October 31, 2022

Via email

David L. Eager, Executive Director Gary L. Harbin

Kentucky Public Pension Authority Kentucky Teachers’ Retirement System
1260 Louisville Road 479 Versailles Road
Frankfort, KY 40601 Frankfort, KY 40601
[email protected] c/o [email protected]

RE: “ESG” and Opinion of the Attorney General 22-05

Dear Messrs. Eager and Harbin:

As you know, the Attorney General “is the chief law officer of the
Commonwealth of Kentucky,” KRS 15.020(1), and the State Treasurer is “the head of
the Department of the Treasury,” KRS 41.020, and as such, is responsible for assuring
that the expenditures of the Commonwealth of Kentucky are paid in accordance with
the Constitution and laws governing the Commonwealth.

Recently, Treasurer Ball asked the Office of the Attorney General whether
“environmental, social, and governance” (ESG) investment practices, which introduce
mixed motivations to investment decisions, are consistent with Kentucky law
governing fiduciary duties owed by investment managers to Kentucky’s public
pensions. The Attorney General opined that such practices violate statutory and
contractual fiduciary duties. A copy of that opinion is enclosed.
Messrs. Eager and Harbin
October 31, 2022
Page 2

We write today to request that you, as the executive directors of the

Commonwealth’s major public pension systems, advise our Offices about your
systems’ efforts to ensure that ESG considerations are not being implemented in your
systems’ investment decisions, consistent with Kentucky law. Your response is
essential to guaranteeing that politics has no place in Kentucky’s public pensions. We
look forward to hearing from you on or before November 23, 2022.

Sincerely,

Daniel Cameron Allison Ball

ATTORNEY GENERAL STATE TREASURER

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 Commonwealth of Kentucky
Office of the Attorney General
Daniel Cameron Capitol Building, Suite 118
Attorney General 700 Capital Avenue
Frankfort, Kentucky 40601
(502) 696-5300
Fax: (502) 564-2894

May 26, 2022

OAG 22-05

Subject: Whether “stakeholder capitalism” and “environmental, social,

and governance” investment practices in connection with the
investment of public pensions funds are consistent with Kentucky
law governing fiduciary duties.

Requested by: Treasurer Allison Ball

State Treasurer of the Commonwealth of Kentucky1

Written by: Carmine G. Iaccarino, General Counsel

Zachary Richards, Assistant Attorney General

Syllabus: “Stakeholder capitalism” and “environmental, social, and

governance” investment practices, which introduce mixed
motivations to investment decisions, are inconsistent with
Kentucky law governing fiduciary duties owed by investment
management firms to Kentucky’s public pension plans.

Opinion of the Attorney General

There is an increasing trend among some investment management firms to use

money in public and state employee pension plans—that is, other people’s money—to

1 Although the Treasurer asks for the Attorney General’s opinion in her capacity as State
Treasurer, she also serves as chair of the State Investment Commission, KRS 42.500(1)(a), and as a
trustee of the Teachers’ Retirement System of the State of Kentucky, KRS 161.250(1)(b)2.
Opinion of the Attorney General 22-05
May 26, 2022
Page 2

push their own political agendas and force social change.2 State Treasurer Allison
Ball asks whether those asset management practices are consistent with Kentucky
law. For the reasons below, it is the opinion of this Office that they are not.

Background

To encourage public service, Kentucky offers public employees certain pension

benefits. See, e.g., KRS 61.510 to KRS 61.705. For years, however, the
Commonwealth’s public pension plans have hovered at severely underfunded levels.
According to the Kentucky Public Pension Authority’s most recent annual report, the
public pension plan for most state employees is roughly 17% funded.3 Kentucky’s
other public pension plans have not fared much better: the public pension fund
covering Kentucky State Police is roughly 30% funded and the County plans are 46%
to 52% funded.4 And while the public pension plans administered by the Kentucky
Public Pension Authority have shown year-over-year improvement in funding,5 there
is a concern that this trajectory may be threatened by extreme approaches to
investment management—particularly those that put ancillary interests before
investment returns for the benefit of public pensioners and state employees.

One such approach is “stakeholder capitalism.” According to its advocates,

“[s]takeholder capitalism is an expansion of corporate management fealty beyond
shareholders to include the workforce, supply chain, customers, communities,
societies, and the environment.”6 What this means in reality is that investment

2 The social change they seek has often been rejected outright by the people’s elected
representatives. See, e.g., Will ESG Disclosures be Mandated by Law? A Legislative Analysis, KING &
SPALDING (Sept. 22, 2021), https://perma.cc/F4FZ-9JA7 (discussing environmental, social, and
governance (“ESG”) legislation from the 117th Congress and finding a “low likelihood” that the
legislation becomes law); see also Stuart Loren, ESG and the Road to Serfdom, LINKEDIN (Oct. 22,
2021), https://perma.cc/3UVC-ETZ7 (“Even if well-intentioned and sensible, . . . do we really want a
handful of senior management at BlackRock and the world’s largest asset allocators pushing for policy-
related changes? Isn’t this the role of government?”).
3 Annual Comprehensive Financial Report for the Fiscal Year Ended June 30, 2021, KENTUCKY
PUBLIC PENSION AUTHORITY (Dec. 8, 2021), at 6, https://perma.cc/AN5N-9YXA (hereinafter “KPPA
2021 Report”).
4 Id. Kentucky is not alone in its public pension experience. Pew, Legal Protection for State Pension
and Retiree Health Benefits, Findings from a 50-state survey of retirement plans (May 30, 2019),
https://perma.cc/CNR7-QK89. (“Since 2000, when public retirement systems were almost fully funded,
states have seen aggregate unfunded pension liabilities grow to more than $1 trillion, with an
additional $700 billion in unfunded retiree health benefit costs.”).
5 KPPA 2021 Report, supra note 3, at 14.
6 Mark A. Cohen, Stakeholder Capitalism: Challenges and Opportunities for Big Law, FORBES (Jan.
19, 2022), https://www.forbes.com/sites/markcohen1/2022/01/19/stakeholder-capitalism-challenges-
and-opportunities-for-big-law/?sh=760110a449e2 (last visited May 26, 2022).

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May 26, 2022
Page 3

management firms who embrace stakeholder capitalism propose prioritizing activist

goals over the interests of their public and state employee clients.

To achieve this version of “capitalism,” investment management firms are

adopting “environmental, social, and governance”—or “ESG”—investment practices.
ESG investing is an “umbrella term that refers to an investment strategy that
emphasizes a firm’s governance structure or the environmental or social impacts of
the firm’s products or practices.”7

American economist Milton Friedman once criticized an earlier version of this

trend whereby one set of stockholders sought to convince another set of stockholders
that business should have a “social conscience.” As he explained, “what is in effect
involved is some stockholders trying to get other stockholders (or customers or
employees) to contribute against their will to ‘social’ causes favored by activists.
Insofar as they succeed, they are again imposing taxes and spending the proceeds.”8
Friedman found this problematic because “the great virtue of private competitive
enterprise” is that it “forces people to be responsible for their own actions and makes
it difficult for them to ‘exploit’ other people for either selfish or unselfish purposes.
They can do good—but only at their own expense.” 9

Today, in perhaps an even more pernicious version of the trend, the debate is
no longer left to stockholders. In fact, there is little-to-no debate. Investment
managers in some corporate suites now use the assets they manage—that is, other
people’s money—to enforce their preferred partisan sensibilities and to seek their
desired societal and political changes.

Investment management firms have publicly committed to coordinating joint

action for ESG purposes, such as reducing climate change. For example, the Steering
Committee for the Glasgow Alliance for Net Zero (“GFANZ”) states: “The systemic
change needed to alter the planet’s climate trajectory can only happen if the entire
financial system makes ambitious commitments and operationalises those
commitments with near-term action. That is why we formed [GFANZ], to bring
together over 450 leading financial enterprises united by a commitment to accelerate
the decarbonisation of the global economy.”10 Similarly, Climate Action 100 “aims to

7 Max M. Schanzenbach & Robert H. Sitkoff, Reconciling Fiduciary Duty and Social Conscience:
The Law and Economics of ESG Investing by A Trustee, 72 STAN. L. REV. 381, 388 (2020).
8 Milton Friedman, The Social Responsibility of Business is to Increase its Profits, THE NEW YORK
TIMES MAGAZINE (Sept. 13, 1970), at 4, https://perma.cc/CTJ6-9FKV.
9 Id.
10 Forward from the Principals Group GLASGOW FINANCIAL ALLIANCE FOR NET ZERO (Nov. 2021), at
6, https://perma.cc/N3KS-KTZG (emphasis added).

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May 26, 2022
Page 4

ensure the world’s largest corporate greenhouse gas emitters take necessary action
on climate change.”11 Climate Action 100 explicitly concedes a mixed motive, stating
that its investor signatories believe that taking action “is consistent with their
fiduciary duty and essential to achieve the goals of the Paris Agreement.”12 As further
suggestion of a political motive, some investment management firms have committed
to both advocate for government-imposed climate change mandates,13 and use their
fiduciary role to prevent portfolio companies from advocating against such
mandates.14

Whether these ancillary purposes are societally beneficial is beside the point
when speaking of the duty of fiduciaries. Fiduciaries must have a single-minded
purpose in the returns on their beneficiaries’ investments.

And this affects Kentuckians. One investment management firm, at one time
directing roughly $1.5 billion on behalf of the Kentucky Public Pension Authority,15
has made a “firmwide commitment to integrate ESG information into [its] investment
processes” to affect “all of [its] investment divisions and investments teams.”16 Other
investment management firms that direct billions of dollars in Kentucky pension
fund investments have publicly made similar commitments to ESG investment
practices.17 There is some suggestion that politically biased investment strategies
have real costs and worsen outcomes for pensioners.18 These harms are significant

11 CLIMATE ACTION 100+, About, https://perma.cc/K64N-J69K.

12 Id.
13 Act Now, Financial Leaders Urge More Climate Action from the G20, GLASGOW FINANCIAL
ALLIANCE FOR NET ZERO, https://perma.cc/43B2-XQ4A (“More governments need to commit to the Paris
target of 1.5 degrees Celsius by 2050. They need to make immediate cuts to emissions . . . .”).
14 2020 Progress Report, CLIMATE ACTION 100+ (2020), at 18 and 78, https://perma.cc/B5XW-XW2X
(scoring companies on whether the companies and their trade associations’ lobbying efforts are “Paris-
agreement aligned” and noting industry associations who “engage in problematic lobbying on climate”
are “holding back Paris-aligned climate policy”).
15 KPPA 2021 Report, supra note 3, at 137. Of course, this figure fluctuates and, as of the date of
this opinion, stood at roughly $1.1 billion according to the Kentucky Public Pension Authority.
16 2020 Sustainability Disclosure, BlackRock, at 6, https://perma.cc/4HE5-6DXH. Compare Larry
Fink’s 2022 Letter to CEOs: A Fundamental Reshaping of Finance, https://perma.cc/H59D-R4BA, with
Larry Fink’s 2022 Letter to CEOs: The Power of Capitalism, https://perma.cc/MMF7-LESJ.
17 See, e.g., Responsible Investment: Policies and Principles, FRANKLIN TEMPLETON (2020),
https://perma.cc/679E-6DQ3; Lord Abbett, ESG Investing, https://perma.cc/S8RS-U7M6; Putnam
Investments, Philosophy – ESG integration in our investment group, https://perma.cc/F3LT-SYJE; see
also KPPA 2021 Report, supra note 3, at 136-37.
18 See, e.g., Christopher Bancroft Burnham, BlackRock’s ESG Strategy Plays Politics with Public
Pensions, BARRON’S (May 28, 2020), https://perma.cc/FRU5-CX93 (“Research has consistently
indicated that conventional index portfolios perform better than ESG portfolios, partly because ESG
portfolios charge higher fees. . . . Fink is pursuing a course which, while possibly more profitable for

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May 26, 2022
Page 5

because companies employing ESG investment strategies are entrusted as fiduciaries

to manage the funds in the best interests of pension beneficiaries like teachers,
firefighters, and many other public servants who have ordered their lives around
promises made and who depend on public pensions to finance their retirements.19

Law

State and federal law have long recognized fiduciary duties for those who
manage other people’s money. The Employee Retirement Income Security Act
(“ERISA”), for example, demands that a fiduciary “discharge that person’s duties with
respect to the plan solely in the interests of the participants and beneficiaries, for the
exclusive purpose of providing benefits to participants and their beneficiaries and
defraying reasonable expenses of administering the plan, and with the care, skill,
prudence, and diligence under the circumstances then prevailing that a prudent
person acting in a like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like aims.” 29 CFR § 2550.404a-
1(a).

Kentucky law provides similarly demanding duties for fiduciaries. KRS 61.650
provides that a “trustee, officer, employee, employee of the Kentucky Public Pensions
Authority, or other fiduciary shall discharge duties with respect to the retirement
system . . . [s]olely in the interest of the members and beneficiaries [and for] the
exclusive purpose of providing benefits to members and beneficiaries and paying
reasonable expenses of administering the system[.]” KRS 61.650(1) (setting forth the
duties governing the fiduciaries of the Kentucky Employees Retirement System or
State Police Retirement System) (emphasis added); see also KRS 78.790 (setting forth
similar duties governing the fiduciaries of the County Employees Retirement
System); KRS 161.430(2) (setting forth similar duties governing the fiduciaries of the
Teachers’ Retirement System of the State of Kentucky). This language draws from
traditional trust principles requiring a single-minded purpose by fiduciaries that has
been summarized as follows: “[a]cting with mixed motives triggers an irrebuttable
presumption of wrongdoing, full stop.”20

BlackRock, puts public pension funds and other client portfolio performance in jeopardy by opening
the door to politics as part of pension portfolio management.”).
19 This Office notes a related move in this trend: the S&P Global Ratings’ (S&P) recent decision to
include ESG credit indicators in state credit ratings. Energy producing states, like Kentucky, may
suffer under these ratings because the Commonwealth’s investment in signature industries like coal,
oil, and natural gas would likely result in lower ESG scores. Yet state law requires pension trustees
to “give priority to the investment of funds in obligations calculated to improve the industrial
development and enhance the economic welfare of the Commonwealth.” See, e.g., KRS 161.430(1)(c);
KRS 78.790(3) (same); KRS 61.650(3) (same). A state’s credit worthiness should be determined by the
health of its economy—not activist ESG considerations.
20 Schanzenbach, supra note 7, at 400–401.

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May 26, 2022
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Like ERISA, state law also demands that such fiduciaries discharge their
duties “[w]ith the care, skill, and caution under the circumstances then prevailing
that a prudent person acting in a like capacity and familiar with those matters would
use in the conduct of an activity of like character and purpose.” KRS 61.650(1)(c)(3);
KRS 161.430(2)(b) (same for the Teachers’ Retirement System of the State of
Kentucky); KRS 78.790(1)(c) (same for County Employees Retirement System). The
duty of prudence requires more than assuming sweeping government mandates that
coincide with an investment manager’s policy preferences.21 Under Kentucky law,
fiduciary duty is not merely gift wrapping that a fiduciary may use to conceal a
package of personal motivations.

Along with these fiduciary duties, the trustees of the Kentucky Public Pension
Authority, for example, have adopted an investment policy that expressly provides
that, in “instances where the Investment Committee has determined it is desirable
to employ the services of an external Investment Manager,” those “Investment
Managers . . . agree to serve as a fiduciary to the Systems.”22 Moreover, the trustees
have expressly stated that, “[c]onsistent with carrying out their fiduciary
responsibilities, the Trustees will not systematically exclude any investments in
companies, industries, countries, or geographic areas unless required to do so by
statute.”23, 24

Conclusion. Whether an investment management firm has breached a

fiduciary duty is a fact intensive inquiry. That determination rests on a number of
considerations and careful review of a fiduciary’s actions, statements, and
commitments. While asset owners may pursue a social purpose or “sacrifice some
performance on their investments to achieve an ESG goal,”25 investment managers
entrusted to make financial investments for Kentucky’s public pension systems must
be single-minded in their motivation and actions and their decisions must be “[s]olely

21 See Jarvis v. Nat’l City, 410 S.W.3d 148, 158 n.28 (Ky. 2013) (“Trustees must often ‘conduct
considerable research and analysis in each potential investment and in devising an overall investment
strategy.’” (quoting Estate of Fridenberg v. Appeal of Commonwealth of Pa., 33 A.3d 581, 590 (Pa.
2011)).
22 Kentucky Retirement System, Investment Policy Statement (adopted Nov. 16, 2021), at Section
II.D.i., https://perma.cc/4LLR-KNC6.
23 Id. at Section I.B.
24 Although beyond the scope of this request, there are some free speech concerns when considering
this scheme in light of the U.S. Supreme Court’s decision in Janus v. AFSCME, 138 S. Ct. 2448, 2464
(2018) (“Forcing free and independent individuals to endorse ideas they find objectionable is always
demeaning . . . .”). Allowing investment management firms to speak on behalf of pensioners or the
pension systems without notice or approval may give rise to First Amendment concerns.
25 Domini Poll: ESG Investing is Gaining Traction, KIPLINGER (Oct. 12, 2021),
https://perma.cc/4LSV-X4DE.

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in the interest of the members and beneficiaries [and for] the exclusive purpose of
providing benefits[26] to members and beneficiaries,” KRS 61.650(1); see also KRS
78.790(1)(c); KRS 161.430(2)(a). To do otherwise risks breaching clearly established
statutory and contractual fiduciary duties and threatens the stability of already
fragile pension systems. In sum, politics has no place in Kentucky’s public pensions.
Therefore, it is the opinion of this Office that “stakeholder capitalism” and
“environmental, social, and governance” investment practices that introduce mixed
motivations to investment decisions are inconsistent with Kentucky law governing
fiduciary duties owed by investment management firms to Kentucky’s public pension
plans.

Daniel Cameron
ATTORNEY GENERAL

Carmine G. Iaccarino
Zachary Richards
Assistant Attorneys General

26 These “benefits” are clearly financial benefits, not an investment manager’s conception of societal
benefits. See Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 420–21 (2014) (noting that the
‘‘benefits’’ to be pursued by ERISA fiduciaries as their ‘‘exclusive purpose’’ does not include
‘‘nonpecuniary benefits’’).