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‘Real issue’ surfaces in state auditor’s race around state investments


Many of the campaign issues in Minnesota are issues in races across the country as well, put there by partisan strategists who see them as potent for bringing the right voters to the polls.

Similar talking points on public safety, abortion, inflation and school curricula can be seen and heard in congressional and state campaigns in every state, Minnesota included. And now some national Republicans are trying to add ESG to the list – or, as they call it, “woke investing.”

First, what is ESG? The acronym for Environment, Social and Governance describes a move to consider issues such as climate change, social justice and equity as state and local governments decide where to invest funds such as those that support employee pensions. 

Supporters of ESG say it makes financial sense to begin avoiding businesses with financial models that may well be unsustainable, leading to reduced value in the future. 

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Opponents, including high-profile Republicans like Texas Gov. Greg Abbott and Florida Gov. Ron DeSantis, have attempted to cite it as the political left using public funds to further political goals. So far, the issue has emerged in only one statewide Minnesota race. As one of four members of the State Board of Investment, the state auditor helps set policy for how the $130 billion in state funds are invested.

“I will not play politics with our pensions,” GOP nominee Ryan Wilson said during the only debate so far with the incumbent DFL Auditor Julie Blaha. “We must put return on investment first.”

Unlike the way some Republicans are stepping gingerly around the issue of abortion and some Democrats are trying to finesee the issues around public safety, Blaha is running toward this political fire rather than away from it. She said considering ESG factors is the trend in retirement fund investing, not just by public systems but by private investors.

GOP nominee Ryan Wilson, left, speaking during a Minnesota State Fair debate with incumbent DFL Auditor Julie Blaha.

Photo by Blois Olson

GOP nominee Ryan Wilson, left, speaking during a Minnesota State Fair debate with incumbent DFL Auditor Julie Blaha.

“Even if you don’t care about the environment at all, you need to think about climate change in investments,” she said during the WCCO radio debate. “There are significant risks and there are significant opportunities in how climate is changing and how we’re transitioning energy.”

Blaha blamed “MAGA auditors and treasurers” who are trying to discredit ESG in investment decisions. “The evidence is overwhelming, and it’s also common sense. How many of us are sinking our savings into coal right now?”

“You know what’s been a great investment over the last six months that we missed out on?” Wilson asked. “Coal.” To which Blaha responded that pension funds are invested with 10, 20 and 30-year outlooks, not six months.

“You cannot be running around trying to day trade with my pension,” she said.

Attacks on ‘woke investing’

Blaha, first elected in 2018, said she called “dibs” on the issue over the other board members – Gov. Tim Walz, Attorney General Keith Ellison and Secretary of State Steve Simon. The board has recently begun assessing how environment, social and governance factors might influence how investment decisions are made. The board has already directed Chief Investment Officer Mansco Perry to remove from the state’s investment portfolio “publicly traded companies which derive 25 percent or more of their revenue from the extraction and/or production of thermal coal …”

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In addition, the board has commissioned several analyses from consultants to advise whether it should divest from other industries and, if so, how. And it has recently acted to support federal Securities and Exchange Commission (SEC) rules to require and make uniform disclosures of climate-related factors for all publicly traded companies.

Gov. Tim Walz

REUTERS/Eric Miller

Gov. Tim Walz

While it is not an issue so far in the race for Minnesota governor between Walz and GOP nominee Scott Jensen, so-called woke investing is an issue in other states. Texas has cut ties with 10 private investment firms that include ESG factors in their investments, including the largest manager of retirement investments BlackRock Inc. It came in response to a state law meant to sanction investors who are turning away from oil and gas.

BlackRock has used the voting power that the shares it manages give it in corporate decision making to promote ESG policies on company management. 

Scott Jensen

Scott Jensen

Florida Gov. Ron DeSantis pushed that state’s investment board to adopt policies that force it to not consider ESG factors. 

The conservative American Legislative Exchange Council (ALEC) has prepared a model ordinance called the State Government Employee Retirement Act for state lawmakers who want to ban consideration of ESG in state investing.

While some states are rejecting ESG policies in investments, many others are not. If there is a dividing line, it appears to be conservative states taking stands against it and liberal states doing the opposite. Maine, for example, had ordered the sale of shares in 200 fossil fuel companies by 2026.

Florida Gov. Ron DeSantis

REUTERS/Octavio Jones

Florida Gov. Ron DeSantis pushed that state’s investment board to adopt policies that force it to not consider ESG factors.

Consultant looks at ESG in Minnesota

The study commissioned by the Minnesota investment board with Meketa Investment Group described Minnesota as “among the more engaged U.S. public pension plans,” noting the actions to include ESG factors in its list of investment beliefs, the push to urge the SEC to require more reporting by public companies, and the participation in ESG discussions being held by national institutional investors such as state investment boards.

The state doesn’t generally buy and sell individual stocks but instead invests in large investment funds banks and investment houses such as BlackRock offer. Because many of those funds “will likely be incorporating assessments of climate risks and opportunities,” the state’s will be incorporating ESG factors “even if the SBI changes nothing in their investment strategy.”

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While Meketa recommended the board consider shifting some assets into companies that “benefit from long-term shifts to a low-carbon economy,” it did not support full divestment from fossil fuels as Maine has done. The consultant said that would not reduce overall demand for such energy sources and would not reduce carbon emissions directly. It would also give up the board’s proxy voting powers that could be replaced by others who don’t share the board’s investment beliefs. It might also separate the state from companies that are transitioning to renewable energy even though they continue to own non-renewable energy assets.

Minnesota’s investment board is considered among the best managed public investment entities in the U.S. and has reported returns in the top 25 percent, sometimes the top 20 percent, among other public pension plans [PDF]. Those returns have slipped during the last several quarters, something common among pension funds. Blaha attributes Minnesota’s worse-than-average performance to the state’s heavier use of publicly traded companies than some other pension plans.

The state fund is the 14th largest non-federal investment fund in the U.S. and the 38th largest in the world.  The state has also done a good job restoring the health of its fund – having 82.2 percent of the money needed to cover future payments – the 14th highest among states.

Blaha said she was happy when the issue came up during the radio debate with Wilson because it is a “real issue” in the campaign and gave her a chance to fact-check some of the claims being made about ESG factors in public investing. It isn’t just states with Democratic governors that are looking at this, and it isn’t just governments. All, she said, are doing it to reduce exposure to companies that will decline in value and instead invest in companies that will grow in value.

“I would like to think that Goldman Sachs is doing this for good environmental reasons,” she said. “But, come on, they’re trying to make money.” Blaha said she rejected calls from organizations such as Youth Climate Change to immediately sell oil stocks because it would violate the board’s fiduciary duties. She also said that many of those same companies could be helping develop alternative sources of energy just as car companies built on gas-powered vehicles are helping advance electric cars.

She endorsed a key recommendation from the board’s consultant that the board move toward investments with a net-zero carbon footprint “while holding investment in our back pocket in extreme situations.”

Republicans weigh in

Wilson said he was aware of the issue after looking into the duties of the auditor but decided to focus on it after hearing on the campaign trail from teachers and firefighters who said they were concerned about the health of their pensions. He said he considers ESG investing to be less about maximizing returns and more about furthering political ideals about climate change and equity.

“Return on investment needs to be first,” he said during an interview. The state pension system is in good shape now but he said he worries about its long-term health if decisions are made that damage financial returns.

“I think we need to let the chief investment officer and the manager they work with be unleashed to get the best-possible return, “Wilson said. “The chief investment officer doesn’t need the state board of investments to tell them to take classes of assets off the table. We don’t need a partisan thumb on the scale.

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“I’m not saying they can’t take into account environmental concerns,” he said. “It’s just that we shouldn’t mandate that they have to take into account one set of concerns with a higher priority than another.” If the Legislature wants to make that choice, it can, he said. But the board shouldn’t make it on its own.

State Rep. Pat Garofalo

State Rep. Pat Garofalo

State Rep. Pat Garofalo is the Farmington Republican in line to become House Ways and Means chair should the GOP win control in November. While he said he is aware of the issue nationally, he is less concerned about Minnesota because the state continues to outperform most other states in investment returns.

“As long as their rate of return is above average, I think people will be patient and be tolerant about any decisions they are making,” Garofalo said. “That being said, the first sign that wokism is hurting our state’s pension funds and reducing our return on investment, there’s going to be some problems.”

Garofalo said there are legitimate times when a state decides not to invest or to invest for public policy reasons, mentioning the Russian divestment movement that led the Legislature to order the state to get out of investments there. The state long ago opted to divest from tobacco companies and from businesses involved in Sudan and Iran. But Garofalo said those decisions should be made by the Legislature, not by a four-member board. 

“What we don’t want to do is use that as a baseline to let some woke shitheads take all our pension funds and put them into solar roadways or some other boondoggle projects,” he said.  

Bond-rating agencies also looking at ESG

ESG also comes into play in Minnesota government in another way. When the state goes to the bond market to raise money for capital construction projects from roads to bridges to college buildings, it first submits to bond ratings from the large ratings agencies. After an assessment of the state’s financial health – primarily the likelihood of it being unable to repay bond buyers – the ratings agencies assign a grade that contributes to the interest rates charged.

Before it sought to sell more than $590 million worth of bonds in early August, Minnesota announced that it had maintained its AAA rating from Fitch and S&P Global Ratings (formerly Standard & Poor’s) and received an upgrade from Moody’s from Aa1 to AAA. All three are the top ratings, and it is the first time since 2003 that a state bond offering scored a trifecta from the ratings houses.

S&P Global recently began providing another piece of information to bond buyers: ESG. 

Minnesota received scores of 2 for each of the three areas assessed, which the agency considered a neutral rating. That is, the factors “have no material influence on our credit rating analysis for Minnesota.” But the scale includes three lower assessments – 3, 4 and 5 for moderately negative, negative and very negative. So, Minnesota’s score is relatively high even if it isn’t labeled “positive.” S&P has reported that most states were given scores of 2 or 3.

In making presentations to the rating agencies, the state Office of Management and Budget does make a pitch for its ESG performance. In one recent presentation, it touted the creation by Gov. Tim Walz of the Climate Change Subcabinet and the Governor’s Advisory Council on Climate Change in 2019, the Climate Action Framework and the Clean Cars Minnesota rule in 2021.

But those types of assessments have been criticized by some states. Utah state officials wrote a letter of protest to S&P.  “Considering recent global events, the current economic situation in the U.S., and the unreliability and inherently political nature of ESG factors in investment decisions, we view this newfound focus on ESG as politicizing the ratings process,” wrote four top Utah elected officials. “It is deeply counterproductive, misleading, potentially damaging to the entities being rated, and possibly illegal.”

The Minnesota Office of Management and Budget declined to provide anyone from its finance area to comment on the issue or the state’s scores on ESG.

Wrote spokesperson Patrick Hogan: “Per S&P, the ESG analysis has no impact on their credit rating for Minnesota, so from our perspective, it’s a non-story.”



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