02/23/2024 08:30 AM House FINANCE

HOUSE BILL NO. 174                                                                                                            
                                                                                                                                
     "An Act  restricting fiduciary  actions by  a fiduciary                                                                    
     of  a  state  fund, the  Alaska  Retirement  Management                                                                    
     Board, and the Alaska  Permanent Fund Corporation Board                                                                    
     that have the purpose  of furthering social, political,                                                                    
     or ideological interests."                                                                                                 
                                                                                                                                
9:35:55 AM                                                                                                                    
                                                                                                                                
Co-Chair  Foster  welcomed  the   bill  sponsor  and  listed                                                                    
individuals available to testify.                                                                                               
                                                                                                                                
REPRESENTATIVE  KEVIN MCCABE,  SPONSOR, introduced  the bill                                                                    
with prepared remarks:                                                                                                          
                                                                                                                                
     HB   174  prioritizes   the   financial  or   pecuniary                                                                    
     interests of  beneficiaries when managing  state funds,                                                                    
     ensuring responsible investment  decisions focus solely                                                                    
     on the financial gain. The  bill strengthens efforts to                                                                    
     establish  a  sustainable  long-term  fiscal  plan  for                                                                    
     Alaska  by eliminating  external social,  political, or                                                                    
     ideological  goals from  investment considerations.  It                                                                    
     will  align  Alaska with  a  growing  number of  states                                                                    
     introducing  legislation  that  emphasizes  responsible                                                                    
     investment  management  and fiscal  responsibility.  It                                                                    
     prohibits  practices like  board  stacking and  ensures                                                                    
     that members  of key  boards prioritize  financial gain                                                                    
     and refrain from  advancing external interests. Passage                                                                    
     of  HB  174 signifies  a  significant  step forward  in                                                                    
     responsible    investment   management    for   Alaska,                                                                    
     safeguarding  citizens   financial  interest   for  the                                                                    
     state's  long-term benefit.  With  the bill's  passage,                                                                    
     Alaskans can  trust that their financial  interests are                                                                    
     being  protected,  contributing  to confidence  in  the                                                                    
     state's  management  and  fostering a  stable  economic                                                                    
     environment.  My  hope  is that  it  will  fortify  the                                                                    
     development  of   a  durable,   sustainable,  long-term                                                                    
     fiscal  strategy for  the  state,  devoid of  transient                                                                    
     trends or influences.                                                                                                      
                                                                                                                                
Representative McCabe continued with prepared remarks:                                                                          
                                                                                                                                
     Investing  in  sustainable  funds that  prioritize  ESG                                                                    
     goals  is supposed  to help  improve environmental  and                                                                    
     social    sustainability    of   business    practices.                                                                    
     Unfortunately,  close analyses  suggests  that its  not                                                                    
     only not  making much  difference to  companies' actual                                                                    
     ESG  performance,  but  it may  actually  be  directing                                                                    
     capital   into  poor   business  performers   and  poor                                                                    
     business models.                                                                                                           
                                                                                                                                
9:38:52 AM                                                                                                                    
                                                                                                                                
JULIE MORRIS, STAFF, REPRESENTATIVE KEVIN MCCABE, reviewed                                                                      
the sectional analysis (copy on file):                                                                                          
                                                                                                                                
     Section 1  amends AS  37.10.071 to  require fiduciaries                                                                    
     of state  funds to  prioritize the  financial interests                                                                    
     of  beneficiaries  when  investing public  funds.  This                                                                    
     prohibits  consideration   of  social,   political,  or                                                                    
     ideological factors in investment decisions.                                                                               
                                                                                                                                
     Section  2 amends  AS 37.10.220  to require  the Alaska                                                                    
     Retirement   Management   board   to   prioritize   the                                                                    
     financial  interests  of beneficiaries  when  investing                                                                    
     public funds.  This prohibits consideration  of social,                                                                    
     political,   or  ideological   factors  in   investment                                                                    
     decisions.                                                                                                                 
                                                                                                                                
     Section  3 amends  AS 37.10.220  to require  the Alaska                                                                    
     Permanent  Fund  Corporation  board to  prioritize  the                                                                    
     financial  interests  of beneficiaries  when  investing                                                                    
     public funds. This prohibits consideration of social,                                                                      
     political, or ideological factors in investment                                                                            
     decisions.                                                                                                                 
                                                                                                                                
9:39:52 AM                                                                                                                    
                                                                                                                                
Representative  McCabe thanked  Co-Chair Foster  for hearing                                                                    
the   bill.  He   noted  individuals   were  available   for                                                                    
questions.                                                                                                                      
                                                                                                                                
Co-Chair Foster  stated it  was the  first bill  hearing and                                                                    
there would  be no  public testimony  or fiscal  note review                                                                    
during the meeting.                                                                                                             
                                                                                                                                
Representative  Ortiz remarked  that  the  bill raised  some                                                                    
interesting questions in relationship  to the status quo. He                                                                    
asked if it was the  bill sponsor's position that the Alaska                                                                    
Permanent  Fund  Corporation  (APFC)  did  not  have  enough                                                                    
autonomy  to  operate  in  the   manner  envisioned  by  the                                                                    
legislation. He asked if there was an existing problem.                                                                         
                                                                                                                                
Representative McCabe responded that  he did not believe the                                                                    
current  [APFC] board  was  hamstrung by  the  issue or  was                                                                    
investing  in  any  environmental  social  governance  (ESG)                                                                    
companies simply  for ESG policy.  He used ExxonMobil  as an                                                                    
example and stated that it had  a robust ESG policy, but the                                                                    
company also made money. He  believed the pertinent question                                                                    
was  whether a  company made  money. He  stated that  if the                                                                    
answer  was  yes,  APFC  could invest  in  the  company.  He                                                                    
relayed there was no intent  to limit what APFC could invest                                                                    
in. However, if a company did  not make money because of its                                                                    
ESG  policies or  merely  focused on  ESG,  like a  Solyndra                                                                    
style,  APFC  should  not  invest in  it  and  the  guidance                                                                    
appeared in the bill.                                                                                                           
                                                                                                                                
9:42:31 AM                                                                                                                    
                                                                                                                                
Representative  Ortiz  stated  his  understanding  that  the                                                                    
primary  mission of  APFC  was to  invest  in the  long-term                                                                    
interest  of   the  fund  and  its   Alaskan  beneficiaries.                                                                    
Consequently,  he asked  for  verification  that APFC  would                                                                    
likely not invest  in a company such as Exxon  if it was not                                                                    
making money because of its ESG policies.                                                                                       
                                                                                                                                
Representative  McCabe  answered  affirmatively.  He  stated                                                                    
that  the  APFC  board,  under its  current  structure,  was                                                                    
investing  for  maximum  investment. However,  he  had  seen                                                                    
evidence  that   other  boards   around  the   country  were                                                                    
embracing  the ESG  mindset and  investing more  for social,                                                                    
environmental,  and  governmental  factors ahead  of  fiscal                                                                    
factors.  He explained  that the  bill communicated  to APFC                                                                    
and the  state's retirement system  that the  money belonged                                                                    
to  the state  and  beneficiaries and  the  funds should  be                                                                    
invested  for maximum  risk adjusted  performance. The  bill                                                                    
specified  that  ESG would  not  be  the top  priority  when                                                                    
making  investments.  He  stated  the  focus  should  be  on                                                                    
maximizing  investments  because   retirees  depend  on  the                                                                    
funds. He stated that retirees could  not eat or live off of                                                                    
an investment  in Solyndra, but  they could eat or  live off                                                                    
an investment in Exxon.                                                                                                         
                                                                                                                                
9:44:38 AM                                                                                                                    
                                                                                                                                
Representative  Hannan   asked  whether   Alaska  Retirement                                                                    
Management   Board   (ARMB)   had  any   considerations   or                                                                    
investment efforts for any companies based on ESG policies.                                                                     
                                                                                                                                
PAM  LEARY,  DIRECTOR,   TREASURY  DIVISION,  DEPARTMENT  OF                                                                    
REVENUE (via  teleconference), replied  that ARMB  and other                                                                    
fiduciaries   followed   the   fiduciary  standard   in   AS                                                                    
37.10.071. She  explained that the standard  had been around                                                                    
for  a very  long time  and  was more  stringent than  every                                                                    
other  state.  She explained  the  standard  had served  the                                                                    
state  well because  anytime ARMB  had  been approached  for                                                                    
investments for  or against  something, it  had to  stick to                                                                    
its  statutes. She  elaborated that  ARMB  did not  consider                                                                    
factors other than  what was in the  sole financial interest                                                                    
of beneficiaries  as required in statute.  There was already                                                                    
an  existing sole  financial interest  statute and  ARMB and                                                                    
other  fiduciaries  had not  followed  any  ESG or  anti-ESG                                                                    
investments  other than  those that  had strictly  financial                                                                    
benefits to the funds.                                                                                                          
                                                                                                                                
Representative  Hannan stated  her understanding  that under                                                                    
current statute the  state may not base  invest decisions on                                                                    
anything  but the  financial basis  of  investments and  the                                                                    
consideration of ESG policies was  not an element that could                                                                    
be allowed for state investment funds.                                                                                          
                                                                                                                                
Ms. Leary responded affirmatively.                                                                                              
                                                                                                                                
Representative McCabe  replied that  they had seen  a number                                                                    
of states  with similar  laws on  the books  specifying they                                                                    
were not supposed  to consider ESG; however,  he stated that                                                                    
the  long-term effect  of  ESG such  as  carbon credits  and                                                                    
carbon taxes would eventually be  profit making. He remarked                                                                    
that there  were ways around  the law that he  was concerned                                                                    
about.  He   wanted  to  ensure   the  direction   from  the                                                                    
legislature  to ARMB  and APFC  was clear  that it  was only                                                                    
interested in financial gain for  the funds. He stated there                                                                    
was also some evidence  that some companies publicly embrace                                                                    
ESG as  a cover  for poor business  performance. He  cited a                                                                    
recent report authored  by Ryan Flugum of  the University of                                                                    
Northern  Iowa  and Matthew  Souther  of  the University  of                                                                    
South Carolina specifying  that when managers underperformed                                                                    
earnings expectations  set by analysts, they  often publicly                                                                    
talked  about  their focus  on  ESG;  however, when  returns                                                                    
exceeded   expectations  the   managers   made  few   public                                                                    
statements  related  to  ESG. He  believed  there  were  119                                                                    
different laws throughout the  states being considered based                                                                    
on ESG investing. He stated that  ESG was a newer term since                                                                    
the law in Alaska statute.                                                                                                      
                                                                                                                                
9:49:27 AM                                                                                                                    
                                                                                                                                
Representative McCabe thanked the  committee for hearing the                                                                    
bill. He thought it was  time to update the state's statutes                                                                    
with newer investment terms and strategies.                                                                                     
                                                                                                                                
HB  174  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair  Foster reviewed  the  schedule  for the  afternoon                                                                    
meeting.