State investment manager argues against ban on ‘green’ investments

The state’s top investment officer doesn’t want lawmakers to bar him from trading the securities of “green” companies — provided those companies can make money for the state.

The goal of stock market purchases in South Dakota, Investment Officer Matt Clark said, is to buy low and sell high — regardless of the kind of business behind the stock’s ticker symbol.

“There isn’t anything we won’t buy at the right price, including a pile of manure,” Clark told the Legislature’s Executive Board on Friday in Pierre.

Environmental, social and governance (ESG) considerations in investing have grown controversial in recent years, as environmental and social activist groups have pressured the leaders of publicly traded companies to look beyond immediate financial returns when making business decisions.

That pressure has played out through legal and informal means. Some lawmakers in Democratic states like California have tried to force public divestment in companies that profit from fossil fuels or financial institutions that fund fossil fuel investments. Citizens, meanwhile, have called on the public to boycott companies engaged in such business, or to boycott companies that fail to consider things like diversity, equity and inclusion.

On the flipside, lawmakers in some conservative states have moved to divest from mutual funds that consider ESG or to ban the purchase of stocks from companies that divest from fossil fuels. The Texas Legislature blocked 10 ESG businesses from working with the state last year, and is moving toward a ban on doing business with insurance companies that weigh environmental factors in setting coverage rates.

State bars social considerations

On Friday, Clark told lawmakers that South Dakota ought to avoid similar measures.

Clark’s office manages not only the trust fund for the state’s retirement system, but several other funds, such as the Dakota Cement Plant Trust Fund, Health Care Trust Fund, School & Public Lands Fund and the Education Enhancement Trust Fund.

Clark and his team were on hand at the Executive Board’s meeting to offer an update on the state’s investment accounts and returns. 

The state’s returns were mostly flat for fiscal year 2023, lawmakers learned. The investment council’s assets sit at about $19.2 billion this year, up less than $200 million from the year before after six years of higher returns. The markets have “muddled along” to produce 4-5% returns for the retirement system, Clark said, though he echoed the recession concerns of national economists by warning lawmakers about what could be “lean times” in the coming years.

The Executive Board also took action to replace a retiring member of the state’s investment council, which oversees Clark’s team.

The ESG comments came after those items of official business. Clark offered his thoughts on ESG investments at the prompting of Rep. Will Mortenson, R-Pierre. 

“We’ve seen kind of a rash of environment, social and governance policy legislation that has come through,” Mortenson said. “Are those firms you target? Are they firms you avoid? Do you not care?”

Clark’s team “only cares about the bottom line” when buying securities, he said. His investment managers are legally barred from considering anything else. South Dakota passed a prohibition on the consideration of social factors in stock purchases back in 2010 — more than a decade before the current wave of anti-ESG legislation began to take shape.

“I always point with pride to the fact that South Dakota was the first state to advance this,” Clark said. “We do not take into account those kinds of issues.”

The governance portion of ESG is something the state does consider, Clark said, because “we always want good governance” from leaders of its investment targets. The environmental and social factors are a different story, he said, which is part of the reason he backed and still supports the 2010 law’s prohibition on investment decisions based on those factors.

“The ‘E’ and the ‘S’ part we think are counterproductive, harm investment results long-term, and they tend to cause you to be the recipient of political pressure,” Clark said.

Restrictions could harm returns

Rep. Chris Karr, R-Sioux Falls, asked Clark to explain how further restrictions might complicate the management of the state’s investments — or perhaps backfire for retirees.

It’s great that the state is only concerned about investment returns, Karr said, but “that also doesn’t mean that we are not invested in companies that would be in that category of ESG.”

“We’ve had legislators that have drafted bills to say, ‘Well, let’s make sure we’re not part of these in the future,’” Karr said. “Can you just briefly touch on the complexity of trying to, I guess, divest us of any investment that would have an ESG category attached to it?”

Some ESG-favored companies are solid investments, Clark said. Electric carmaker Tesla, for example, is a company that would count as ESG friendly by some metrics, but it’s also a company that has boosted the state’s retirement funds.

If the state invests in a “green” company, Clark said, it’s because those companies yield green in the form of returns.

“We’ll buy cigarette companies. We own a lot of coal companies. Coal companies have been some of our favorite investments. And we’ll own Tesla at times,” Clark said. “It’s strictly on the basis of the present value of future cash flows and the risk assignment to those cash flows.”

In fact, Clark said, ESG buying can be a benefit for South Dakotans. If ESG-minded investors overbuy a stock and the price plummets, that gives the state an opportunity to buy that stock at a lower price and cash in later on.

If that approach makes money, he said, he and his staff will follow it.

“Some of my staff may secretly be environmentalists,” Clark said. “It doesn’t matter. They’re not allowed to take any of those things into consideration.”