Insufficient focus on climate risk management within U.S. state pension funds could potentially jeopardize vast financial resources.
In a recent report, environmental advocacy groups Sierra Club and Stand.earth have found that two-thirds of the pension systems analyzed received D or F grades for poor management of climate-related financial risks. This is particularly evident among blue state pension funds, which often lag in Environmental, Social, and Governance (ESG) voting due to political and legal pressures.
These pressures stem from Republican-led states and officials who have actively opposed ESG practices. They have urged regulatory bodies like the SEC and Department of Labor to prohibit asset managers from considering ESG factors in investments. Furthermore, coalitions of states have sued major asset managers and public pensions, accusing them of collusion and anti-market behaviors tied to ESG and climate goals, branding them a “climate cartel” that pressures companies on net-zero commitments.
Large US asset managers serving both ESG-conscious clients and anti-ESG states face conflicting demands, causing some to compromise their ESG stewardship to placate political opposition. This compromise can result in weaker voting engagement by blue state public pension funds under their management.
The impact of anti-ESG legislation on blue state pension funds' performance is significant. Restricting ESG considerations can hamper funds’ capacity to manage climate-related financial risks effectively, potentially exposing them to greater long-term investment volatility or losses. Anti-ESG laws also complicate how pension funds fulfill their fiduciary duties to beneficiaries, as climate risk is a material financial risk that fiduciaries must consider.
Moreover, investor and client dissatisfaction can arise from political interference in ESG stewardship. Asset owners and pension funds globally are increasingly demanding meaningful ESG engagement. Political interference can lead to loss of trust and clients shifting mandates to other managers with stronger ESG commitments, potentially affecting blue state pension funds' overall investment returns and reputations.
The Protecting Americans' Retirement Savings from Politics Act H.R. 4767, if passed, would make it significantly harder for institutional investors to conduct proxy voting by outlawing the outsourcing of proxy voting and excluding passively managed funds from voting. States with anti-ESG legislation in place, such as Arizona, Texas, and Florida, scored poorly due to policies restricting climate-related considerations in proxy voting.
Despite these challenges, some pension funds, including Oregon PERS, MassPRIM, and the NYC Pension Funds, have begun pushing companies beyond simple disclosure by supporting shareholder proposals that encourage decarbonization or other climate-related policies. Only eight pension funds received top grades of A or B for effectively tackling climate-related risks.
The report assessed proxy voting guidelines and voting records for 32 major public pension systems. Key findings include a lack of transparency for Alabama, South Carolina, and Utah pension funds, as they had denied Freedom of Information Act (FOIA) requests, resulting in incomplete data for these states.
Amy Gray, associate director of Climate Finance at Stand.earth, commented that pension funds must do more to protect pensioners and climate alike through updated proxy voting guidelines and voting in line with climate and human rights. The New York State Common Retirement Fund leads with an A grade, while Massachusetts Pension Reserves Investment Management (MassPRIM) and CalPERS are among other strong performers.
US state and local pension systems collectively represent over $3.8 trillion in assets under management (AUM). These pension systems risk a wipeout of approximately half of their equity holdings if emissions are not addressed. Pension funds must navigate this complex landscape to ensure they are fulfilling their fiduciary duties while also addressing climate-related risks for the benefit of their beneficiaries.
Science plays a crucial role in helping pension funds navigate the complex landscape of climate-change-related financial risks, as they strive to fulfill their duties while addressing these risks for the benefit of their beneficiaries. For instance, environmental science can aid in understanding the impacts of climate change on business operations and financial markets.
Finance and business sectors also need to adapt to this new reality, as anti-ESG laws can hinder pension funds' capacity to manage climate-related financial risks effectively, potentially leading to greater investment volatility or losses. This adds another layer of importance to the integration of environmental, social, and governance (ESG) factors in business practices and investment strategies.
