Can investment managers for Kentucky public pensions use ESG or stakeholder-capitalism strategies under their fiduciary duties?
Plain-English summary
State Treasurer Allison Ball asked the Attorney General whether "stakeholder capitalism" and "ESG" (environmental, social, and governance) investing practices, when used by firms managing Kentucky's public pension money, are consistent with the fiduciary duties those firms owe under Kentucky law. The opinion's answer was no.
The opinion's core legal point is about the nature of a fiduciary duty. Kentucky statutes (KRS 61.650 for the Kentucky Employees Retirement System and State Police Retirement System, KRS 78.790 for the County Employees Retirement System, and KRS 161.430 for the Teachers' Retirement System) require a fiduciary to act "solely in the interest of the members and beneficiaries" and for the "exclusive purpose" of providing benefits to them. That language mirrors the federal ERISA standard in 29 CFR § 2550.404a-1(a). The opinion read these provisions, drawing on traditional trust principles, to require a "single-minded" focus on financial return for the beneficiaries.
From that premise, the opinion reasoned that strategies which deliberately mix in non-financial goals (advancing social or political objectives alongside, or ahead of, investment returns) introduce mixed motives that the fiduciary standard does not allow. The opinion noted that the duty of prudence (KRS 61.650(1)(c)(3) and parallel provisions) and the statutory direction to prioritize investments that benefit Kentucky's economy (KRS 161.430(1)(c) and related sections) point the same direction. It also raised, without deciding, a free-speech concern under Janus v. AFSCME about managers speaking on behalf of pensioners.
The opinion was careful on one point: whether any particular firm actually breached its duty is a fact-intensive question that depends on that firm's specific actions, statements, and commitments. The opinion did not adjudicate any firm's conduct. Its conclusion is the general legal one stated in the syllabus: ESG and stakeholder-capitalism practices that introduce mixed motivations are inconsistent with the fiduciary duties owed to Kentucky's public pension plans.
What this means for you
Investment managers and pension fund trustees
Under this opinion, a firm managing Kentucky public pension assets owes a duty to act solely in the financial interest of members and beneficiaries, and the Attorney General reads strategies that mix in non-financial ESG or stakeholder-capitalism goals as inconsistent with that duty. The opinion notes that whether a specific firm breached its duty is a separate, fact-intensive inquiry.
Public pension beneficiaries
The opinion frames the fiduciary standard as protecting the financial returns that fund teachers', police officers', and other public servants' retirements, and reads Kentucky law to require managers to keep that financial purpose paramount.
Fiduciary law attorneys
The opinion ties the Kentucky statutes (KRS 61.650, KRS 78.790, KRS 161.430) to the ERISA exclusive-purpose standard and to trust-law principles, and cites Fifth Third Bancorp v. Dudenhoeffer for the view that the statutory "benefits" are financial rather than nonpecuniary. It treats the breach question as fact-dependent rather than categorical.
Common questions
Q: Did the Attorney General say ESG investing is illegal for Kentucky pensions?
A: The opinion concluded that ESG and stakeholder-capitalism practices that introduce mixed motivations are inconsistent with the fiduciary duties owed to Kentucky's public pension plans. It also said whether any particular firm actually breached its duty is a fact-intensive question it did not resolve.
Q: What law does this rest on?
A: Primarily Kentucky's fiduciary statutes, KRS 61.650, KRS 78.790, and KRS 161.430, which require fiduciaries to act solely in the interest of members and beneficiaries for the exclusive purpose of providing benefits, echoing the federal ERISA standard.
Q: Can a pension manager consider social goals at all?
A: The opinion reads the duty as requiring a single-minded focus on financial return for beneficiaries; it treats strategies that prioritize or mix in ancillary social or political objectives as inconsistent with that duty.
Q: Does this opinion penalize any specific firm?
A: No. The opinion states that whether an investment management firm has breached a fiduciary duty is a fact-intensive inquiry requiring careful review of that firm's actions; it does not make that finding against any named firm.
Background and statutory framework
Kentucky's public pension fiduciary duties appear in KRS 61.650 (Kentucky Employees Retirement System and State Police Retirement System), KRS 78.790 (County Employees Retirement System), and KRS 161.430 (Teachers' Retirement System), each requiring a fiduciary to act solely in the interest of members and beneficiaries, for the exclusive purpose of providing benefits, and with prudence (e.g., KRS 61.650(1)(c)(3)). These echo the ERISA standard in 29 CFR § 2550.404a-1(a). The opinion also pointed to statutory direction favoring investments that improve Kentucky's economy (KRS 161.430(1)(c); KRS 78.790(3); KRS 61.650(3)). The Treasurer requested the opinion in her capacity as State Treasurer, while also serving as chair of the State Investment Commission (KRS 42.500(1)(a)) and as a Teachers' Retirement System trustee (KRS 161.250(1)(b)2). The opinion cited Fifth Third Bancorp v. Dudenhoeffer on the financial nature of plan "benefits" and Janus v. AFSCME on a potential free-speech concern.
Citations and references
Statutes and regulations:
- KRS 61.650(1), (1)(c)(3) (fiduciary duty; prudence)
- KRS 78.790; KRS 161.430(2) (parallel fiduciary duties); KRS 161.430(1)(c) (Kentucky-economy priority)
- KRS 42.500(1)(a); KRS 161.250(1)(b)2 (Treasurer's roles)
- 29 CFR § 2550.404a-1(a) (ERISA exclusive-purpose and prudence standard)
Cases:
- Jarvis v. Nat'l City, 410 S.W.3d 148 (Ky. 2013)
- Estate of Fridenberg v. Appeal of Commonwealth of Pa., 33 A.3d 581 (Pa. 2011)
- Janus v. AFSCME, 138 S. Ct. 2448 (2018)
- Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014)
Source
- Landing page: https://www.ag.ky.gov/Opinions/Pages/default.aspx
- Original PDF: https://www.ag.ky.gov/Resources/Opinions/Opinions/OAG%2022-05.pdf
Original opinion text
Best-effort transcription from the official PDF. Footnotes are reproduced inline in brackets; minor formatting artifacts may remain. The linked PDF is authoritative.
Commonwealth of Kentucky
Office of the Attorney General
Daniel Cameron, Attorney General
Capitol Building, Suite 118, 700 Capital Avenue, Frankfort, Kentucky 40601
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 Kentucky [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.]
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 push their own political agendas and force social change. 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. 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. And while the public pension plans administered by the Kentucky Public Pension Authority have shown year-over-year improvement in funding, 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." What this means in reality is that investment 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."
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." 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."
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." Similarly, Climate Action 100 "aims to ensure the world's largest corporate greenhouse gas emitters take necessary action on climate change." 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." As further suggestion of a political motive, some investment management firms have committed to both advocate for government-imposed climate change mandates, and use their fiduciary role to prevent portfolio companies from advocating against such mandates.
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, has made a "firmwide commitment to integrate ESG information into [its] investment processes" to affect "all of [its] investment divisions and investments teams." Other investment management firms that direct billions of dollars in Kentucky pension fund investments have publicly made similar commitments to ESG investment practices. There is some suggestion that politically biased investment strategies have real costs and worsen outcomes for pensioners. These harms are significant 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.
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."
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. [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)).] 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." 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." [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.]
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," 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 in the interest of the members and beneficiaries [and for] the exclusive purpose of providing benefits[ ] to members and beneficiaries," KRS 61.650(1); see also KRS 78.790(1)(c); KRS 161.430(2)(a). [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").] 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