Arkansas' ESG Oversight Committee cannot take into consideration the financial impact of the potential divestment of certain investments at the state's retirement systems under state law before determining its final list of financial service providers that discriminate against energy and/or fossil fuel companies, committee Chairman David Scott said Monday.
On Thursday, the committee voted to find that six financial service providers that conduct business with state government discriminate against energy and/or fossil fuel companies.
The six financial service providers will be sent a written notice about the committee's findings and given an opportunity to demonstrate within 30 days' receipt of the notice that they are not discriminating against energy and/or fossil fuel companies. Scott said the written notices to the six service providers will be sent by certified mail today.
The committee decided Monday to meet on May 6 to decide whether any of the six financial service providers provided sufficient information to the committee to demonstrate that they don't discriminate against energy or fossil fuel companies. At that meeting, the committee is expected to give final approval to the list.
The committee also voted Monday to clarify what entities are included in three financial service providers that the committee determined on Thursday do discriminate based on public statements in companies' reports.
The three financial service providers include UBS Group AG, UBS Asset Management, UBS Securities LLC, and UBS Financial Services Inc.; Credit Suisse Asset Management, Credit Suisse Group AG, and Credit Suisse Securities LLC; and Royal Bank of Canada, Royal Bank of Canada Global Asset Management, and RBC Capital Markets.
Last week, the committee determined that three other financial services providers discriminate against energy and/or fossil fuel companies. These include Goldman Sachs Asset Management, Goldman Sachs & Co., and Goldman Sachs Group Inc.; TD Asset Management, TD Bank Group and TD Securities; and Nomura Asset Management, Nomura Group and Nomura Securities.
All six financial providers conduct business with the state treasury; UBS conducts business with the Arkansas Teacher Retirement System; and Goldman Sachs conducts business with the Arkansas Local Police and Fire Retirement System, state officials said.
The Arkansas Teacher Retirement System is invested in three funds managed by UBS, including the UBS Trumbull Property Fund with a current value of about $125.5 million, the UBS Agrivest Core Farmland Fund with a current value of about $62 million, and the UBS Trumbull Property Income Fund with a current value of about $52.5 million, system Deputy Director Rod Graves said last week.
The Arkansas Local Police and Fire Retirement System made an investment in the 2016 Goldman Sachs Vintage VII Private Equity Secondaries Fund, which has a current market value of $10.1 million as of Dec. 31. This fund purchased secondary interests in limited partnerships and is in the process of returning funds to investors as part of its distribution process, the system's investment consultant and Stephens Inc.'s executive vice president, Larry Middleton, said Thursday.
During the ESG Oversight Committee's meeting on Monday, committee member Steve Cook said he would like to give officials of the Arkansas Teacher Retirement System and Arkansas Local Police and Fire Retirement System the opportunity to speak to the committee "to let us know the impact that will cost both those systems if those investment managers pull out of those two entities.
"We heard public testimony that the systems thought that were in compliance with Act 411," and that the systems didn't invest in investment managers' funds that discriminate against energy, fossil fuels, firearms or ammunition companies, Cook said.
Cook said he wants to give the two retirement systems the opportunity "if they wish, to say why or why not those companies should or should not remain in their portfolio."
Scott said he isn't against Cook's idea, but the ESG Oversight Committee's "Statutory duty really doesn't have to do" with considering the financial impact on state retirement systems under Act 411 of 2023, adding that the committee can't use that information as a decision-making tool.
Committee member Tom Lundstrum also said the financial impact of the ESG Oversight Committee's decisions on state retirement systems seems to be outside the committee's mandate under Act 411.
Doralee Chandler, deputy attorney general for state agencies, said financial impact information is not evidence that the committee can use under Act 411 of 2023 in determining its final list of financial service providers that discriminate. However, she said that financial impact information could be provided to the committee after it determines its final list.
Asked about the potential financial impact to the Arkansas Local Police and Fire Retirement System if it's forced to divest its investment in the Goldman Sachs fund after the ESG Oversight Committee's meeting on Monday, system Director David Clark said Monday "LOPFI has not completed such a calculation."
Information about a potential financial impact to the Arkansas Teacher Retirement System if the system is forced to divest its investments in UBS funds was not available Monday afternoon through system officials.
The Arkansas State Highway Employees Retirement System has one holding of a Goldman Sachs-issued bond for $1 million, Robyn Smith, that system's executive secretary, said after the committee's meeting.
Asked whether the retirement system could continue to do business with Goldman Sachs under Act 411 if the company is on the ESG committee's final list, Smith said in a written statement that she wasn't trying to be "obtuse."
"This is a very complicated act of legislation," she said. "Once the list is finalized, we will need to review all of our holdings and relationships to determine the extent, if any, of connections to the entities on the list. At that point we will have to confer with our legal representative whether the statute prohibits such connections."
After the committee meeting, Arkansas Public Employees Retirement System Executive Director Amy Fecher said, "We can confirm that we do not have any investments with these [six] firms" that the committee has determined discriminate against energy or fossil fuel companies.
The state treasury has used Credit Suisse, Nomura, RBC, Goldman Sachs, TD Securities and UBS as broker-dealers to effectuate the buying and selling of fixed-income securities such as U.S. Treasury securities, U.S. agency securities, and mortgage-backed securities for the portfolio of the treasury, state treasury spokesperson Heather McKim said Thursday.
The state treasury has its own investment management team that decides which securities are bought and sold, McKim said, and the state treasury's portfolio securities are held at its custodian bank, Bank of New York Mellon. The state Board of Finance approves specific broker-dealers to provide investment services that the state treasury does business with, she said.
State treasury investment practices prioritize the three key objectives of safety, liquidity and return on investments, and these objectives guide its decision-making process, McKim said.
The ESG Oversight Committee is required to prepare and provide to each public entity by mid-May a list of financial service providers that discriminate against energy, fossil fuel, firearms or ammunition companies, or otherwise refuse to deal based on environmental, social justice or other governance-related factors under Act 411 of 2023. The state treasurer must maintain the list as determined by the ESG Oversight Committee on the state treasurer's website.
The state treasurer is required under the law to divest the state of direct or indirect holdings with financial services providers included on the list, as are state and local governments. Upon furnishing the list to the state treasurer, the committee will automatically expire under Act 411 of 2023.