Green investment in Texas shows how funds are navigating anti-ESG laws

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Shortly after Texas pioneered the first US ESG blacklist in late 2022, a big investor in education in the oil-producing state pumped $300mn into a fund designed to subsidise the global energy transition away from fossil fuels.

The commitment from the $51bn Texas Permanent School Fund (PSF), which allocates more than $2bn annually to public education, is the largest in the Macquarie Green Investment Group’s energy transition solutions fund, MGETS, according to PitchBook data.

The investment highlights how fiduciaries are finding ways to navigate gaps in rules designed by conservative officials to keep environmental, social and governance considerations out of public investment portfolios, while showing the difficulty of enforcing such prohibitions.

A 2021 state law passed by the Texas legislature called on state pension plans and other entities to divest from firms and funds deemed hostile to fossil fuels. Glenn Hegar, the state’s Republican comptroller, went further in late 2022 when he named 10 firms and more than 300 funds targeted for divestment by Texas pension funds and other state endowments such as the PSF.

While the law contains an exemption for private equity funds that has already survived at least one test, Hegar has encouraged state agencies to follow the spirit of the law when it comes to their investment portfolios.

“As comptroller Hegar has pointed out in correspondence with these pensions and other funds, every effort should be made to comply with the spirit of the law and the will of the legislature who sought to ensure Texas tax dollars were not invested in a manner that undermines the state economy,” Hegar’s spokesman said.

A spokeswoman for the PSF confirmed that some of its holdings were in MGETS, which she noted was not on Hegar’s blacklist. “Texas PSF Corporation is in full compliance with all state laws,” she said.

The Macquarie fund started raising money in August 2022 with a $2bn target and is poised to reach or surpass that target sometime this year, according to PitchBook data. The fund invests in sustainable aviation fuels, green hydrogen, clean fertiliser and sustainable finance seed capital, among other environmentally focused projects.

Andrew Poreda, a senior research analyst for Texas-based Sage Advisory, told the Financial Times that the Macquarie investment appeared consistent with other PSF holdings that have clean energy themes, even though it ran counter to the apparent goals of state elected officials.

“There’s no explicit messaging that you can’t invest in clean energy, but it’s going against the sentiment and backdrop that the legislature and the Texas governor are placing.”

Hegar’s spokesman said that state lawmakers retained ultimate supervision over state investment entities and that his office “has no formal oversight over the investment activities of the PSF”.

“The law provides the impacted entities with a range of options to ensure they are able to meet their fiduciary duties to their clients and the people of Texas,” the spokesman said. “Whether they make use of those options is a decision for the governing bodies of the investment entities.”

Hegar’s blacklisting of firms perceived to be anti-fossil fuel led a nationwide movement among conservative state legislatures and financial officers to curb the spread of ESG investing in the US. Some more liberal jurisdictions have in turn taken opposing steps to encourage greater consideration of environmental or social factors in investments.

BlackRock, the $9.1tn New York-based asset manager, has been a frequent target of the anti-ESG efforts. Most recently, the firm was sued by Tennessee, where the state attorney-general accused it of violating consumer protection laws by misusing ESG factors; BlackRock rejected the claims and said it would “vigorously contest” the accusations.

Hegar in February wrote to the PSF to note that his office had divested from BlackRock and “all BlackRock-related investments” while encouraging the PSF to “explore alternatives and invest with a new partner that does not boycott energy companies”.

Since the PSF’s investment, a number of legal battles have been fought elsewhere across the country over ESG investing.

In September, a federal judge dismissed a lawsuit challenging a Department of Labor rule that allowed but did not require fiduciaries to consider ESG factors in investments. That decision came with a note from the bench that the judge “need not condone ESG investing generally or ultimately agree with the rule to reach this conclusion”.

Meanwhile, a coalition backed by Oklahoma’s state employees union is challenging efforts there to divest from several large financial institutions based on their perceived opposition to oil and gas. In New York City, three pension plans that have chosen to divest from fossil fuel companies face a separate lawsuit alleging their decision was not made to further the interests of plan participants.

Macquarie, a big player in US natural gas trading, which is among more than 300 signatories to the Net Zero Asset Managers initiative, declined to comment.