ESG and Minnesota State Finance

The Minnesota State Board of Investment (SBI)  is an agency you may not have heard of but is the State's fiscal backbone. It invests the State's holdings, in particular, the retirement savings of its employees.

Minnesota state government is the largest employer in the State of Minnesota, with over 41,000 active employees in more than 100 state agencies, boards, and commissions across the State. Almost another 58,000 are employed in Education at colleges and universities. Local Governments in cities, towns, and counties employ another 280,000 with another 140,000 in Education. In addition, the Minnesota State Retirement system currently pays monthly benefits to over 20,000 retirees survivors and disabled employees.

That is why the investing strategy of the SBI is so essential. Those workers are counting on good returns for their contributions to their pensions so that they can collect those payments when they retire. So even if you hate pensions, think that everybody should have a defined contribution retirement or 401K  or think it's unfair that public sector workers have them and private-sector workers don't, here is why you should care.

The State guarantees the state pensions. The State must raise taxes to make them whole if they go broke. The courts have treated state and local pensions as an unbreakable promise to their workers. Benefits can be modified but not significantly. Minnesota is on the hook for that money, and so are its taxpayers.

Reforming the state pensions will be challenging, and there will be transition costs. Recent market gains have lowered pensions' unfunded liabilities, but some funds are less well funded than others. As we may be heading into a recession, that could all change. For more about the current state of Minnesota's pensions, read our Session Wrapup Summary on Pensions.

Returning to investment strategy and SBI, over the last decade, under the Dayton Administration, some fundamental changes in how the State's money was managed took place. These changes mirrored those in other states and among many large institutional investors. They also coincided with the retirement of Howard Bicker, the longtime Executive Director of SBI retirement. (Bicker retired in 2013 after 43 years of service). Bicker had a remarkable run as manager of SBI's returns and kept the funds focused on ROI to the exclusion of politics, fads, and trends in the investment world. For example, when the legislature insisted on divestment from South Africa, Northern Ireland, and Sudan, he dutifully arranged the compliance necessary to fulfill the divestment. Still, he also tried dissuading legislators from putting too many political strings on the State's investment activities. First, it was difficult to guarantee 100% compliance in indirect investments, which meant forgoing solid investment opportunities. Secondly, compliance costs would begin to cut into the investment costs of the State.

When Howard Bicker retired and Mansco Perry, who had previously worked for SBI under Bicker, was appointed Director, many people thought this signaled policy continuity at the top. But Perry was tuned into trends in institutional investment, and one of the biggest trends was Environmental, Social, and Governance oriented investing ESG.

Under Perry's tenure at SBI, SBI has adopted a core investment belief emphasizing the importance of addressing ESG. ESG is discussed the way a financial "risk" would be, although in this case, the "risk" isn't necessarily quantifiable; it can be subjective, like not obtaining a desirable social goal. But desirable for whom? The goals vary based on the area. For example, environmental goals are taken from NGOs that have forecasted the impact of climate change and have promoted specific actions to counter it. The social goals may have to do with a diverse workforce, racially and gender diverse boards and leadership, and how egalitarian the pay structure is at a company, known as the "pay ratio." None of these goals have anything to do with making investors money. Instead, they have everything to do with reshaping the societies in the countries they operate in. It's also a way to sidestep traditional political leadership and elected representatives using financial control.

SBI has gone the whole hog into ESG. It's actually a leader in ESG. The State has always exercised its shareholder power directly and by proxy; as an investor, it can vote its shares at shareholder meetings. But over the last five years, it has increased its participation in ESG-oriented coalitions of shareholders.

SBI also uses some of the biggest investment management firms to place much of its investment. As a client of these big firms, they have been able to push them to join specific investor coalitions that they already belong to:

  • BlackRock joined the Climate Action 100+, which pressures companies into taking on climate change goals, like carbon neutrality created by environmental activists at the most influential Climate Change NGOs.
  • State Street Global Advisors, SBI's largest international developed and emerging markets manager, is a member of the United Nations Principles for Responsible Investment (UNPRI).
  • TPG, a manager for the SBI's private markets portfolio, joined the Thirty Percent Coalition to pressure companies to appoint 64 female directors to 53 company boards. 

 

This is what SBI has been up to, with the full, enthusiastic support of the past two progressive Governors, Dayton and Walz, and their administrations. Each decision that SBI makes is proposed by the director and the advisory board but must be ratified by the Executive Council, which is the official board of investment. That is comprised of the State's constitutional officers: Governor Walz, Lt. Governor Peggy Flannigan, Secretary of State Steve Simon, Attorney General Keith Ellison and State Auditor Julie Blaha. Five of the most progressive politicians in the State. Even if you agree with a few, some, or all of the goals of ESG, putting the State's finances behind them is taking a financial risk on behalf of the State's employees and retirees, and taxpayers. The risk of climate change or a gender-imbalanced board of directors may drop in priority when those retirement funds begin to look empty.