Indicates Matter Stricken

Indicates New Matter

 

Committee Report

March 30, 2023

H. 3690

Introduced by Reps. Taylor, G. M. Smith, Thayer, Bradley, Hiott, Bannister, W. Newton, Sandifer, West, Davis, Erickson, J. E. Johnson, Jordan, Whitmire, Hixon, Elliott, Forrest, Wooten, Bustos, Willis, Yow, Carter, Hartnett, Moss, McCravy, B. J. Cox, Haddon, Burns, Chumley, Oremus, Hardee, Ligon, Long, Gilliam, Magnuson, Lawson, Nutt, Brewer, Guffey, Hager, Mitchell, Neese, Sessions, Vaughan, Robbins, Kilmartin, M. M. Smith, B. Newton, Hewitt, Leber, Pope, Blackwell and Caskey

 

S. Printed 03/30/23--H.                                                                           [SEC 4/3/2023 1:41 PM]

Read the first time January 12, 2023

 

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The committee on House Labor, Commerce and Industry

To who was referred a Bill (H. 3690) to amend the South Carolina Code of Laws so as to enact the "ESG Pension Protection Act"; by amending Section 9-16-10, relating to Retirement System Funds definitions, etc., respectfully

Report:

That they have duly and carefully considered the same, and recommend that the same do pass with amendment:

 

    Amend the bill, as and if amended, SECTION 2, by striking Section 9-16-10(10) and inserting:

    (10) "Pecuniary factor" means a factor that a prudent person in a like capacity would reasonably believe has a material effect or impact on the financial risk or return on an investment, including factors material to assessing an investment manager's operational capability, based on an appropriate investment horizon consistent with a retirement system's investment objectives and funding policy. The term excludes "nonpecuniary factors" which is any factor or consideration that is collateral to or not reasonably likely to effect or impact the financial risk and return of the investment and include, but are not limited to, the promotion, furtherance, or achievement of environmental, social,  or political goals, objectives, or outcomes.

Amend the bill further, SECTION 3, by striking Section 9-16-30(G)(1), (2), and (3) and inserting:

(1) The commission shall cast shareholder proxy votes that are in keeping with its fiduciary duties that are consistent with the best interest of the trust fund, based on pecuniary factors, and most likely to maximize shareholder value over an appropriate investment horizon consistent with a retirement systems investment objectives and funding policy. Any commission engagement with a company regarding the exercise of shareholder proxy votes or the proposal of a proxy question must be based solely on pecuniary factors and for the sole purpose of maximizing shareholder value, except that the commission may engage with a company to express opposition to the proposal of or the merits of a proxy question that does not have a pecuniary impact.

       (2) To the extent that it is economically practicable, the commission must retain the authority to exercise shareholder proxy rights for shares that are owned directly or indirectly on behalf of a system.  The commission may retain a proxy firm or advisory service to assist the commission in exercising shareholder proxy rights, but only if the proxy advisor has a practice of and commits in writing to follow proxy guidelines that are consistent with the requirements of item (1).

       (3) The commission only may allocate capital to a public equity investment strategy if the manager of the investment strategy has a practice of and commits in writing to meet the requirements of item (1) and Section 9-16-50(A)(5), unless it is not economically practicable for the commission to do so, or it is necessary for the commission to avoid the concentration of assets with any one or more investment managers. For any public equity investment strategy for which the manager does not have a practice of and does not commit in writing to meet the requirements of item (1), the commission must include a summary of the terms, fees, and performance of the investment in the commission's annual investment report and publish the summary in a conspicuous location on the commission's website.

Amend the bill further, SECTION 4, by striking Section 9-16-50(A)(5) and inserting:

       (5) may consider benefits created by an investment in addition to investment return only if the commission determines that the investment providing these collateral benefits would be prudent even without the collateral benefits only shall consider pecuniary factors in making an investment decision or when allocating capital to an investment strategy.

Amend the bill further, SECTION 4, by striking Section 9-16-50(B) and inserting:

    (B) The commission shall adopt a statement of investment objectives and policies for the retirement system.  The statement must include the desired rate of return on assets overall, the desired rates of return and acceptable levels of risk for each asset class, asset-allocation goals, guidelines for the delegation of authority, an explicit statement that all investment decisions must be based only on the consideration of pecuniary factors, and information on the types of reports to be used to evaluate investment performance.  At least annually, the commission shall review the statement and change or reaffirm it.  The relevant portion of this statement may constitute parts of the annual investment plan required pursuant to Section 9-16-330.

Amend the bill further, SECTION 6, by striking Section 9-16-330(B)(2) and inserting:

       (2) Any final authority delegated to the chief investment officer pursuant to this subsection must be exercised subject to the oversight of the chief executive officer. The closing documentation of an investment made pursuant to this delegation must include the chief executive officer's certification that the investment conforms to the amount and the extent of the delegation. The closing documentation of any investment also must include the chief executive officer's certification that the decision to make the investment is based on pecuniary factors and is not being made to promote, further, or achieve any nonpecuniary goal, objective, or outcome. Any authority exercised pursuant to this section must be exercised in a manner consistent with the limitations imposed by this section and investments may not be divided into smaller amounts in order to avoid these limitations. The commission must be notified of an investment made pursuant to any delegated authority within three business days of the investment's closing and the investment must be reviewed with the commission at its next regularly scheduled meeting. The commission may amend, suspend, or revoke the delegation of the final authority to invest at any time and may place stricter limits on any delegated authority than those provided in this subsection.

Renumber sections to conform.

Amend title to conform.

 

WILLIAM SANDIFER for Committee.

 

statement of estimated fiscal impact

Explanation of Fiscal Impact

 

State Expenditure

This bill specifies that RSIC may only consider pecuniary factors when making investment decisions on the retirement system managed by the commission.  Additionally, to the extent practical, RSIC must retain the authority to exercise shareholder proxy rights for shares that are owned directly or indirectly on behalf of the system.  The bill outlines how this retention of authority may be accomplished.   This bill also grants the Attorney General's Office the authority to bring an action to enforce Chapter 16 of Title 9, entitled the Retirement System Funds.

 

Attorney General's Office. This bill grants the Attorney General the authority to bring an action to enforce Chapter 16 of Title 9, entitled the Retirement System Funds. This bill will not impact expenses for the agency as the responsibilities will be handled with existing staff and resources.

 

Public Employee Benefits Authority.  PEBA anticipates this bill will have no impact on the agency or the revenues of the retirement systems that PEBA manages.  Therefore, this bill will have no expenditure impact on PEBA. 

 

Retirement System Investment Commission.  This bill specifies that, to the extend practical, RSIC must retain the authority to exercise shareholder proxy rights for shares.  The agency may retain a proxy firm or advisory service to assist in exercising shareholder proxy rights, but only if certain criteria are met.  Additionally, the commission must meet at least annually to review compliance regarding the exercise of proxy vote.

 

RSIC anticipates this bill may result in an increase in Other Funds expenditure depending upon how the commission manages the authority to exercise shareholder proxy rights.  RSIC notes that there are three options to accomplish the requirements of this bill.  The following are the three options:

Managing proxy voting in-house:  If RSIC manages the proxy voting in-house this would increase Other Funds expenditures by $1,035,000 This would include expenses for an additional 5.0 FTEs, 1 Senior Officer with a salary and fringe totaling $245,000 and 4 Investment Officers with salary and fringe of $161,000 for each position, totaling $644,000. This also includes the cost of an external Proxy Consultant at an estimated cost of $146,000.  The agency does not currently have sufficient Other Funds revenue to cover the total increase of $1,035,000.

Hiring an external proxy advisor to assist in exercising its proxy authority:  The agency anticipates an increase in Other Fund expenses between $146,000 and $292,000 would be required to hire an external proxy advisor, depending upon the negotiated contract price. RSIC anticipates it would need to request an increase in Other Funds authorization to cover this expense.

Fully delegate proxy voting to an external investment manager:  RSIC anticipates this would have no expenditure impact as managing the proxy voting is included in the fee charged by the external investment manager.  However, RSIC noted that whether an external investment manager would vote proxy consistent with the requirements of this bill is currently unknown. 

 

RSIC is currently unsure which of these three scenarios will fully accomplish the requirements of this bill.  Therefore, the Other Funds expenditure impact of this bill on RSIC is undetermined, depending upon which option RSIC implements. 

 

State Revenue

This bill specifies that the Retirement System Investment Commission (RSIC) may only consider pecuniary factors when making investment decisions.  Additionally, to the extend practical, RSIC must retain the authority to exercise shareholder proxy rights for shares.

 

PEBA and RSIC indicate this bill will have no impact on the retirement system investments.  Therefore, this bill will have no impact on state revenue. 

 

 

Frank A. Rainwater, Executive Director

Revenue and Fiscal Affairs Office

 

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A bill

 

TO AMEND THE SOUTH CAROLINA CODE OF LAWS SO AS TO ENACT THE "ESG PENSION PROTECTION ACT"; BY AMENDING SECTION 9-16-10, RELATING TO RETIREMENT SYSTEM FUNDS DEFINITIONS SO AS TO ADD A DEFINITION OF "PECUNIARY FACTOR"; BY AMENDING SECTION 9-16-30, RELATING TO DELEGATION OF FUNCTIONS BY THE COMMISSION, SO AS TO PROVIDE THAT PROXY VOTING DECISIONS MUST BE BASED ON PECUNIARY FACTORS; BY AMENDING SECTION 9-16-50, RELATING TO INVESTMENT AND MANAGEMENT CONSIDERATIONS BY TRUSTEES, SO AS TO PROVIDE THAT THE COMMISSION MAY ONLY CONSIDER PECUNIARY FACTORS IN MAKING CERTAIN INVESTMENT DECISIONS; BY AMENDING SECTION 9-16-320, RELATING TO ANNUAL INVESTMENT PLANS SO AS TO REQUIRE CERTAIN MEETINGS; BY AMENDING SECTION 9-16-330, RELATING TO STATEMENT OF ACTUARIAL ASSUMPTIONS AND INVESTMENT OBJECTIVES, SO AS TO REQUIRE CERTAIN CERTIFICATIONS; AND BY ADDING SECTION 9-16-110 SO AS TO PROVIDE THAT THE ATTORNEY GENERAL MAY BRING AN ACTION TO ENFORCE CERTAIN PROVISIONS.

 

Be it enacted by the General Assembly of the State of South Carolina:

 

SECTION 1.  This act may be cited as the "ESG Pension Protection Act".

 

SECTION 2.  Section 9-16-10 of the S.C. Code is amended by adding:

 

    (10) "Pecuniary factor" means a factor that a prudent person in a like capacity would reasonably believe has a material effect or impact on the financial risk or return on an investment based on an appropriate investment horizon consistent with a retirement system's investment objectives and funding policy. The term excludes "nonpecuniary factors" which is any factor or consideration that is collateral to or not reasonably likely to effect or impact the financial risk and return of the investment and include, but are not limited to, the promotion, furtherance, or achievement of environmental, social, governance, or political goals, objectives, or outcomes.

 

SECTION 3.  Section 9-16-30(G) of the S.C. Code is amended to read:

 

    (G)(1) The commission shall cast shareholder proxy votes that are in keeping with its fiduciary duties that are consistent with the best interest of the trust fund, based on pecuniary factors, and most likely to maximize shareholder value over an appropriate investment horizon consistent with a retirement systems investment objectives and funding policy.

       (2) To the extent that it is economically practicable, the commission must retain the authority to exercise shareholder proxy rights for shares that are owned directly or indirectly on behalf of a system.  The commission may retain a proxy firm or advisory service to assist the commission in exercising shareholder proxy rights, but only if the proxy advisor commits to follow proxy guidelines that are consistent with the requirements of item (1).

       (3) The commission may only delegate the exercise of shareholder proxy rights to an investment manager under one or more of the following conditions:

           (a) the manager commits to vote in a manner consistent with item (1);

           (b) the commission reasonably believes that the economic benefits of the manager's strategy will provide a superior outcome as compared to a strategy by which the commission retained proxy voting authority; or

           (c) the allocation is necessary to avoid the concentration risk of assets with any one or more investment managers.

 

SECTION 4.  Section 9-16-50 of the S.C. Code is amended to read:

 

    Section 9-16-50. (A) In investing and managing assets of a retirement system pursuant to Section 9-16-40, the commission:

       (1) shall consider among other circumstances:

           (a) general economic conditions;

           (b) the possible effect of inflation or deflation;

           (c) the role that each investment or course of action plays within the overall portfolio of the retirement system;

           (d) needs for liquidity, regularity of income, and preservation or appreciation of capital;  and

           (e) the adequacy of funding for the plan based on reasonable actuarial factors;

       (2) shall diversify the investments of the retirement system unless the commission reasonably determines that, because of special circumstances, it is clearly prudent not to do so;

       (3) shall make a reasonable effort to verify facts relevant to the investment and management of assets of a retirement system;

       (4) may invest in any kind of property or type of investment consistent with this chapter and Section 9-1-1310;

       (5) may consider benefits created by an investment in addition to investment return only if the commission determines that the investment providing these collateral benefits would be prudent even without the collateral benefitsshall only consider pecuniary factors in making an investment decision or when allocating capital to an investment strategy. The commission only may allocate capital to an investment strategy that prioritizes a nonpecuniary goal, objective, or outcome or considers nonpecuniary factors as part of the investment strategy, if the commission finds that a prudent person in a like capacity would reasonably believe that the investment strategy will provide a superior risk adjusted return as compared to similar type investment opportunities available at the time that do not pursue a nonpecuniary objective or consider nonpecuniary factors.

    (B) The commission shall adopt a statement of investment objectives and policies for the retirement system.  The statement must include the desired rate of return on assets overall, the desired rates of return and acceptable levels of risk for each asset class, asset-allocation goals, guidelines for the delegation of authority, an explicit statement requiring adherence to the requirements of item (A)(5), and information on the types of reports to be used to evaluate investment performance.  At least annually, the commission shall review the statement and change or reaffirm it.  The relevant portion of this statement may constitute parts of the annual investment plan required pursuant to Section 9-16-330.

 

SECTION 5.  Section 9-16-320 of the S.C. Code is amended by adding:

 

    (H) The commission shall meet no less than annually to review compliance with Section 9-16-30(G) regarding the exercise of shareholder proxy rights.  The commission must review a report that summarizes the votes cast by or on the commission's behalf or at the commission's direction. The report must include a vote caption, the commission's vote, the recommendation of company management, and the recommendation of any proxy advisor retained by the commission. The report required by this subsection must be posted in a conspicuous location on the commission's website.

 

SECTION 6.  Section 9-16-330 (A) and (B) of the S.C. Code is amended to read:

 

    (A) The commission shall provide the chief executive officer and the chief investment officer with a statement of general investment objectives. The commission also shall provide the chief executive officer and the chief investment officer with a statement of actuarial assumptions developed by the system's actuary and approved by the board. The commission shall review the statement of general investment objectives annually for the purpose of affirming or changing it and advise the chief executive officer and the chief investment officer of its actions. The retirement system shall provide the commission, its chief executive officer and chief investment officer that data or other information needed to prepare the annual investment plan.

    (B)(1) Notwithstanding Section 9-16-30(A), the commission's statement of general investment objectives may include a delegation to the chief investment officer of the final authority to invest an amount not to exceed:

           (a) two percent of the total value of portfolio assets for each investment, if the investment is in assets that are publicly tradeable and the investment provides for liquidity in ninety days or less;  or

           (b) one percent of the total value of portfolio assets for each investment, if the investment is in assets that are not publicly tradeable or the investment's liquidity provision is greater than ninety days.

       (2) Any final authority delegated to the chief investment officer pursuant to this subsection must be exercised subject to the oversight of the chief executive officer. The closing documentation of an investment made pursuant to this delegation must include the chief executive officer's certification that the investment conforms to the amount and the extent of the delegation. The closing documentation must also contain the chief executive officer's certification that the investment complies with the requirements of Section 9-16-50(A)(5). Any authority exercised pursuant to this section must be exercised in a manner consistent with the limitations imposed by this section and investments may not be divided into smaller amounts in order to avoid these limitations. The commission must be notified of an investment made pursuant to any delegated authority within three business days of the investment's closing and the investment must be reviewed with the commission at its next regularly scheduled meeting. The commission may amend, suspend, or revoke the delegation of the final authority to invest at any time and may place stricter limits on any delegated authority than those provided in this subsection.

 

SECTION 7.  Article 1, Chapter 16, Title 9 of the S.C. Code is amended by adding:

 

    Section 9-16-110.  The Attorney General may bring an action in a court of competent jurisdiction to enforce this chapter.

 

SECTION 8.  This act takes effect upon approval by the Governor.

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