National Conference on Public Employee Retirement Systems

The Voice for Public Pensions


The ESG Debate: How Recent Legislation Is Impacting Retirement Fund Best Practices

NCPERS believes that, in order to execute their fiduciary duty, funds should be able to decide what to invest in.

By: Bridget Early, Director of Membership and Strategic Alliances, NCPERS

This article was originally featured in the July 2023 issue of The Monitor

Utilizing an environmental, social, and governance (ESG) framework to invest is nothing new, but it has been rapidly growing in popularity, with global ESG fund assets reaching approximately $2.5 trillion at the end of 2022. However, one new and concerning trend has been the recent ESG backlash led by lawmakers.
Recent research shows that, in fact, ESG and non-ESG investing strategies result in similar returns. When weighted by market capitalization, portfolios with ESG preferences did not fare significantly better or worse than non-ESG investments.
Despite this, with the growing politicization of ESG, lawmakers across the country are proposing or adopting legislation to regulate how and what public pension funds invest in. In blue states, the focus has primarily been on divestment from fossil fuels. Most recently, a California bill was introduced that would prevent CalPERS and CalSTRS from making new investments in fossil fuels and would require them to divest by 2030. The CalPERS board voted to oppose the bill, citing the staggering transaction costs and the lack of evidence that divestment would impact the demand for fossil fuel.
On the other end of the spectrum, red and purple states have been rapidly adopting anti-ESG legislation modeled after ALEC's ‘boycott bill,' which was designed primarily to protect oil companies and gunmakers from ‘boycotts' by investors and businesses. This politicization of ESG is dangerous and ultimately will likely have a negative impact on public pension funds' investment performance.
Oftentimes, these anti-ESG bills are rooted in political beliefs rather than operating as an apolitical fiduciary. They come with exorbitant costs with both direct and indirect impacts on public retirement funds' performance. Lawmakers also may not fully comprehend the long-term impact of these bills. Restricting how a fund invests can impact diversification and long-term returns by reducing the universe of investments. There are hidden costs as well. For instance, a fund may need to hire additional staff to help manage the mandates or protect the system from lawsuits. Or, due to decreased returns, the fund may ultimately require increased employee and employer contributions.
Already, we're seeing these negative impacts across the country. Below is a sampling of the impact of recent legislative proposals on retirement systems:

  • Texas County District Retirement System will lose an estimated $6 billion over the next 10 years due to investment restrictions included in SB 1446.
  • Due to investment restrictions included in HB 1469, North Dakota anticipates additional overhead costs of $10.2 million biennially.
  • As a result of decreased competition in the municipal bond market, Florida “now pays 43 basis points more in yield (or $4.3 million for every $1 billion of bonds sold) than California with an inferior credit rating, or 0.35% more than it did prior to 2022,” according to a Bloomberg analysis.

These legislation proposals—being replicated throughout the country—will likely lead to reduced investment returns, increased overhead costs, and ultimately increases in employee and employer contributions. This could have broad impacts on not only the retirement plan and its beneficiaries, but also businesses, local economies, and ultimately taxpayers.
NCPERS believes that, in order to execute their fiduciary duty, funds should be able to decide what to invest in. If you are interested in learning more about the impact of these legislation proposals, or if you would like to obtain advocacy-related resources from NCPERS, please contact me at


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