Public pensions for teachers or other public employees are getting caught up in politics. More investors have started to consider governance, social and environmental issues, like risks from climate change, but there has been pushback at the state level.
A is among the latest that would prevent state pension boards from considering ESG (environmental, social and governance) investments. Sixteen states have already passed laws to limit this kind of investing, and there have been over 150 bills on this issue in 37 states.
What is ESG?
It stands for Environmental, Social and Governance. Over time, more investors have been considering these factors in identifying risks, as well as growth opportunities. According to the consulting firm McKinsey & Company, more than publish ESG reports.
In ESG, the 鈥楽,鈥� the Social aspect of an organization, includes things like fair wages, labor standards and diversity, while the 鈥楪,鈥� the Governance, is about its leadership.
The 鈥楨,鈥� the Environmental factors, might include a company鈥檚 use of natural resources, how it disposes of waste, its greenhouse gas emissions, and how ready it is to deal with climate change risks, like heat waves, fires, or flooding.
鈥淭he sea levels are rising鈥ome real estate is going to be underwater. Are we taking that into account when we鈥檙e thinking about the 20- or 30-year valuation of an asset?鈥� said Witold Henisz, vice dean and faculty director of the at the Wharton School of the University of Pennsylvania.
Henisz said there are many reasons investors might care about these issues. He gives the example of the value of an oil or gas field.
鈥淚f we shift away from using fossil fuels to using solar and using hydro or using wind, what鈥檚 the value of a deepwater oil field in 2050 or 2060? Maybe it鈥檚 zero. And are we incorporating that in the value of ExxonMobil today?鈥� he asked. If we鈥檙e not doing that, Henisz said we鈥檙e not accurately valuing those assets, The ESG framework is a way of correcting that, he said.
States React to the ESG Movement
, such as Illinois and Maryland, have laws or policies requiring state pension boards or local governments to consider ESG factors in their investment strategies. The law in Maine goes further and requires the public pension board to divest from fossil fuel interests.
But many more states are heading in the opposite direction.
The American Legislative Exchange Council, known as ALEC, has created ALEC is made up of conservative legislators and is mostly funded by large corporations, including the fossil fuel industry, and others, like the Koch brothers, well-known climate change deniers.
鈥淭he aim of this model policy is to strengthen fiduciary rules to protect pensioners from politically driven investment strategies,鈥� said Lee Schalk, vice president of policy at ALEC.
The push against ESG investing is to protect retirement investments, according to Schalk, 鈥溾�o ensure that those who are managing the state pension funds are only doing so in the best interest of taxpayers and pensioners.鈥�
Schalk said many public sector employees may not understand that their pensions are being used to support investments that consider ESG. 鈥淎nd if they did understand that, they probably wouldn鈥檛 be a huge fan of it,鈥� he said.
Many states are following this line of thinking.
In Florida, Governor Ron DeSantis, who is now running for the Republican presidential nomination, calls ESG investing 鈥渨oke capitalism.鈥� He signed a into law in early May that prohibits Florida state-controlled pensions from investing their money based on ESG factors.
The Utah state treasurer called ESG investing, 鈥渟atan鈥檚 plan,鈥� and that state鈥檚 makes any company that discriminates against the gun industry ineligible for state and municipal contracts.
In 2021, Texas banned state entities and municipalities from doing business with banks that have ESG policies against fossil fuels and firearms.
鈥淲hat that meant is you couldn鈥檛 use the biggest, most sophisticated financial institutions to issue your bonds because they all take ESG factors into account,鈥� explained Wharton鈥檚 Witold Henisz.
In response, five of the largest underwriters left Texas: JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America, and Fidelity.
Local governments have had to work with smaller banks, which has meant higher fees. According to a in the first eight months of the anti-ESG measure, Texas cities would pay an additional $300 to $540 million dollars in interest on bonds.
Anti-ESG closer to home
An anti-ESG bill was introduced in Pennsylvania last year, but it didn鈥檛 go anywhere. But , a bill similar to the ALEC model legislation was passed by the Ohio Senate, and is currently in a House committee. It prohibits state pension boards, like the Ohio Public Employees Retirement System, and others that represent school employees, police and firefighters, from considering anything but financial matters in investment decisions.
, pension boards in Ohio said they already do prioritize finances.
Opposition has included some unions in Ohio representing teachers, hospital workers and other public employees. According to the AFL-CIO in Ohio, consideration of ESG factors has become a mainstream practice and this legislation could negatively impact Ohio pension funds and their ability to maximize their investment returns while incurring the lowest possible fees.
President Biden鈥檚 first veto
In January, a new Department of Labor rule made it easier for workplace retirement plans, like 401Ks, to consider ESG factors.
Republicans on Capitol Hill tried to overturn it, but in March, President Biden issued preserving the Department of Labor rule.
Republicans say this uses American pensions to support a progressive political agenda, but the president says the opposite, that if pension boards don鈥檛 consider climate change and other risks, it jeopardizes the retirement savings of people across the country.