In the US, whether or not financial institutions should be able to invest in line with environmental or social factors has become a key issue for Republican politicians. Typically, Republican anti-ESG [environmental, social and governance] laws have been directed at state agencies, either banning them from doing business with financial institutions blacklisted for “boycotting” certain investments like fossil fuels or firearms, or prohibiting state or pension funds from making ESG investments.
By January 2023, almost 50% of US states either have some type of anti-ESG law in place or have placed blacklisting ESG action high on their legislative agendas.
These laws directly affect public pension funds, in terms of how they invest and how they vote on shareholder resolutions. By early 2023, legislators in more than 20 states had introduced bills amending the fiduciary duty laws covering investing and proxy voting for state retirement systems, prohibiting pension plans from taking non-financial considerations into account when voting at shareholder meetings.
And yet, there is a fundamental mismatch between the short-term political cycle in which the politicians setting these laws operate, and the much longer-term investing horizon of pension funds.
Perhaps due to their longer-term outlook, public pension funds – in Republican as well as swing and Democratic states – were far more likely to vote in favour of ESG resolutions during the proxy seasons of 2021 and 2022, finds September 2023 analysis from financial services provider Morningstar.
Speaking to Energy Monitor, report author Janet Yang Rohr says that pension funds are “more truly long-term” investors than asset managers. According to Rohr, pension funds interviewed by Morningstar claim they have voted in favour of so many ESG resolutions “because they want to make good investments, making good money for [their] beneficiaries… when pension funds are operating without a spotlight on them, [voting for ESG policies] is a decision they would make naturally – to them it is just a good decision”.
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However, she adds: “When political considerations get in the way – when your boss, the governor, is asking why you are voting for ESG resolutions, that is when other considerations come into account, and you can see some of the effects of that [in the report].”
US Republican state pension funds turn anti-ESG
Morningstar’s data suggests that the anti-ESG backlash is already impacting voting. While ESG resolutions saw a decline in shareholder support across the board in 2023, Morningstar finds that “Republican state pension plans showed the largest year-over-year decline in support” for ESG proposals, “dropping almost 15 percentage points from 2021 to 2022”.
As detailed in a June article in Top 1000 funds, the relationship between pension funds and state politicians is complex, where “the convoluted governance structures of US state pension funds, where elected officials are also trustees of the pension money and in some cases the sole trustee, is the complicating issue”. The authors cite research showing that pension funds whose boards contain a greater representation of state officials are more likely to underperform as evidence of why political influence over pensions’ financial decision-making should be limited.
In March, West Virginia State Treasurer Riley Moore praised the state legislature for passing his anti-ESG law to prevent money managers handling state pension funds from advancing their ESG goals ahead of financial returns: “Now, the states must collectively stand up against ESG proxy voting activism with our public retirement funds,” he said at the time.
In May 2023, Florida Governor Ron DeSantis enacted what some have called the “farthest-reaching anti-ESG law to-date”, as it not only requires that investment decisions (and proxy voting) of state pension assets be made on the basis of “pecuniary factors” only, but it also limits investment decisions for local governments, trust funds and the state’s CFO.
At the time, lawyers questioned how the law would operate in practice, given it would likely force fund managers working for state pension funds to include disclaimers noting they don't reflect these views – or else face regulatory action. Others expressed concern about the potential financial risks of boycotting major financial institutions because of their ESG investment decisions, with January research from a coalition of non-profits – the Sunrise Project, As You Sow and Ceres – suggesting that taxpayers risk losing out on hundreds of millions of dollars of public funding thanks to anti-ESG laws.
During the 2023 proxy season, there was a “stark partisan split” in terms of how state pension funds from Republican vs. Democratic states voted on climate proposals, finds a recent report from US-based think tank the Center for Active Stewardship, which is focused on a selection of key climate resolutions voted on earlier this year.
According to the analysis, support for climate proposals ranged from 45–79% for blue state funds CalPERS, CalSTRS and the various NYC pension systems, compared with 0–11% for red state funds Ohio PERS, Texas TRS and the pension systems managed by Florida SBA.
Despite this partisan split, however, the data does reveal some occasions where Republican state pension funds voted for climate proposals that state pension funds in blue states voted against; for example, the Texas TRS supported two proposals that CalSTRS voted against – including a resolution filed by activist shareholder advocacy group As You Sow, calling for Dow Chemical to analyse the impact of falling virgin plastic demand on its business.
Similarly, Florida SBA backed four proposals that either CalSTRS or CalPERS rejected, including a proposal filed by As You Sow’s CEO, Andrew Behar, calling for ExxonMobil to restate its historical emissions disclosures to reflect the impact of asset sales, along with another proposal from Berhar asking that British defence company Raytheon publish a transition plan detailing its efforts to reduce emissions in line with a 1.5°C warming scenario.
Nolan Lindquist, executive director at the Center for Active Stewardship, says that while Florida SBA has indeed supported a number of climate proposals that the non-profit has been tracking, “What you will see generally is they just have a much higher bar for when they consider a company to be enough of a laggard on climate disclosures and risk management… compared with Democrat state pension funds like CalSTRS.”
He notes that most of the proposals Florida SBA supported this year already tended to get high levels of support from other investors, meaning he doesn’t think that “there is anything massively surprising” in terms of how they voted.
However, he notes, “it is interesting to see that the folks that set the voting policy [at Florida SBA] are seemingly being pretty thoughtful within the constraints set by the political situation in that state”.
Lindquist concludes that regardless of the political situation, or the “semantics” of ESG investing, there is “always going to be a significant safe harbour for considering these issues, because whether you call it ESG or not, the reality is that we live in a time where governments around the world are massively incentivising alternative energy, and where various market participants want better disclosure on these issues, and generally, they are financially material”.
Given the obvious financial risks of boycotting investments that support the energy transition, particularly in red states that are primary beneficiaries of investment from the Inflation Reduction Act, the anti-ESG backlash is already facing a backlash of its own.
In May, for example, Indiana lawmakers watered down an anti-ESG proposal that prevented state pension funds from considering ESG factors after an initial fiscal analysis found the bill could cost the public retirement system $6.7bn over ten years, according to Bloomberg Law.
Public pension funds – and their beneficiaries – are in it for the long haul, perhaps unlike individual Republican politicians. As such, proxy voting should reflect these long-term ambitions, which will necessarily involve supporting climate-friendly technologies like wind and solar, and shifting away from reliance on fossil fuels, rather than boycotting the energy transition.