Paul Atkins, former SEC commissioner, is not a fan of recent moves by Republican-run states to blacklist asset managers because they consider environmental, social and governance factors when they invest.

It’s not because he doesn’t believe in the purpose of blacklisting.

Atkins simply thinks there is a better way for state regulators to “fight back” against ESG standards: put the “single interest rule” into practice.

During a panel discussion with Andy Puzder, a senior fellow at the Pepperdine School of Public Policy, Atkins said he thinks the blacklisting approach may not produce the intended consequences — hurting managers’ profits. of assets engaged in ESG.

Atkins and Puzder discussed how public pension plans incorporate ESG into investment decisions and the recent debate around this practice. The panel was moderated by Leonard Gilroy, vice president of the Reason Foundation, a libertarian think tank.

During the discussion, Gilroy asked the panelists what they thought of the recent backlash from Republican policymakers against ESG investing. In July, West Virginia Treasurer Riley Moore sent letters to six financial firms — Goldman Sachs, JPMorgan, Wells Fargo, US Bancorp, BlackRock and Morgan Stanley — barring them from doing business with state institutions. , whether for bond underwriting or asset management.

In August, Texas Comptroller Glenn Hegar followed suit, producing a list of 10 companies that “boycott” energy companies and are subject to divestment from state institutions. Later that month, the Florida State Board of Trustees, under Governor Ron DeSantis, passed a resolution prohibiting the $186 billion pension fund from considering ESG factors in its investment process.

It’s not just in Texas, West Virginia and Florida. Since August 15, North Dakota, Oklahoma, Kentucky, Utah, Minnesota, Idaho, South Carolina, Louisiana, Wyoming, Arizona, Indiana, Missouri, Ohio and South Dakota have all proposed anti-ESG bills, Reuters reported.

Instead, Atkins said states have power built into the single interest standard, a rule under the fiduciary law of trusts that states a fiduciary is required to consider only the interests of the beneficiary. . This means, for example, that an asset manager should take actions that are aimed solely at increasing the pension portfolio. Any action taken in the name of one’s own political and personal interests would constitute a violation of this rule. This is exactly what critics accuse ESG advocates of doing: applying their own values ​​to investment strategies. (Asset managers say ESG factors, such as climate change, present risks and opportunities for investors that cannot be ignored.)

According to an article from Stanford Law Review, in the case of the use of ESG factors by a fiduciary (an asset manager), the only standard of interest would be violated if the application of ESG factors were based on the “own sense of ethics” of the manager or to “obtain collateral benefits for third parties.” The single interest rule is mandatory under the Employees Retirement Income Security Act (ERISA), a federal law designed to protect retirement assets.

Atkins said there is a range of interpretations of the single interest standard. At one end of the spectrum, the definition is rigid: “You deviate one iota from pursuing the best economic interests of your beneficiary and you are off limits.” You violated that law,” Atkins said.

On the other hand, Atkins said interpretations of the standard are “vague and lenient,” allowing the fund manager to invest recipients’ money in a way that makes sense to them.

For states looking to combat the growth of ESG investment standards and the managers who use them, Atkins said those states need to take the more rigid approach to the rule.

“Some ways states can fight back are to make sure their state has as strong a single interest standard as possible,” he said.

Responsibility rests with state officials. Another way to assert a strong single-interest standard is for state officials, like the comptroller, to have annual or semi-annual reviews of people who handle state money, Atkins said.