Lack of climate risk management at US state pension funds puts billions at stake
US state and local pension systems face significant exposure to climate risks, yet their track record on proxy voting is mixed, with funds in blue states facing anti-ESG legislation often lagging behind, new research finds.
State and local pension systems in the US, collectively representing more than $3.8trn in assets under management (AUM), risk facing a wipeout of approximately half of their equity holdings if emissions are not addressed, yet often fail to take sufficient action through proxy votes, according to a new report produced jointly by Sierra Club and Stand.earth.
Amy Gray, associate director of Climate Finance, Stand.earth and one of the authors of the report commented: “This report is a stark reminder that pension funds can – and must – do so much more to wield their massive investor power. As investors on the longest-term horizons, pensions must read the writing that’s been on the wall for decades: live up to their fiduciary duty, and protect pensioners and climate alike through updated proxy voting guidelines, and voting in line with climate and human rights. It is disappointing to see so many funds not accessing such a powerful strategy to defend climate and the working class communities they serve.”
The report assessed proxy voting guidelines and voting records for 32 major public pension systems, highlighting that two-thirds of the pension systems analysed received D or F grades, indicating poor management of climate-related financial risks.
In contrast, only eight pension funds received top grades of A or B for effectively tackling climate-related risks, with New York State Common Retirement Fund leading with an A grade, while Massachusetts Pension Reserves Investment Management (MassPRIM) and CalPERS were also among other strong performers.
States with anti-ESG legislation in place, such as Arizona, Texas and Florida, scored poorly due to policies restricting climate-related considerations in proxy voting, the report found, also highlighting a lack of transparency for Alabama, South Carolina, and Utah pension funds, which had denied FOIA requests, resulting in incomplete data for these states.
Pennsylvania Public School Employees’ Retirement System, Public Employees' Retirement System of Nevada, and Missouri Public School Retirement System failed to support any assessed climate-related votes, the report showed.
A general shortcoming among funds was an overreliance on disclosure mechanisms, rather than actually advocating for corporate transition plans, the report’s authors argued. “While some pension funds (including Oregon PERS, MassPRIM, and the NYC Pension Funds) have begun pushing companies beyond simple disclosure by supporting shareholder proposals that encourage decarbonisation or other climate-related policies, too many remain focused primarily on improving transparency. Some funds (such as California University and the Michigan Retirement System) take a middle-ground approach, supporting enhanced disclosure and target-setting but stopping short of advocating for concrete actions like developing public transition plans,” the authors stressed.
US state pension funds are expected to face a growing number of anti-ESG legislation, most notably the Protecting Americans' Retirement Savings from Politics Act H.R. 4767, which would make it significantly harder for institutional investors to conduct proxy voting, among others, by outlawing the outsourcing of proxy voting and excluding passively managed funds from voting.
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