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.