Private equity has entered the culture wars.

Florida State Board of Administration (the manager of the nation’s fourth-largest pension system) and California State Teachers’ Retirement System (the nation’s second-largest) took opposite stances on how, if at all, public allocators should incorporate ESG when making investment decisions.

Florida SBA in late August adopted a resolution effectively banning ESG considerations when choosing investments for the $206 billion Florida pension fund. The resolution said Florida SBA would only use pecuniary factors in its decisions and specifically excluded the “consideration of the furtherance of social, political or ideological interests.”

The resolution does not reference private equity directly. Nor does it reference the status of past Florida SBA investments with an ESG focus, such as commitments made to TPG’s Rise Fund I and Rise Fund II.

“We are reasserting the authority of republican governance over corporate dominance and we are prioritizing the financial security of the people of Florida over whimsical notions of a utopian tomorrow”

Florida Governor Ron DeSantis

A Florida SBA spokesperson gave the same response when asked questions about how the resolution would affect private equity funds going forward and if commitments already made would be grandfathered.

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

‘Utopian tomorrow’

But in a press release touting the resolution, Florida Governor Ron DeSantis, a firebrand Republican likely eyeing a presidential campaign, critically referenced Blackrock and State Street.

“We are reasserting the authority of republican governance over corporate dominance and we are prioritizing the financial security of the people of Florida over whimsical notions of a utopian tomorrow,” DeSantis said in the statement.

Other conservative-leaning states, particularly those where fossil fuel production plays a major role in local economies, have also taken steps to counter the ESG trend. And the conservative American Legislative Exchange Council has drafted a sample bill entitled the State Government Employee Retirement Protection Act that would eliminate politically driven investment strategies from state pension systems.

One “red state” retirement entity recently followed the same path as Florida. At its board meeting on September 9, Indiana Public Retirement System approved a change to its investment policy statement, emphasizing that its investment decisions would focus on risk and return, not social issues.

“Investment managers pursuing other agendas may come into conflict with the needs of our members. We developed this additional statement to reinforce to our partners, vendors and managers of our singular commitment to the financial well-being of our members,” said one member of Indiana’s investment team at the meeting. Buyouts watched a webcast of this meeting.

On the other coast…

Meanwhile, CalSTRS took one of the strongest pro-ESG actions from any public pension systems to date when it unveiled plans to reduce carbon emissions in its portfolio by 50 percent by the year 2030 before reaching full net zero by 2050. A few CalSTRS board members at the August 31 meeting where this plan was unveiled criticized DeSantis for Florida SBA’s action.

“These types of laws do not have any kind of staying power, because they conflict with a financial professional’s legal responsibilities”

Beth-ann Roth, R|K Invest Law

The big headline from the CalSTRS plan will come from public markets as it will allocate 20 percent of its public equities to a “low-carbon” index. But CalSTRS will also incorporate greenhouse gas emissions into its investment decisions, including private equity, as part of the $301 billion system’s risk-and-return analysis.

Private funds play a large role in CalSTRS’ move towards net zero, according to its staff. CalSTRS sees public equities as a way to reduce emissions in its portfolio. But it views private markets as a way to invest in energy transition and similar projects.

The Oregon Investment Council, which manages $96.7 billion in pensioner money, is one of the biggest backers of ESG – the Oregon State Treasury Office even uses renewable energy to meet much of its facility’s electricity needs.

Oregon also is one the nation’s most prominent private equity allocators. Currently, 27 percent of its portfolio is devoted to PE, making it the largest asset class.

“I don’t know anyone who can say with a straight face that all of the implications that are now real about climate change don’t affect the ability to generate returns,” Oregon State Treasurer Tobias Read tells Buyouts. “Of course they do. Not being allowed to consider it is a breach of fiduciary duty. I think it is that simple.”

Feelings remain mixed as to how the trend could affect allocation strategies and fundraising.

CalSTRS chief investment officer Christopher Ailman told reporters he was not worried about the system’s net-zero goals limiting its investing opportunities, which will prevent it from traditional oil and natural gas private equity opportunities – and the strong returns from rising commodity prices.

“Our philosophy is that we target bigger bites with fewer funds,” Ailman said. “We’re selective in private equity and we will continue to be selective. Many funds are already thinking about net zero and are paying attention to long-term mega-trends. Energy transition is a huge trend, and there are certainly ways to make money in it.”

Finnish the argument

Others say Florida’s decision will likely not affect fundraising efforts due to the size of the global investing universe. “Florida is a large system, but so are European pension plans,” says Heather Wyckoff, a partner at Schulte Roth & Zabel who advises private investment funds. “Finland is a massive investor and has an ESG policy. Do investors like Florida have the market power to really sway ESG? I don’t think they really have the type of influence on capital raising that would be meaningful.”

Others said Florida’s resolution may not be as enforceable as intended.

“These types of laws do not have any kind of staying power, because they conflict with a financial professional’s legal responsibilities,” says Beth-ann Roth, an attorney with R|K Invest Law who previously worked for the SEC. “You’re relying on the judgment of someone who has expertise to understand what goes into a company’s viability as an investment. They have a fiduciary duty to take all relevant information into account.”

“How can a regulator draw that line?” Roth asks. “These types of laws cannot withstand scrutiny and don’t make any sense from my perspective because all relevant information has financial consequences.”