A Passionate Defense of ESG Investing from Connecticut Treasurer

Moving in response to the latest in a long series of mass shooting incidents impacting communities across the United States, Connecticut State Treasurer Denise Nappier this week announced that her state will significantly step up its shareholder activism with respect to its ownership of stock in firearm manufacturers. She specifically cites the potential of future divestment, should the shareholder activism fall short. 

In a letter written to State Senator Gayle Slossberg, later made public, Nappier states in no uncertain terms that, regarding the process of potential divestment, as principal fiduciary of the Connecticut Retirement Plans and Trust Funds (CRPTF), she carries “sufficient authority to divest following a period of engagement with our portfolio companies, consistent with the State’s divestment laws.”

In the meantime, Nappier says she is implementing a process of “fortifying our efforts in the corporate boardrooms of our portfolio companies that manufacture guns, and pursuing aggressively their adoption of the Sandy Hook Principles—a set of measures aimed at curbing gun violence, keeping guns out of the hands of children and those with mental health problems, and supporting universal, federal background checks.”

As Nappier lays out, the assets of the CRPTF are invested in five companies that manufacture guns, as follows: CIE Financiere Richemont SA, $7.19 million; Daicel Corporation, $1.65 million; Olin Corporation, $879,071 and fixed income valued at $915,255; Orbital ATK Inc., $1.02 million and fixed income valued at $784,437; and Vista Outdoor, Inc., $4.04 million. All told, the CRPTF’s exposure to gun manufacturers is $16.5 million, or .05% of the assets of the CRPTF.

While the investing rules controlling the Connecticut public pension fund are different from those governing corporate retirement plans run under the Employee Retirement Income Security Act (ERISA), Nappier’s argumentation as to why divestment may be the right thing to do offers some food for thought for anyone charged with the fiduciary management of retirement plan assets.

As readers may know, some voices in the retirement plan space have emerged in the last several months arguing that the use of environmental, social and governance (ESG) investing programs and principles has growth too political. For example, the American Council for Capital Formation has challenged both CalPERS and the New York City pension system for making moves to reduce exposure to fossil fuel producers. However, an even greater number of business leaders and public officials today argue the move to more closely consider ESG factors when building investing programs is coming at the behest of individual and institutional investors and is simply the right thing to do, financially and otherwise. 

Indeed, this is the argument Nappier relies on to explain the new efforts: “I am charged with making investment decisions in the best interests of the beneficiaries that depend on these assets for retirement. Fiduciary duty requires that I take into account not only the appropriate balance between risk and return, but also the long-term viability of the investment itself. I believe that companies whose shares we hold have an obligation to address public issues that have potential effects on the business operations of the company.”

Nappeir goes on to state that she “believes that common-sense gun control measures and whether investment in gun companies will deliver returns that meet the long-term interests of the plans’ beneficiaries are really two sides of the same coin, neither of which can be ignored.”

“The issue of gun violence is not only a public health issue, but a financial issue as well, which is central to our concern with all divestment considerations,” she argues. “Companies with sound governance—such as accountable board structures, proper management of legal and regulatory risks, and alignment of executive compensation with company performance, to name a few—lead to better, more consistent performance for shareholders over time. When companies in which we are invested fail to manage potential business risks, legal and/or regulatory actions, or reputational harm arising from the misuse of firearms, it also puts at risk our long-term shareholder value.”

Nappier concludes that divestment, as a general matter, is just one of a range of tools that investors can use to reflect their priorities. In fact, she feels it “represents the last of a series of options that shareholders can employ to effect change. Indeed, responsible ownership requires shareholders to engage the companies in which they invest to ensure that the boards are effective stewards of a viable, sustainable business strategy. If those efforts prove unsuccessful, then I agree that divestment is an appropriate course of action.”

The letter also offers significant detail on the way the state is planning to become a more active shareholder in terms of the gun manufacturers in its portfolio.

“As an investor, we recognize the multi-faceted nature of the firearms and weapons industry, which on the one hand provides weapons that enhance the safety and protection of our communities by our military and law enforcement, and provides sporting weapons used by law abiding citizens, but which, at the other end of the spectrum, places dangerous firearms into the hands of those that misuse them,” Nappier writes. “After the Sandy Hook massacre in 2012, my office surveyed the CRPTF’s investments in companies that either manufacture or distribute guns. We asked those companies to take reasonable steps to avoid the misuse of firearms in order to protect their reputation, the company’s bottom line, and our investment.”

Nappier says the state had constructive discussions with numerous companies, including Sears and Amazon, sellers of firearms accessories, which resulted in those companies taking steps to alter their business operations to help reduce gun violence and promote safety. In addition, Amazon, Dicks’ Sporting Goods and Wal-Mart indicated that their business practices were compatible with the Sandy Hook Principles.

“Two gun manufacturers, Alliant Techsystems and Olin Corporation, never responded,” Nappier explains. “We then filed a resolution with Alliant calling for adoption of the Sandy Hook Principles. (We were unable to do so with Olin because our manager sold the shares before we could file.) The Alliant resolution garnered less than 9% of shareholder votes. Despite that failure, we maintained our ownership, and in 2017 we filed a resolution with its spin-off, Vista Outdoor, seeking declassification of the board. This governance measure, in our view, will lead to greater accountability on the part of individual board members because each would be up for election on an annual basis. Our declassification resolution garnered 92% of the votes cast.”

The full letter can be downloaded here.