Rebutting Anti-ESG Arguments: A Roadmap for Managing Public Pension Funds Responsibly

New York, NY — Federal financial regulators have identified and begun addressing the massive financial threat climate change and the risk of a disorderly clean energy transition pose to our financial system. But at the same time, an organized campaign to undermine climate financial action has played out in Congress, and has spread to state legislatures. This political backlash at the state and local level is especially relevant to the trillions of dollars of household financial assets managed in public pension funds. The campaign decrying “woke capitalism” seeks to prevent accounting for environmental risks in the management of public pension funds. If it succeeds, fourteen percent of the US workforce’s retirement security is at risk.

A new Roosevelt Institute brief, State Pension Funds and Climate Risk: A Roadmap for Navigating the Energy Transition, offers a full-throated rebuttal to the anti-ESG (environmental, social, and corporate governance) movement. Authors Lenore Palladino, Roosevelt Institute senior fellow and assistant professor at the University of Massachusetts Amherst; Jordan Haedtler, former congressional aide for the US House Financial Services Committee; and Kristina Karlsson, Roosevelt Institute senior program manager, climate and economic transformation program argue that in order to protect constituents’ future financial security, state officials must incorporate climate financial risk into their oversight and management of public pension funds.

The brief outlines a proactive state-level path forward that builds on existing federal guidance for mitigating climate financial risk. To support state-level policymakers in making this shift, the authors discuss:

• The importance of public pension funds in serving 34 million workers and retirees;
• How anti-ESG legislation promotes risky fossil fuel investments and increases debt servicing costs by limiting competition;
• The varied approaches across states when it comes to managing public pension funds, including the harmful “returns only” framework; and
• Specific policy recommendations to redefine the fiduciary duty of state and local pension fund trustees to include systemic risk—including climate risk—analysis.

Insight from the authors:

“Across the nation, state officials are allowing asset managers to invest workers’ capital against their own interest,” says Karlsson. “For the livelihood of those workers and millions of retirees—not to mention the health of our planet—public pension funds must disinvest from fossil fuels.”

“We’re seeing promising movement in states like Colorado and Maryland, where state officials are taking seriously the risk that climate change poses to their public pension funds,” says Haedtler. “But to protect the public from an emerging financial stability threat, we need much more of this, particularly in light of misguided and costly anti-ESG attacks.”

“In our current retirement system, where we rely on private asset managers to handle state-level public pension funds, it’s up to state political actors to ensure they’re doing so responsibly,” says Palladino. “Because decarbonizing our economy is in the financial interest of workers and retirees, that means implementing new rules and standards that incorporate ESG analysis into all investment decisions.”

This brief builds on Roosevelt Institute work about how to refocus asset management toward the public interest. While this new research provides guidance to improve our current system of private asset management, author Palladino has argued that an across-the-board public option for asset management—not just public pension funds—would ensure household wealth is invested in the best interest of beneficiaries. Read more in:

• A Public Option for Asset Management in the United States, by Lenore Palladino; and
• The Potential Benefits of a Public Asset Manager, by Lenore Palladino and Chirag Lala