potential financial jeopardy from inadequate climate-related risk management within U.S. state pension funds
The performance of US state pension systems in addressing climate risks through proxy voting is facing significant challenges, according to a new report by Sierra Club and Stand.earth. The report finds that two-thirds of the analyzed pension systems receive D or F grades for managing climate-related financial risks.
Pressure on Asset Managers
Many major asset managers, such as BlackRock, State Street, and Vanguard, who often manage pension assets, are being pressured by Republican-led states not to use proxy voting for climate or ESG goals. States demand these managers avoid "activist proxy voting or corporate engagement" tied to environmental or social objectives and instead focus solely on traditional shareholder value.
This pressure has led to a decrease in the number of ESG shareholder resolutions voted on in the US, with support for environmental and social proposals remaining relatively low. The reduction in ESG shareholder proposals partly comes from regulatory changes that allow companies to exclude many ESG shareholder proposals and reflects shifting investor sentiment and state political pressures.
Impact of Anti-ESG Legislation
Anti-ESG legislative campaigns spearheaded by some Republican states actively target asset managers and proxy advisors, imposing stricter fiduciary interpretations that exclude climate-related financial risks from consideration. These campaigns often frame climate and ESG initiatives as "woke" activism that violates fiduciary duty or antitrust laws.
Such legislation forces asset managers to roll back or abstain from net-zero climate commitments and collaborations with climate coalitions like Climate Action 100+ and GFANZ. This reduction in climate engagement and proxy voting in favor of shareholder resolutions promoting sustainability is a concern for climate activists.
Performance of State Pension Systems
The report highlights nine pension funds that receive poor grades, indicating poor management of climate-related financial risks. On the other hand, New York State Common Retirement Fund, Massachusetts Pension Reserves Investment Management (MassPRIM), and CalPERS are among the strong performers, receiving top grades of A or B.
The authors of the report criticized a general shortcoming among funds for relying too heavily on disclosure mechanisms instead of advocating for corporate transition plans. Some funds, such as Oregon PERS, MassPRIM, and the NYC Pension Funds, are starting to push companies beyond disclosure by supporting shareholder proposals encouraging decarbonization or other climate-related policies.
Call for Action
Amy Gray, associate director of Climate Finance at Stand.earth, says pension funds must take more action to protect pensioners and the climate through updated proxy voting guidelines and voting in line with climate and human rights. The report's authors also call for increased transparency, particularly in states like Alabama, South Carolina, and Utah, where pension funds have denied Freedom of Information Act (FOIA) requests, resulting in incomplete data for these states.
The Protecting Americans' Retirement Savings from Politics Act H.R. 4767, if passed, is expected to make it significantly harder for US institutional investors to conduct proxy voting by outlawing the outsourcing of proxy voting and excluding passively managed funds from voting. This proposed legislation could further impede US state pension systems' ability to address climate risks through proxy voting.
- In the realm of education and self-development, it is crucial for individuals to understand the business and career development opportunities in investment, particularly in environmental-science-focused funds, which are essential for addressing climate-change risks and promoting sustainability.
- Despite the pressure from some Republican-led states on asset managers not to use proxy voting for climate or ESG goals, the report suggests that strong performers like the New York State Common Retirement Fund, Massachusetts Pension Reserves Investment Management, and CalPERS are setting positive examples by adopting top grades for managing climate-related financial risks.
- Asset managers, such as BlackRock, State Street, and Vanguard, face challenges in maintaining investing practices that align with climate goals due to increasing anti-ESG legislation, which could result in a decrease in climate engagement and proxy voting in favor of shareholder resolutions promoting sustainability.
- To further strengthen the performance of US state pension systems in addressing climate risks, the authors of the report emphasize the need for action, including updated proxy voting guidelines, increased transparency, and advocating for corporate transition plans, while urging for the protection of the freedom of information and the prevention of passively managed funds from being excluded from voting.
