A newly elected official in Missouri says his emphasis in his role as state auditor will be to focus on combating left-wing “environmental, social, and governance”—or “ESG”—policies with respect to investments.
“Well, as the state treasurer, I’ve gained … a lot more exposure to ESG issue than pretty much anybody in elected office in Missouri. So, I will try to at least use that knowledge that I’ve gained, and that experience that I have being on the board of the [state] pension plan and working on these issues, to help,” Missouri State Treasurer Scott Fitzpatrick, who was elected this month as the state’s next auditor, told The Daily Signal. He will take his new office on Jan. 9.
“There’s going to be legislation in Missouri this coming session dealing with ESG issues and proxy voting, and things like that. So, as somebody who’s been very involved in that conversation at the board level on a pension plan, as well as having been exposed to it a lot through my engagements with the State Financial Officers Foundation, with [The Heritage Foundation], with you guys, the stuff that I’ve been able to learn, I’m going to be a part of that legislative process in helping develop that legislation,” Fitzpatrick said. (The Daily Signal is the news outlet of The Heritage Foundation.)
The incoming Missouri state auditor explained why he’s against the use of environmental, social, and governance policies.
Essentially, the reason I am against ESG being used as a tool for investing purposes is because it prioritizes nonfinancial factors in investment decisions, and how you’re managing people’s investments, over those financial—or what we call pecuniary—factors that should be the priority when you’re managing somebody else’s money and have a responsibility to them to generate the best return possible on their investment.
Fitzpatrick, a Republican, joins “The Daily Signal Podcast” to discuss why he is against those environmental, social, and governance policies; how he will continue his work combating those policies as state auditor; and why he thinks he was able to flip the auditor’s seat, which had been held by a Democrat for nearly seven years.
Listen to the podcast below or read the lightly edited transcript.
Samantha Aschieris: Scott Fitzpatrick is joining the podcast today. He is the state treasurer of Missouri and will become the state’s next auditor in a few weeks, having just won his election on Nov. 8. Scott, thanks so much for joining us today.
Scott Fitzpatrick: Hey, thanks for having me on. Glad to be with you guys.
Aschieris: Of course. Now, I first want to talk a little bit about your recent win to become the next auditor in Missouri. You actually flipped this seat. It was previously held by Democrat Nicole Galloway, and this was the only Democrat-held seat statewide, KCUR.org reports. What do you think contributed to your success in flipping this seat, which had been held by Democrats for roughly seven years?
Fitzpatrick: Well, I think a few things. No. 1, obviously, the environment in Missouri has changed significantly in the last eight years since Auditor Galloway first came into office. She was initially appointed by our prior Democrat governor and was reelected in 2018. It was actually the same year that Josh Hawley won the Senate race. She was able to hold on to her office in that cycle. She ended up not running this time, so there was a different Democrat.
So, one thing was it wasn’t the incumbent that I was running against, I was running against a Democrat that didn’t have any experience in the office, No. 1. As much as I’d like to take full credit for that.
But it is a combination of things. And I think the message that we’re talking about resonated. I was really focused on the core issues of the office. I think it’s important that taxpayers know how their money’s being spent and that they have somebody watching over their funds that is going to hold officials, whether bureaucrats or politicians, accountable when that money is misused or if it’s stolen. So, those are the things that I talked a lot about.
We also talked a lot about schools. Schools are under the purview of the Auditor’s Office in Missouri. And really, they’ve not done any of that really in the last 15 years in the Auditor’s Office, in terms of auditing school districts.
I think one thing that’s come out of COVID is that people have become reengaged in the educational lives of their kids. … Now that they’ve had a front-row seat to it through this distance learning stuff that happened in 2020, they’re much more interested in what’s happening day-to-day in their kids’ lives educationally. And I think the auditor has a role to play there.
Aschieris: Yes. I do want to talk a little bit more about your role as the auditor coming in, but I first want to talk about your current role as the state treasurer. You work to combat ESG, or environmental, social, and governance policies. Can you first break down for us what ESG is and some of the ways that you were able to fight back against it and why you are against it?
Fitzpatrick: Absolutely. So, ESG, most people who are listening to this may know, stands for environmental, social, and governance. And I’m sure there’s a lot of people that don’t know. It’s interesting because I was with a group of county treasurers maybe a month or two ago and I asked them to show hands how many of them knew what ESG stood for, and only one out of over a hundred county treasurers even raised their hands.
So, it’s this very nuanced—it’s the latest acronym that the Left is using to try to advance their social causes and political causes that they can’t get accomplished through the democratic process, whether that’s in state legislatures or in Congress. They’re trying to implement it through corporate boardrooms.
And essentially, the reason I am against ESG being used as a tool for investing purposes is because it prioritizes nonfinancial factors and investment decisions, and how you’re managing people’s investments over those financial or what we call pecuniary factors that should be the priority when you’re managing somebody else’s money and have a responsibility to them to generate the best return possible on their investment.
The real pervasive thing about ESG is that there are ESG funds or ESG products that asset managers offer, and there are some people that want to invest in those things. They want to feel like they’re making social impact with the money they’re investing. That’s fine.
If there’s somebody who is choosing and it’s disclosed to them up front, “Listen, you’re going to pay higher fees on this investment. We’re going to prioritize investing your money in stocks that meet certain criteria that are not related to financial retirement, are more related to environmental issues or to social issues,” and somebody’s making that decision with all the information, then OK.
But the problem that we really have seen in the last few years is that non-ESG investment products, so just standard index funds that somebody might invest in to try to get exposure to the stock market at large, are having ESG-linked proxy voting and stewardship kind of policies put in place on them that are not really being disclosed to the people whose money they’re investing.
That’s the real problem with it because when you prioritize these things and investments that are not disclosed to be ESG funds, you’re essentially damaging the shareholders. You’re causing harm, financial harm to the people whose money you’re investing. It’s become a major problem that needs to be addressed.
Aschieris: Yeah. I’m also curious, too, how can someone know if their investments are following ESG policies? Or, how does someone who might not be familiar with these policies understand where their money is going to or how it’s being impacted by ESG?
Fitzpatrick: So, a lot of it, it really depends on how you’re investing. So, a lot of 401(k) plans have what they call target date funds. … It’s a set it and forget it type thing. You’re just saying, “OK, I’m going to put this much money in my 401(k) every month and I’m going to put it in the 2055 target date fund,” meaning that’s the target date you want to retire, the year you want to retire in is in 2055.
That fund has a certain makeup of equities and bonds, or stocks and bonds, and that mix is changed by the fund manager over time. But what’s happening behind the scenes there is that really what you have is you own stock in a publicly traded company or in several publicly traded companies with that asset.
When you’re talking about a 401(k) plan, those are typically managed by your employer and you may not have a lot of say in those types of investments. But one thing you can do is just you need to ask your plan administrator, “How are my shares being voted on proxy voting issues? And who is in charge of basically managing this money for us? And what policies are they using to guide that stewardship or that management of this money?” And so, that’s one thing in your retirement accounts.
You have separate money that’s in a brokerage account sometimes, if some people invest outside of their retirement plans in the stock market. They typically would do that, unless somebody’s investing directly through an E-Trade account or something like that. A lot of times people have a financial adviser, and that financial adviser is selling them products that they’re investing in that give them exposure to the public markets.
The next thing you need to do now that you have become aware of this issue is you need to ask that investment adviser how your shares are being voted. And in a lot of cases, they may not even know. There’s maybe somebody further up in the organization that’s basically making a decision on how to vote your shares on proxy issues that your investment adviser may not even be fully aware of.
So, that’s really the kind of issue as it stands right now.
What you can do if you have money in public markets and publicly traded companies with an investment adviser, you need to just ask them, “How are my shares being voted? Who’s making these decisions? What policies are in place to determine how to vote on these things?”
Aschieris: One investment company that comes up a lot whenever I research ESG is BlackRock. Your state actually sold all its public equities managed by BlackRock last month, that’s according to reporting from Fox News. It was about $500 million. Can you tell us a little bit about this, the response from BlackRock? And have they done anything that would lead you to use them again?
Fitzpatrick: So, Missouri’s state employment retirement system, I am on the board of that. So, in state treasuries or in state governments, typically there’s a state treasurer who’s in charge of investing all the money that’s “inside” the treasury.
So, pension fund money is typically not something that’s inside the treasury. So when we pay money to the pension plan, it’s money that’s inside the treasury and we’re paying it over to the pension plan and it goes outside the treasury. Whereas, money inside the treasury, I’m the sole fiduciary, I get to make all the decisions about how that money’s invested.
Money in the pension plan is overseen by a board, and that board has staff that work on investing the money and they have much different policies on how they invest. So, I basically kind of sounded the alarm on the proxy voting and shareholder engagement issue. …
And when I talk about shareholder engagement, what I mean by that is companies like BlackRock basically have calls with management of these large publicly traded companies where they’re basically conducting oversight on the companies. And they provide these managers, whether it’s the CEO of the company or other high-ranking officials in the company, they provide them guidance and feedback on the things that they believe, they being BlackRock, should be prioritized by the company as they plan their strategies for the coming months and years.
And more, and more, and more, BlackRock has been basically focusing those conversations around issues like racial equity audits and around climate change initiatives, like reducing Scope 3 emissions. …
Scope 3 emissions, by the way, make a company essentially responsible for their whole supply chain, both upstream and downstream from them, which involves companies that are not controlled by them. And so, it’s an incredibly expensive endeavor, it makes no sense for shareholders, and it is nonsensical. These are the things that BlackRock was pushing in these shareholder engagements or these calls with their management.
So, I basically told the board, I said, “Guys, we cannot allow these people to continue to be our voice. They’re speaking on behalf of our funds. These funds are Missouri taxpayer funds and they’re voting on behalf of our funds, our shares in these company. The ultimate owner of these shares are the taxpayers and the people who are benefiting from the pension fund as well.”
And so, what we said to BlackRock was, “Listen, you have to stop voting for us on proxy voting issues while we develop our own proxy voting policy that will need to be implemented.”
BlackRock basically just said, “No, we’re not going to not vote for you.” They said, “We’ll give you the option of one of these kind of pre-selected proxy voting policies that we’ll implement for you, but we won’t just abstain while you guys consider how you want to your shares to be voted.”
And so, what we did as a result of that was we sold all of that equity that we had in BlackRock exposure. We got out of that and we put it in a different type of a derivative contract, essentially to kind of mimic that same exposure while we implemented our proxy voting policy.
To answer your question, I would not support putting the money back with BlackRock right now, even with the voting choice program they’re trying to implement.
The problem is these management calls that they do where they’re talking to management, they’re still going to be saying the same thing on these management calls. Even if they’re implementing our proxy voting directives, their messages that they send to the companies that they’re overseeing will not be consistent with the proxy voting policy that was adopted by the Missouri State Employees’ Retirement System.
I think it’s important that the people who are managing your money are not only voting the shares the way that your proxy voting policy says they should be voted, which is to prioritize financial return over non-financial matters when making decisions on how to vote on shareholder issues and on board of directors elections. I don’t have confidence that BlackRock would—the voice that they use to talk to these companies would mimic what we have in our proxy voting policy on the issues that do go to proxy votes.
Aschieris: Now, moving forward in your new role as the state auditor, how will you continue your work that you did as the state treasurer in your new role pushing back against ESG policies?
Fitzpatrick: Well, as the state treasurer I’ve gained, I think, a lot more exposure to the ESG issue than pretty much anybody in elected office in Missouri. So, I will try to at least use that knowledge that I’ve gained and that experience that I have being on the board of the pension plan and working on these issues to help.
There’s going to be legislation in Missouri this coming session dealing with ESG issues and proxy voting and things like that. So, as somebody who’s been very involved in that conversation at the board-level on a pension plan, as well as having been exposed to it a lot through my engagements with the State Financial Officers Foundation, with Heritage, with you guys, the stuff that I’ve been able to learn, I’m going to be a part of that legislative process in helping develop that legislation, No. 1.
No. 2, a big job of the auditor is to let people know what’s happening with their money. One of the things I want to look at doing when I get into the Auditor’s Office is doing reporting on the proxy votes that are being made in Missouri’s pension plans because MOSERS, the Missouri State Employees’ Retirement System, is just one pension plan. We have another separate plan that has some other state employees in it. We have our public school retirement system, which is the biggest one in the state. We have our local government employee retirement system.
So, we have a lot of different pension plans in Missouri and they’re all allowing somebody else to vote their shares on these proxy issues.
I think that if people knew what was happening with the money that BlackRock and others are managing on behalf of our pension plans, if they knew the things that were being voted for, they would be very upset. Not only because they’re making the wrong financial decision for the pension plans, they’re prioritizing non-financial goals over providing the maximum return to shareholders, they’re also advancing social and political causes that the people whose money they’re managing would not agree with by and large.
And so, I think the auditor can expose that. And I think we should expose that and make sure that the Legislature and that taxpayers have the information on how their money’s being used to advance these causes in these large publicly traded companies in America.
Aschieris: Just on the topic of ESG, before we let you go, I wanted to get your thoughts on a letter that was sent by 17 Democrat [attorneys general]. They were defending their use of ESG policies in investment decisions to lawmakers. This was in response to commentary that republican AGs actually sent earlier this year, according to Fox News.
I’m just going to read part of the letter. It reads, “That commentary rejects consideration of ESG factors when assessing the risks and rewards associated with a particular investment. ESG factors, however, are like any other material factors, such as supply chain concerns or changing interest rates that inform investment decision-making.”
The letter also says, “Companies that fail to take climate change risks into account, for example, can suffer serious financial consequences, both in terms of physical damage, and litigation, and regulatory costs. Increased severe weather patterns cause damage to transit infrastructure, which in turn interrupts services and hurts business.”
Do you have a response or any thoughts on this letter from the Democrat AGs?
Fitzpatrick: Sure. One thing I would say is the rules that are being promulgated by the Biden administration, both in the Department of Labor and the [Employee Retirement Income Security Act] rules, the [Securities and Exchange Commission] is promulgating rules related to ESG, and what they’re doing is they’re treating ESG factors as basically risks above and beyond that, I guess, should warrant greater consideration than the other types of risks that they are talking about in that letter, like supply chain risks and other things that I think are really more material to the business, right?
Scope 3 emission reductions, when you’re talking about an investment bank that is being told by BlackRock that they need to disclose the carbon footprint of all of their customers, that has a tremendous downstream impact in the economy. So, you’re not just talking about the large publicly traded institutions at that point. You’re talking about these small businesses.
The people on Main Street, the farmers and ranchers in this country that are going to be told by financial institutions, in order to comply with rules and this kind of forced behavior that’s being put on them by the people who are representing all their largest shareholders, which are BlackRock, State Street, and Vanguard, they own 20% of all the stock and the S&P 500 on behalf of their customers.
So, I think what they’re saying is just completely off base. They’re trying to prioritize these issues above and make them more important or more critical than other issues. There’s no reason or argument to do that.
By the way, this is an example. Apple, the board of directors, there was a shareholder proposal that wanted Apple to conduct a racial equity audit. The Apple board recommended against this proposal. BlackRock voted for that proposal. That does nothing to advance any cause for shareholders, right?
There is no material financial risk at a company like Apple based on their racial equity audit outcomes. If anything, the risk is that they’ll be pressured by shareholders to discriminate against people, maybe white males, in order to achieve certain racial outcomes and the number of employees they have that are of a specific race or gender. We’ve seen that.
Sometimes these things that we’re talking about, an ESG issue, when you have activists pushing those issues, can result in legal liability for going too far that direction on issues. And so, the Democrat AGs, I think, are just responding to what the Republican AGs have done.
I think it’s important to understand that what’s happening here is Republican attorneys general, Republican state treasurers, state auditors, we are pushing back against an industry-level change in behavior in how people’s assets are managed, people’s retirement funds are managed, that is bad for investors. We’re pushing back against that.
The way that some of these people are trying to frame it is that we are the ones that are making a big issue out of something that’s always been this way. And it’s not. The industry is changing. Their behavior is changing. BlackRock, Larry Fink puts in his letter a couple years ago that, “At BlackRock, we force behaviors, we force people to change to address issues like the climate and things like that.” We are reacting to that.
And so, I think it’s important to understand that as this continues, this conversation continues to evolve, that we are just fighting back against the politicization of people’s money in ways that they wouldn’t agree with, in ways that damage their retirement accounts.
Aschieris: Well, Scott Fitzpatrick, thank you so much for joining us. I really appreciate you coming on to discuss ESG and your new role as the Missouri state auditor. We really appreciate it. We’ll definitely have to have you back on. As you said, this conversation continues to evolve. So, thank you so much and have a great day.
Fitzpatrick: Hey, absolutely. Thanks for having us.
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