increase investor returns." The State said that it will continue to prioritize safeguarding investor returns over pushing "political and social agendas embodied in ESG investing." It emphasized that ESG-focused investment firms must be held to the same fiduciary standards as all other firms, and not be given any special treatment to promulgate a political agenda.

Separately, a collective of 19 state attorneys general submitted a letter to the adviser expressing similar concerns, and asserting that the ESG policies may violate state laws prohibiting boycotts of energy companies.

Commentary

While the issue of "greenwashing" has been the focal point of investment advisers' ESG activities, there is a separate issue of equal legal importance: whether an ESG-based investment strategy may be inconsistent with an adviser's fiduciary obligation to maximize returns, at least where the client has not affirmatively consented to a potential sacrifice of investment returns in order to obtain some non-economic end. Under the Trump administration, the DOL sought to discourage any ESG investment strategy that would detract from the maximization of returns, while the Biden administration has sought to allow more leeway in this respect. While ERISA does not apply to state plans, generally similar requirements are at issue.

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