Climate wars: US pension funds navigate political divide

The recent wave of anti-ESG legislation in red states – much of which specifically targets public pension plans – reveals just how bitterly divided US politicians are over climate change.

In 2024 alone, more than two dozen ESG bills have been introduced - some favourable  but most oppositional - and six so far are now law.

Yet the implications of the divide from a money and risk management perspective tend to be subtler than the dramatic political battles.

For red-state pension plans, the conflict pits a climate-risk conscious pension board against state legislators and treasurers pushing an anti-ESG agenda.

Such tension may result in red-state pension boards covertly exploring climate risk, conducting green-hushing, and, in certain cases, publicly calling out the political agenda.

“Most pension boards generally accept that climate risk is real and needs to be addressed, in line with fiduciary duty,” says Fatima Yousofi, who analyses public sector retirement systems for the Pew Charitable Trusts.

“But the politicisation of climate issues can make a level-headed approach challenging.”

The stakes

There is an awful lot at stake. Government defined benefit plans—including federal, state, and local government plans— hold $8.7trn in assets, according to Investment Company Institute. Aligning such vast sums with the Paris Agreement would boost global efforts to meet net zero by 2050.

In 2022, Florida Governor Ron DeSantis signed a resolution directing the Florida State Board of Administration to prioritise returns without considering the "ideological agenda" of ESG.

Texas has passed laws restricting state entities from investing in companies that discriminate against fossil fuel companies, famously including Blackrock on its boycott list.

By contrast, New York State’s Climate Leadership and Community Protection Act (2019) sets aggressive targets for greenhouse gas emissions reductions and mandates state agencies, including the New York State Common Retirement Fund, to align their policies with these goals. 

“Some states, legislatively and ideologically, support ESG and climate investments,” said Yousofi. “Other states prioritise business as usual, economics and traditional energy investment, especially in fossil fuels, even enacting laws to prevent divestment from fossil fuels.”

Yousofi also observes that legislators from all parties tend to conflate ESG with impact investing (both for and against the practice), while pension boards approach the issue from a risk management perspective.

Red states can be more practical than their politicians

Despite the political stance of red states, many pension boards within these states still consider climate risk as part of their fiduciary duty.

Some red state funds may even conduct climate stress testing, though not on the scale of their blue-state peers, according to Pew.

“We have to cooperate with or at least keep in the good books of our lawmakers,” said a spokesperson for a red-state pension plan. “But we're also long-term investors. Understanding climate risks and monitoring clean energy investment trends is just good business. We take our fiduciary duty very seriously.”

The implications: green-hushing

Green hushing is where companies or organisations try to downplay or hide their social or environmental efforts due to fear of criticism or backlash.

For many red-state pension boards, this means publicly toeing the political line while covertly considering climate risk and energy-transition related investments.

“We’re a fossil fuel friendly state, so of course we’re actively looking for fossil fuel-related opportunities,” said the red-state pension plan spokesperson. “However, we don’t rule out clean energy investments. We’re just quiet about them.”

The source explained that the fund’s vague sounding energy, natural resources, and infrastructure bucket contains investments that support the energy transition, such as transmission cables for solar power.

“If you asked me officially about what I think about climate change, I would have to say ‘no comment’,” the source said.

The pension board hasn’t publicly ruled out the reality of “climate risk”, they continued. Rather, it’s a “non-issue” on account of the “climate wars” between Democrats and Republicans.

“I feel sorry for those trustees that have to navigate conflicting demands between their fiduciary duty and what the state legislatures or other elected officials are seeking to impose on them,” said John Adler, head of ESG at the office of the New York City Comptroller, which oversees five public pension plans.

“It's really a very difficult situation that the politicians are putting them in.”

Anti-ESG rules have also subdued asset managers.

“Most asset managers are being extra careful about what they're saying publicly because they don't want to join the next red-state boycott list,” Adler added.

Public battles within red states

Sometimes red-state pension boards publicly denounce their state legislators and treasurers.

The Oklahoma Public Employees’ Retirement System (OPERS) recently voted to continue contracting with BlackRock and State Street—the managers of most of the state’s pension assets. Oklahoma Treasurer Todd Russ argued that the decision could violate state laws opposing ESG.

Yet the board voted 9 to 1 in favour of the exemption, with Russ — who serves on the board — casting the only vote against the exemption.

The pushback came in the wake of a blistering op-ed in which the executive director of the Oklahoma Public Employees Association Tony DeSha denounced a “a political effort that, if left unchecked, could cost the taxpayers of Oklahoma millions of dollars while throwing into question the promises the state has made to thousands of retired public employees.”

Exhaustive research from OPERS found that divesting from BlackRock and State Street would cost the pension system approximately $10m, with the potential for even greater losses.

Texas’s anti-ESG laws cost the state more than $700m in 2022-3, according to the Texas Association of Business, a chamber of commerce that includes major oil companies like ExxonMobil, Chevron, and ConocoPhillips.

The ESG sword cuts both ways

While studies show that forcing pension plans to divest from asset managers like BlackRock has a negative financial impact, an aggressive fossil fuel divestment policy may also lead to significant short term losses.

Yousofi noted that an evolution toward a more measured approach—on both sides of the issue—with a great recognition that strict pro- and anti-ESG investing mandates can lead to unintended costs and administrative challenges.

Oregon’s coal divestment bill, for example, is a narrower version of previously proposed legislation that called for unwinding from all investments in fossil fuels.

In Maine, the state retirement system is pushing back against a looming deadline to divest from all fossil fuels by January 2026 because an analysis by the pension fund found that the expedited timeline could result in losses for plan beneficiaries. 

Polarised interpretations of fiduciary duty

Red state politicians’ main attack line against integrating ESG concerns into investment decisions is that the approach is harmful for beneficiaries and therefore violates fiduciary duty. 

Plaintiffs recently used this argument in a case against the New York City Retirement Systems' decision to divest from fossil fuels. The judge dismissed the case as “speculative”.

“Pitting financial returns and fiduciary duty against climate change action is a false dichotomy,” said John Adler.

“We don't think ESG opponents are being honest. Climate change poses enormous risk to the global economy, and, by extension, pension plans.”