Did Texas’ ESG Ban Have Any Bite?

I tried to cross-check the Texas comptroller’s list of banned funds and companies with the publicly available holdings of Texas state pension funds. I found little overlap. Of course, not all disclosures are publicly verifiable or available, but I have to wonder if the banned list was even meant to bite.

ESG and politics have become inextricably linked over the past six months or so. An important step in this direction is the announcement by Glenn Hegar (the Comptroller of Texas) that Texas state agencies must divest themselves of 348 specific funds and 10 asset management companies promoting ESG. Especially, August 24, 2022Glenn Hegar directed the Texas Employees Retirement System, the Texas Teachers Retirement System, the Texas Municipal Retirement System, the Texas County and District Retirement System, the Texas Emergency Services Retirement System, and the Permanent Schools Fund to notify its office within 30 days if the pension funds held the Prohibited Funds or ESG investments administered by the Prohibited Management Companies. The 10 prohibited management companies are BlackRock, BNP Paribas SA, Credit Suisse Group AG, Danske Bank A/S, Jupiter Fund Management, Nordea Bank, Schroders PLC, Svenska Handelsbanken, Swedbank AB and UBS Group AG.

Note that BlackRock is the only US asset manager on the list (assets under management or AUM of $8 trillion). The list is oddly heavy on Scandinavian banks that have relatively small AUMs (Danske’s $100 billion Nordea’s 248 billion euros, Swedbank’s 166 billion eurosand Svenska’s 65 billion euros). Given that the other nine asset management companies, other than BlackRock, are all based in Europe or the UK, one has to wonder what the actual amount of the ban is, because the direct holdings of pension funds Texans in European societies are probably low. Should we even expect Texas pension funds to invest in any of the banned companies, except perhaps BlackRock and UBS?

Therefore, my first reaction to the announcement was to wonder what the relevance of the divestment order was for Texas public pension funds anyway. In addition to this, most public pension funds invest a large portion of their assets in market-wide indexed funds such as the S&P 500 which are not all ESG labeled. The rest of the money is in private equity or alternative investments, which have traditionally been opaque about ESG and the projects they invest in. Therefore, my hypothesis was that the potential overlap between the prohibited list that Glenn Hegar published and investments held by Texas state pension funds were likely low.

I set out to find out if the data is compatible with my intuition. To do this, I extracted the last known list of investments published by these Texas pension funds and compared it to the list of 348 funds that are “blacklisted”.

Texas Teachers’ Retirement System (TRS)

Texas Teachers’ Retirement System (TRS) held approximately $160 billion. The composition of their assets is: (i) 21% stable value investments (cash 16%, stable value hedge funds 5%); (ii) 54% in global equities (18% in the US, 13% in non-US developed countries, 9% in emerging markets and 14% in private equity); and (iii) 21% in what they call real return strategies (real estate 15%, energy 6%). Again, I couldn’t find a list of funds held, but I did find stocks held by TRS on S&P CAP IQ. TRS held $13.9 billion in public shares in 2011.

The top 10 stocks held by TRS are the usual suspects, except for a few ETFs sold by Vanguard: (i) Apple ($796 million); (ii) Vanguard FTSE Emerging Markets ETF ($712 million); (ii) Microsoft ($551 million); (iii) Amazon ($339 million); (iv) Alphabet ($315 million); (v) Vanguard S&P 500 ETF ($258 million); (vi) Shell ($241 million); (vii) iShares S&P 500 ETF ($231 million); (viii) Tesla ($183 million); (ix) United Health ($172 million); and (x) Johnson and Johnson ($168 million). Interestingly, CAP IQ reports an iShares stake, a BlackRock brand. This will likely be sold and replaced by Vanguard’s S&P 500 ETF, I assume.

The list of top investments held by TRS appears to resemble the largest holdings in the S&P 500 index. It’s also worth noting that among their top 10 holdings is a European oil company, Shell, but not a US oil company like Exxon. . Exxon has a much larger market capitalization ($417 billion) than Shell ($173 billion) and Exxon is headquartered in Texas. One also has to wonder why oil and gas companies aren’t featured more prominently in the top 10 investments held by TRS and other Texas pension funds I’ve reviewed for this article.

I also checked the positions that TRS left recently after the 8/24/22 announcement. Exits were Healthcare Trust of America, Inc., Whiting Petroleum Corporation, Mobile TeleSystems, Hanger, Inc., Vonage Holdings Corp., Mandiant, Inc., Healthcare Realty Trust Incorporated, Epizyme, Inc., CDK Global, Inc., Metromile , Inc., Meritor, Inc., Biohaven Pharmaceutical Holding Company Ltd., Global Blood Therapeutics, Inc., GCP Applied Technologies Inc., Turning Point Therapeutics, Inc., Plantronics, Inc., ManTech International Corporation, Coherent, Inc., Sanderson Farms, Inc. and PS Business Parks, Inc.

Healthcare Trust, Whiting, Metromile, Turning and Epizime were involuntary exits due to mergers and the like. I could be wrong, but the other outings don’t seem particularly pro or anti ESG to me.

Texas Emergency Services Retirement System (TESRS)

Texas Emergency Services Retirement System (TESRS) had $141 million as of 8/31/21. Asset allocation of TESRS as of this date: (i) short-term investments (0.8%); (ii) US large cap equities (24%); (iii) US small and mid cap stocks (10.2%); (iv) international equities in developed markets (15%); (v) international equities in emerging markets (5%); (vi) core fixed income securities (21.7%); (vii) non-core fixed income securities (8.9%); (viii) US core real estate (7.3%); and (ix) multi-asset investments (7%).

The TESRS report as of 08/31/21 lists the funds in which the pension system invests. I saw a stake in BlackRock Multi-Asset Inc-K #1981 of $10.11 million. I saw lots of investments in the usual suspects such as Amazon etc., but nothing in banned banks or ESG funds.

Texas Continuing Schools Fund

Texas Continuing Schools Fund, according to its disclosure on 08/31/21, has $52 billion in assets. I saw an investment in BlackRock, the company, but not in ESG funds.

Texas County and District Retirement System (TCDRS)

Texas County and District Retirement System (TCDRS) has assets of $45 billion as of 12/31/21. TCDRS Asset Allocation looks like this: (i) 29% in credit; (ii) 25% in shares; (iii) 25% in investment capital; (iv) 10% in real assets; (v) 6% in hedge funds; and (vi) 5% investment grade bonds and cash. S&P CAP IQ does not have detailed data on its public equity holdings.

Texas Employee Retirement Systems (ERS)

Texas Employee Retirement Systems (ERS) held approximately $33 billion in assets as of August 2022. Composition of assets: (i) 33% public capital; (ii) 20% in private equity; (iii) 9% in overall credit; (iv) 3% in public real estate; (v) 5% in infrastructure; (vi) 11% in rate strategy; (vii) 5% in hedge funds; (viii) 1% each in special situations and in cash. It’s hard to imagine ERS holding the objectionable ESG funds in any category other than public equities. I searched but couldn’t find a list of funds (not companies) held by ERS.

The top 10 stocks held by ERS are the usual S&P 500 suspects: (i) Apple ($340 million); (ii) Microsoft ($252 million); (iii) Amazon ($148 million); (iv) Alphabet ($139 million); (v) United Health ($88 million); (vi) Tesla ($81 million); (vii) Johnson and Johnson ($77 million); (viii) ExxonMobil ($68 million); (ix) Prologis ($62 million); and (x) Berkshire Hathaway ($59 million).

Before saying that this must represent holdings after Glenn Hegar’s announcement, I checked the positions that ERS left after Hegar’s announcement. Exits were Healthcare Trust of America, Inc, Cedar Realty Trust, Inc., Healthcare Realty Trust Incorporated, Duke Realty Corporation, Noble Corporation Plc and Hemisphere Media Group, Inc.

Of the six exits, three were unintended as Healthcare Trust, Healthcare Realty Trust and Noble Corporation were acquired. The remaining outings don’t strike me as pro or anti-ESG.

Texas Municipal Retirement Systems (TMRS)

Texas Municipal Retirement Systems (TMRS) has assets of $38 billion as of 12/31/21. The asset allocation is as follows: (i) global public capital (32.8%), (ii) private equity (9.8%)); (iii) core fixed income securities (5.0%); (iv) non-strategic fixed income securities (20.6%); (v) real estate (12.5%); (vi) other public and private contracts (11.0%); (v) hedge funds (7.8%); and (vi) cash equivalents (0.5%).

S&P CAP IQ does not list public holdings of TMRS. TMRS Public Disclosure as of 3/31/22 suggests they hold $6.8 billion in MSCI USA IMI Fund and $3.9 billion in NTGI ACWI ex. IMI of the United States (NL). Nothing pro and anti-ESG here.

So where does this leave us? I am not able to find much overlap between the list published by Glenn Hegar and what is actually held by Texas pension funds. I realize that the securities held by the pension funds are likely administered by BlackRock or one of the banned asset management firms and the affiliation may not be made public. Also, I only have access to public data, and I may have inadvertently missed a few disclosures. You could always say that it is very disturbing to be cut off from future business opportunities.

Yet, after this exercise, I have to wonder if the forbidden list had or was meant to have any real bite. Given that these Texas pension funds are unlikely to hold shares in this list of relatively small European financial institutions (BlackRock is the only exception) in the first place, could Hegar’s announcement simply represent grandstanding? Politics ?

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