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 bill moving through the Ohio legislature 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.
LISTEN to Julie Grant discuss her reporting with The Allegheny Front’s Kara Holsopple
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 90 percent of S&P 500 companies publish ESG reports.
In ESG, the ‘S,’ the Social aspect of an organization, includes things like fair wages, labor standards, and diversity, while the ‘G,’ the Governance, is about its leadership.
The ‘E,’ the Environmental factors, might include a company’s 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.
“The sea levels are rising…some real estate is going to be underwater. Are we taking that into account when we’re thinking about the 20- or 30-year valuation of an asset?” said Witold Henisz, vice dean and faculty director of the ESG Initiative at the Wharton School of the University of Pennsylvania.
Henisz says there are many reasons investors might care about these issues. He gives the example of the value of an oil or gas field.
“If we shift away from using fossil fuels to using solar and using hydro or using wind, what’s the value of a deepwater oil field in 2050 or 2060? Maybe it’s zero. And are we incorporating that in the value of ExxonMobil today?” he asked. If we’re not doing that, Henisz said we’re not accurately valuing those assets, The ESG framework is a way of correcting that, he said.
States React to the ESG Movement
Some states, 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 model anti-ESG legislation. 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.
“The aim of this model policy is to strengthen fiduciary rules to protect pensioners from politically driven investment strategies,” said Lee Schalk, vice president of policy at ALEC.
The push against ESG investing is to protect retirement investments, according to Schalk, “…to ensure that those who are managing the state pension funds are only doing so in the best interest of taxpayers and pensioners.”
Schalk said many public sector employees may not understand that their pensions are being used to support investments that consider ESG. “And if they did understand that, they probably wouldn’t be a huge fan of it,” 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 “woke capitalism.” He signed a sweeping anti-ESG bill 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, “satan’s plan,” and that state’s new anti-ESG law 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.
“What that meant is you couldn’t use the biggest, most sophisticated financial institutions to issue your bonds because they all take ESG factors into account,” explained Wharton’s 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 study by the Wharton School, 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’t go anywhere. But in Ohio, 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.
Responding to the bill, 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’s 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 the first veto of his presidency 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’t consider climate change and other risks, it jeopardizes the retirement savings of people across the country.