At the urging of Governor DeSantis, Florida’s State Board of Administration recently adopted a new resolution changing the state investment policy.  As I read the language, it either does next to nothing or pointlessly blinds Florida’s asset allocators.  

Consider the language in the resolution instead of the overheated political press releases going out around it.  The resolution limits investment criteria to “pecuniary factors.”  A “pecuniary factor” is  one that is”expected to have a material effect on the risk and return of an investment based on appropriate investment horizons consistent with the fund’s investment objectives and funding policy.  It expressly excludes “the consideration of the furtherance of social, political, or ideological interests.” (emphasis added). The resolution also directs that its capital allocators may not “subordinate the interests of the participants and beneficiaries to other objectives and may not sacrifice investment return or take on additional investment risk to promote any non-pecuniary factors.”

This resolution seemingly has no impact on the ability of Florida funds to consider ESG factors when allocating capital.  Imagine you’re an asset allocator with a long time horizon and trying to evaluate between investing in different companies.  One company has critical infrastructure situated in areas highly likely to experience damage from rising sea levels.  The other company does not face this risk.  Exposure to environmental risk appears likely to have a material effect on the risk and return of the investment.  Environmental risk would be a “pecuniary factor.”

The language also seemingly allows asset allocators to consider political factors in allocating capital, so long as they are likely to have a material effect on the risk and return of an investment.  For example, an asset allocator might have an investment thesis that corporate donations to DeSantis, Trump, or some other politician materially increase the risk that these companies will face consumer boycotts or other opposition in the future.  The investment thesis might even be that people or entities donating to DeSantis have poor judgment and that poor judgment will lead to relative underperformance in the future. This would be a pecuniary factor under the definition.  

This would not stop asset allocators from taking into account a firm’s commitment to diversity.  A fund might have an investment thesis that diversity matters to performance.  This makes it a pecuniary factor.

All the resolution seemingly does is prohibit making investment decisions with the goal of furthering social, political, or ideological interests.  This seems aimed at a problem that does not appear to exist.  I don’t know any reason to believe that Florida’s funds have been allocating capital to achieve non-financial objectives.  In this sense, the resolution seems to be pointless posturing.  After all, the resolution only prohibits the “consideration of the furtherance of social, political, or ideological interests.” (emphasis added). The phrase “of the furtherance of” does all the work here.

Companies operate in social, political, and ideological environments.  Asset allocators need to be able to consider these issues to assess risk and return.  The the extent that this actually prohibits considering these factors, which I would not read it as doing, it would only work to pointlessly blind Florida to reality and condemn it to underperformance.