This week, Florida Chief Financial Officer Jimmy Patronis issued a directive requiring asset managers to remove Floridians’ retirement money from environmental, social, and governance (ESG) funds.
Florida’s Deferred Compensation Plan (DCP), which is a supplemental retirement plan for state employees, totals $5.1 billion in assets. A percentage of these assets will be identified for divestment from ESG funds developed by asset managers such as Vanguard. A press release issued by CFO Patronis’s office stated that one of the funds that will fall under the prohibition is the Vanguard FTSE Social Index Fund.
The 93,000 Floridians that are enrolled in this program are the beneficial owners of the assets invested in these ESG funds. The fiduciary duty to make decisions based solely on the financial interests of the retirees is a strict standard that if breached could expose plan fiduciaries to legal liability.
CFO Patronis has made it clear that in order to do business with Florida, asset managers need to focus on offering investment products that will focus on pecuniary returns:
“The State of Florida has taken a hard stand that ESG is undemocratic, it constrains companies’ ability to pursue the best returns possible, and many of its values run counter to the values of everyday Floridians. As ESG has gone unchecked throughout the financial services sector for too many years, fiduciaries who believe ESG is bad for returns need to take steps in redirecting dollars away from these funds, and into ones that are more focused on the bottom line. We’ve been boiled like a frog for too long, and it’s time to hop out of the pot.”
The directive makes it clear that funds need to focus solely on maximizing returns. Research from Boston College found that state mandates on social investing and ESG policies for public pension funds “reduce annual returns by 70 to 90 basis points.” CFO Patronis’ decision is based on data that concludes these funds are failing to focus on maximizing nest eggs.
This news comes after CFO Patronis divested $2 billion of state treasury funds from BlackRock and the Trustees of the State Board of Administration passed a resolution to require the sole consideration of pecuniary factors when both making investment decisions and proxy voting.
Codifying the SBA’s resolution or enacting legislation similar to the American Legislative Exchange Council’s (ALEC) model bill (State Government Employee Retirement Protection Act) will protect the pecuniary interests of pensioners and should be a top priority during the Florida legislature’s 2023 session.
This announcement comes on the heels of the Department of Labor’s (DOL) promulgation of its final rule allowing plan fiduciaries of employer-sponsored retirement plans to make investment decisions and vote proxies based on ancillary ESG factors. The final rule allows qualified default investment alternatives (QDIAs), such as the target date funds in the DCP, to invest in ESG funds that include the consideration of non-pecuniary factors. Fortunately, Congress still has time to consider a joint resolution of disapproval under the Congressional Review Act to repeal DOL’s final rule.
While work still needs to be done in Washington, significant progress is being made in states like Florida to depoliticize retirement money. The Florida Department of Financial Services will review the funds to be removed from the program and subsequently divest those assets to be placed in funds that the CFO believes will solely offer financial benefits to retirees.
As the United States is likely heading into an economic downturn, states are making the right decisions to maximize returns in a macroeconomic environment that has been unkind to both stocks and bonds.