Divestment law would not injure 3 retiree systems

State officials assess impact if ESG-driven firms shunned

The Arkansas public employees and judicial retirement systems have a total of about $50.3 million in bonds issued through financial service providers that Arkansas’ ESG Oversight Committee has determined discriminate against fossil fuel and/ or energy companies, system officials said.

Officials said the bonds include $39.2 million issued through the Union Bank of Switzerland, $7.9 million issued through Goldman Sachs, $2.1 million issued through Nomura Holdings, about $874,539 issued through Toronto Dominion Bank, and about $33,528 issued through Credit Suisse.

Union Bank of Switzerland also is known as UBS and Toronto Dominion Bank also is known as TD Bank, said Amy Fecher, executive director of the Arkansas Public Employees Retirement System and Arkansas Judicial Retirement System.

Asked about the financial impact to the two systems if they are forced to divest these holdings, Fecher said Tuesday in a written statement, “With the current market value, the financial impact of liquidating the holdings for APERS and AJRS would result in a financial net base gain in our positions.”

APERS is the Arkansas Public Employees Retirement System. AJRS is the Arkansas Judicial Retirement System.

Arkansas Teacher Retirement System Executive Director Mark White said the system has about $5.1 million in bonds issued through the financial service providers that the ESG Oversight Committee has determined discriminate against fossil fuel and/or energy companies. These bonds included a corporate bond of about $5 million issued through UBS and a corporate bond of about $131,000 issued through Goldman Sachs, he said.

The system also has three issues of collateralized mortgage obligations of about $468,000 from Credit Suisse Mortgage Trust, he said.

He said Act 411 of 2023 requires the retirement systems to make a decision within 365 days of the ESG Oversight Committee’s final decision of which financial service providers discriminate against fossil fuel and/ or energy companies to ei

ther divest affected holdings or determine that the affected holdings are locked into a maturity date such that early divestment would result in a financial penalty and negative financial impact to the state.

Asked about the potential financial impact on the system if it is forced to divest these holdings, White said, “Looking first at the corporate bonds and CMOs from UBS, Goldman Sachs, and Credit Suisse, the total market value is $5.6 million and the total purchase price was $5.3 million.

“So, if we sold them all now, we would realize a gain of approximately $300,000 and not a loss,” he said in a written statement. “These investments can be sold on the public market without any significant administrative cost.”

Last week, Arkansas’ ESG Oversight Committee decided to meet May 6 to decide whether any of the six financial service providers they have identified have provided sufficient information to the committee to demonstrate that they don’t discriminate against energy or fossil fuel companies. At that meeting, the committee is expected to approve its final list.

The six financial service providers were sent a written notice last week about the committee’s findings and given an opportunity to demonstrate within 30 days receipt of the notice that they are not discriminating against energy and/or fossil fuel companies.

The financial service providers include UBS Group AG, UBS Asset Management, UBS Securities LLC, and UBS Financial Services Inc.; Credit Suisse Asset Management, Credit Suisse Group AG, and Credit Suisse Securities LLC; and Royal Bank of Canada, Royal Bank of Canada Global Asset Management, and RBC Capital Markets.

They also include Goldman Sachs Asset Management, Goldman Sachs & Co., and Goldman Sachs Group Inc.; TD Asset Management, TD Bank Group and TD Securities; and Nomura Asset Management, Nomura Group and Nomura Securities.

All six financial providers conduct business with the state treasury, according to state officials.

Last week, ESG Oversight Committee Chairman David Scott said the five-member committee cannot take into consideration the financial impact of the potential divestment of certain investments at the state’s retirement systems under state law before determining its final list of financial service providers that discriminate against energy and/or fossil fuel companies.

Doralee Chandler, deputy attorney general for state agencies, told the committee last week that financial impact information is not evidence the committee can use under Act 411 0f 2023 in determining its final list of financial service providers that discriminate, but the information could be provided to the committee after it determines its financial list.

The Arkansas Teacher Retirement System also is invested in three funds managed by UBS, including the UBS Trumbull Property Fund with a current value of about $125.5 million, the UBS Agrivest Core Farmland Fund with a current value of about $62 million, and the UBS Trumbull Property Income Fund with a current value of about $52.5 million, according to system Deputy Director Rod Graves.

Asked about the potential financial impact on the system if the system is forced to divest these investments, White said “for the three UBS funds — one agricultural and two property funds — the short answer is we don’t know if there would be a loss.

“There are at least two methods of divesting,” he said. “Whether there is a loss would depend on which of the methods we choose as well as market prices at the time of divestment. We will need to do a lot more work with our investment consultants and legal counsel before we know if a loss is likely or the amount of any loss.”

The Arkansas Local Police and Fire Retirement System made an investment in the 2016 Goldman Sachs Vintage VII Private Equity Secondaries Fund, which had a market value of $10.1 million as of Dec. 31. This fund purchased secondary interests in limited partnerships and is in the process of returning funds to investors as part of its distribution process, according to the system’s investment consultant and Stephens Inc.’s executive vice president, Larry Middleton.

The Arkansas State Highway Employees Retirement System has one holding of a Goldman Sachs-issued bond for $1 million, according to Robyn Smith, that system’s executive secretary.

The state treasury has used Credit Suisse, Nomura, RBC, Goldman Sachs, TD Securities and UBS as broker-dealers to effectuate the buying and selling of fixed-income securities such as U.S. Treasury securities, U.S. agency securities, and mortgage-backed securities for the portfolio of the treasury, state treasury spokesperson Heather McKim said last month.

The state treasury has its own investment management team that decides which securities are bought and sold, McKim said, and the state treasury’s portfolio securities are held at its custodian bank, Bank of New York Mellon. The state Board of Finance approves specific broker-dealers to provide investment services that the state treasury does business with, she said.

State treasury investment practices prioritize the three key objectives of safety, liquidity and return on investments, and these objectives guide its decision-making process, according to McKim.

Under Act 411 of 2023, the state treasurer must maintain the list of financial service providers that the ESG Oversight Committee determines discriminate against energy, fossil fuel, firearms or ammunition companies, or otherwise refuse to deal based on environmental, social justice or other governance-related factors.

The state treasurer is required under the law to divest the state of direct or indirect holdings with financial services providers included on the list, as are state and local governments. Upon furnishing the list to the state treasurer, the committee will automatically expire under Act 411 of 2023.

During the 2023 regular session, Arkansas Public Employees Retirement System officials estimated the system could lose about $30 million to $40 million as a result of the bill that became Act 411 of 2023, and officials at the Arkansas Teacher Retirement System estimated the system could lose about $7 million a year in what they described as a conservative estimate of the measure.

The Arkansas Teacher Retirement System and the Arkansas Public Employees Retirement System are state government’s two largest retirement systems. The Arkansas Teacher Retirement System’s investments are valued at more than $21 billion, and the Arkansas Public Employees Retirement System’s investments are valued at more than $11 billion.

Last year, state Rep. Jeff Wardlaw, R-Hermitage, who sponsored the bill that became Act 411 of 2023, said his measure is aimed at making sure the state doesn’t put its funds into companies that discriminate against the firearms, ammunition and fossil fuel industries, and he didn’t buy the retirement systems’ estimates of his measure’s potential losses to the retirement systems. At that time, he said the measure would minimize the financial impact on the systems.