Private equity could fall foul of Florida’s new ESG investment ban

ESG and impact investing organisations are taking note as the US’s fourth biggest pension system acts against the movement.

Private equity may face challenges in sourcing capital from Florida’s $206 billion pension system after the board decided to eliminate ESG considerations when making investment decisions.

The resolution passed by Florida State Board of Administration’s board of trustees, which manages the country’s fourth largest pension fund, marks the largest salvo against ESG made by a state body to date. Private equity may fall within this mandate through funds that focus specifically on ESG and impact investing, but also for broader funds that consider ESG as part of their general strategy.

“As a fiduciary, the State Board of Administration’s (SBA) obligation has been and will continue to be focused on maximising returns for our state’s most important public servants over and above political, social and ideological objectives,” according to a statement from a spokesperson for Florida SBA.

While the implications for private equity funds that get capital from the pension system are not exactly clear, it is likely private funds will fall under the mandate. A system spokesperson did not comment beyond the official statement.

“This will be a challenge for private funds. It’s ubiquitous in the finance industry to consider ESG criteria. There are a lot of unknowns and no one is sure how rigorously the new dictate will be applied,” said Bryan McGannon, director of policy and programmes at US SIF: The Forum for Sustainable and Responsible Investment.

Many private equity firms that have a range of strategies have begun considering ESG when making investments, in part because of pressure from their LPs. Some, like KKR, TPG and Bain Capital, have raised capital specifically for impact investing that focuses on ESG factors when buying companies.

Florida SBA backs two impact investing funds from TPG called The Rise Funds. It’s not clear if the system will sell its stakes in the funds because of the ban.

Hot button

ESG has become a hot-button issue in recent months and has been particularly criticised in states that produce large amounts of fossil fuels. Multiple sources said other states with conservative leanings could follow Florida’s lead.

The resolution says Florida SBA can only use “pecuniary factors” when deciding on investments based on risk and return, which do not include the “consideration of the furtherance of social, political or ideological interests”.

The resolution also addresses the system’s proxy voting, stating the board may not sacrifice investment return or take on additional risk to promote non-pecuniary factors.

In his press release announcing the policy change, Florida Governor Ron DeSantis said an aim of the policy was to “reclaim the SBA’s s proxy voting authority from large financial firms such as Blackrock, State Street and Vanguard”.

Part of the confusion on what comes under the regulation is defining what ESG is.

“Overall, I have no idea where investors even draw the line on what is and isn’t an ESG factor or how this will even be implemented,” said Delilah Rothenberg, the executive director of the Predistribution Initiative, a non-profit focused on improving ESG investment practices.

For example, emerging manager investing often involves backing firms run by diverse founders such as women and minorities. It’s not clear if diversity as a consideration in backing a manager would fall under the ban.

There is potential for a “pervasive misunderstanding” of the differences between ESG investing, which Florida has banned, and impact investing, according to one source who specialises in ESG and sustainable investing.

Impact investing is specific to supporting certain causes and making investment in industries such as renewable energy and sustainable agriculture, the expert said.

A leading group supporting impact investing, with a particular focus on private funds, was still angered about Florida SBA’s decision.

”It’s important to note that ESG strategies have taken off in recent years exactly because many investors recognise that prudent, long-term thinking is in their best interest and in the interest of their beneficiaries. Investment decisions should be left to investment professionals, free from the interference of special interests,” said a spokesperson for the US Impact Investing Alliance.

The American Investment Council, the leading trade organisation in support of the private equity industry, declined to comment.