Former SEC Commissioner Argues Against Asset Manager Blacklists

Paul Atkins said states should adopt the most rigid interpretation of the “Sole Interest” rule to curtail growing ESG investments.

Paul Atkins (David Paul Morris/Bloomberg)

Paul Atkins

(David Paul Morris/Bloomberg)

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

It’s not because he doesn’t believe in the objective of blacklists.

Atkins just thinks there is a better way for state regulators to “strike back” against ESG standards: putting the “sole interest rule” into practice.

During a panel discussion that included Andy Puzder, a senior fellow at the Pepperdine School of Public Policy, Atkins said he believes the blacklist approach may not produce the intended consequences — to hurt the profits of asset managers engaged in ESG.

Atkins and Puzder addressed how public pension plans are factoring ESG into investment decisions and the recent debate around the 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 about their thoughts on the recent pushback from Republican policymakers against ESG investing. In July, West Virginia Treasurer Riley Moore sent letters to six financial firms – Goldman Sachs, JPMorgan, Wells Fargo, U.S. Bancorp, BlackRock, and Morgan Stanley — barring them from doing business with the state’s 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 the state’s institutions. Later that month, the Florida State Board of Administration, under the leadership of Governor Ron DeSantis, passed a resolution that barred the $186 billion pension fund from considering ESG factors in its investment process.

It’s not just in Texas, West Virginia, and Florida. As of 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 embedded in the sole interest standard, a rule under trust fiduciary law that states that a trustee is required to consider only the interests of the beneficiary. This means, for example, that an asset manager must take actions that are solely meant to grow the pension’s portfolio. Any action taken on behalf of one’s own political and personal interests would be in violation of this rule. That’s exactly what critics accuse ESG advocates of doing: applying their own values to investment strategies. (Asset managers argue that ESG factors, such as climate change, pose risks and opportunities for investors that can’t be ignored.)

According to an article in the Stanford Law Review, in the case of a trustee’s (an asset manager’s) use of ESG factors, the sole interest standard would be violated if the application of ESG factors was based on the manager’s “own sense of ethics” or to “obtain collateral benefits for third parties.” The sole interest rule is mandatory under the Employee Retirement Income Security Act (ERISA), a federal law intended to protect retirement assets.

Atkins said there is a range of interpretations of the sole interest standard. On one end of the spectrum, the definition is rigid: “You deviate one iota off of looking out for the economic best interests of your beneficiary and you’re out of bounds. You’ve violated this statute,” Atkins said.

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

For states looking to fight back against growing ESG investing standards and the managers who use them, Atkins said these states must take the most rigid approach to the rule.

“Some ways that states can strike back is to ensure that their state has a sole interest standard that’s as strong as possible,” he said.

The onus is on state officials. Another way to assert a strong sole interest standard is for state officials, like the comptroller, to have annual or semi-annual reviews of the people who are managing the state’s money, Atkins said.