Like many other US pension funds, West Virginia Investment Management Board’s (IMB) proxy vote has been a lightning rod for anti-ESG sentiment. The belief that IMB’s external managers, and the proxy advisory firms many of them use to guide them on board votes and shareholder resolutions, were using IMB’s vote to further climate and social goals that might be detrimental to the portfolio inflamed anti-ESG campaigners.
In a backlash to sustainable investment, visible in other Republican-led states across America, West Virginia has introduced legislation to prohibit its public pension fund from following shareholder advisers’ voting recommendations that consider ESG criteria.
But for all the talk that this will safeguard the $19 billion defined benefit public fund from a political ESG agenda that endangers the financial interest of beneficiaries, Craig Slaughter, CEO and CIO of West Virginia Investment Management Board, IMB, is worried.
He believes recent legislation introduced by West Virginia’s Republican administration to claw back direct control of IMB’s proxy vote marks the tip of an iceberg. Political interference in investment decision-making is back and threatens the fiduciary independence of the retirement plan.
Slaughter is better positioned than most to recognise the danger signs. He’s been at the helm of IMB for over three decades since he was recruited to right the ship after millions, including pension fund assets, went missing due to mismanagement in the Treasurer’s office in the late 1980s. He set about restoring IMB’s fiduciary independence, getting it out of the Treasurer’s office, and put in place structures to protect the pension fund from any perception that beneficiary savings were state money.
“Politics and investment don’t mix,” says Slaughter, speaking in an interview from IMB’s Charleston offices. “Our goal was to create a professional organization immune from changing political environments.”
“Politics and investment don’t mix,”
Under his watch IMB has occasionally faced pressure to invest in this, divest that, or use assets to achieve some policy or another. But conservative West Virginia always managed to shake off any influence from the left; politically influenced investment ideas never got much traction and a long spate of healthy returns (as of December 31, 2022, the 20-year return is 8.2 per cent) reflects the absence of political influence from the investment process. As Republican rhetoric grows more intrusive, Slaughter believes things are starting to change.
The new legislation, coming into force in the next 15 months, will increase the level of scrutiny and impose potentially costly processes and hurdles in the proxy voting process. However, Slaughter’s main concern is that this legislation marks the first step on a road that could see the legislature tell the pension fund how to invest its assets.
One day that could mean ordering divestment of fossil fuels by those that oppose it, but right now he is more concerned the anti-ESG movement led by West Virginia’s cultural Republicans could start to dictate investment strategy that could include forcing investment in West Virginia’s fossil fuel industry.
“Whether pro-ESG or anti-ESG, the idea of using other peoples’ money to achieve a political purpose is offensive to me.”
“The implication from discussions on the floor of both our legislative houses was that next year, this will be on the agenda,” he says. “We are a fossil fuel state and there have been bills in the past that have wanted us to overtly support fossil fuels. At the IMB we don’t favour or disfavour fossil fuels, we just buy them if they are a good investment and if not we don’t’, but that may no longer be good enough. Whether pro-ESG or anti-ESG, the idea of using other peoples’ money to achieve a political purpose is offensive to me.”
Proxy process, external managers
IMB outsources all asset management to external managers, mostly trusted to use the pension fund’s proxy vote at shareholder meetings in a way that safeguards its fiduciary interests just as they are on every other investment decision.
“We may not have agreed with every single vote they cast, but we don’t believe they were being crazy with it,” says Slaughter who believes (with the benefit of hindsight) if he’d paid closer attention to this tiny corner of the portfolio he might have been able to pre-empt the crisis. “The idea is that the left, pro-ESG forces, have infiltrated the proxy voting process and are using it to further their vision of the world. To the extent they have, I have some sympathy for the anti-ESG crowd.”
From now until the legislation comes into force, Slaughter plans to dig into every proxy vote cast in West Virginia’s name, analysing the process and educating IMB’s trustees to make sure they understand the issues at stake in a burdensome process. On one hand, it may result in West Virginia continuing to use the bespoke proxy services of some of its external managers.
On the other, where IMB invests via a commingled pool structure, the pension fund may be required to use an alternative solution. This would include BlackRock, mandated by IMB to run its index fund and under particular scrutiny for promoting sustainable investment. It would be a change that may not be in the best interests of the fund.
“Although we may have to use an alternative platform for voting in BlackRock’s case, it may not be the best solution. I’m convinced BlackRock takes its proxy vote very seriously. They just may have the most robust proxy voting platform out there,” he reflects.
In another scenario, if the analysis reveals managers are not voting in West Virginia’s best fiduciary interest IMB may have to vote the proxies itself, developing its own policy in a new approach that will require a boosted internal team. This would most likely happen, he predicts, because these managers rely completely on the services of proxy advisors.
“These are the ones, I’m guessing, we’ll have most of the problem with.”
Trusting the trustees
One of the trustees’ key tasks will be developing an ability to analyse issues that appear to be pro-ESG for no good reason, but on digging a little deeper, reveal financial utility in the best interests of the pension fund.
One of the best examples of which, says Slaughter, appears to be activist investors forcing oil giant Exxon to take on three board members to bolster its alternative energy expertise. (See How CalSTRS took on Exxon.)
“Ever since that happened, Exxon has outperformed its peers. The logic behind the vote seems legitimate under any fiduciary standard. To say that this was not a responsible vote from a fiduciary standpoint doesn’t seem to hold water.”
But his confidence in IMB’s trustees’ to only look at the voting process through a fiduciary lens is clouded by political influence on the board that encapsulates the wider challenge ahead. Of IMB’s 13 trustees, Slaughter describes 10 as experienced businesspeople from the private sector, whose allegiance to the fund is enshrined in their own personal liability for any breach of fiduciary duty.
Three remaining trustees (the Treasurer, Auditor and Governor) serve by virtue of their office. Their primary allegiance, he says, is to the state and West Virginia’s taxpayers.
“Our beneficiaries are a different group of people from taxpayers. As a trustee of a pension plan your obligation is solely to your beneficiaries. These people are trying to wear two hats, and it’s difficult to do that successfully. Amazingly, it has not been an issue until this last legislative session when the Treasurer appeared to choose taxpayers over beneficiaries.”
managers cultivating greenwashing
Slaughter also believes some of IMB’s asset managers have also gotten out of their lane. He is just as critical of those in the asset management community that have rushed to sell products as sensitive to ESG, but which have led to greenwashing and inaccurate rhetoric.
“It’s absolutely true that some money managers talk a big game about ESG to cater to pro-ESG investors when in fact these managers aren’t really doing anything any different than what they ever did,” he says.
“Of course, we don’t want our asset managers to change what they are doing if they are genuinely good at it. But we don’t want them to imply that they are doing something they are not. Some factors that fall under ESG are relevant to successful investing, but most of them are not.”
In fact, he believes that ESG has incited such a political and cultural battle in some US states it would be better if the term was ditched altogether.
“I say to money managers, quit talking about ESG and just talk about the things that matter to your process. Don’t get over your skis, don’t try and be more than you are.”
It’s part of a growing call to tone down ESG language that he believes is starting to be heard. Asset managers are tweaking proxy voting policies, and he has noticed that at least one bank has modified its marketing material depending on the state they are working in.
“In red states, they don’t mention ESG,” he says.
It may be a sign of the ESG debate starting to cool, but after decades of experience, Slaughter is battening down for one of the most important battles in his career.
“Until now, I’ve always felt like I had it easy on the political front,” he concludes.