Funds struggle to bypass ESG laws

In a unique move, the Texas Permanent School Fund (PSF), a $51 billion investor in education in the state of Texas, has allocated $300 million to the Macquarie Green Investment Group’s energy transition solutions fund (MGETS). This fund is designed to subsidise the global energy transition away from fossil fuels. The commitment from PSF is the largest for MGETS, according to PitchBook data.

This investment showcases the challenges fiduciaries face in navigating rules set by conservative officials to exclude environmental, social, and governance (ESG) considerations from public investment portfolios. In 2021, Texas passed a law requiring state pension plans and other entities to divest from firms and funds considered hostile to fossil fuels. In late 2022, Texas Comptroller Glenn Hegar named 10 firms and over 300 funds for divestment by Texas pension funds and state endowments, including PSF.

Although the law has an exemption for private equity funds, Hegar has urged state agencies to align with the spirit of the law in their investment portfolios. PSF confirmed its holdings in MGETS, which was not on Hegar’s blacklist, stating that it is in full compliance with state laws.

The Macquarie fund, which started raising money in August 2022 with a $2 billion target, focuses on sustainable aviation fuels, green hydrogen, clean fertiliser, and sustainable finance seed capital. This investment by PSF, despite running counter to the goals of state officials, aligns with other clean energy-themed holdings in its portfolio.

Hegar’s blacklisting efforts against firms perceived as anti-fossil fuel triggered a nationwide movement among conservative state legislatures to restrict ESG investing. While some liberal jurisdictions advocate for greater consideration of ESG factors, legal battles and debates over the role of ESG in investments continue across the country.

Macquarie, a major player in US natural gas trading and a participant in the Net Zero Asset Managers initiative, declined to comment on the PSF investment.

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