National Conference on Public Employee Retirement Systems

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What’s Next for Public Pensions and ESG?

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  • On: 01/01/2024 19:43:00
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While the concept of socially responsible investing has been around for more than 70 years, the term has made its way to mainstream media over the past year as a political talking point—and public pensions are increasingly being caught in the crossfire.
What’s Next for Public Pensions and ESG?

By: Lizzy Lees, NCPERS
A decade ago, most had never heard of ESG. While the concept of socially responsible investing has been around for more than 70 years, the term has made its way to mainstream media over the past year as a political talking point—and public pensions are increasingly being caught in the crossfire.
Before we look at what may be next, it's important to look back at some of the key, ESG-related developments that have taken place over the past two years.
On the federal level, the ESG debate ramped up near the end of 2022 with the DOL's regulation that permits retirement plan fiduciaries to use ESG strategies. After being challenged by a group of 26 conservative state attorneys general and private plaintiffs, the rule was upheld in late 2023 by a well-known conservative jurist. The House has approved a number of ESG-limiting bills, but the Senate has had no appetite—effectively stalling any far-reaching legislation from moving forward. As a result, most of the activity has been at the state level.
ESG-related investment restrictions gained attention in Texas with the 2021 bans on governmental agencies engaging with companies that boycott firearm entities or financial companies the Comptroller determines are boycotting energy companies. The momentum has continued as many red states have implemented or proposed similar bans restricting the use of ESG factors or banning investments with certain financial institutions deemed to be boycotting energy companies. For example, in 2022, Florida Gov. Ron DeSantis announced restrictions on the State Board of Administration fund managers from considering ESG factors, and later adopted additional restrictions with H3/S302. In Oklahoma, legislation was adopted banning state retirement systems from investing in companies the Treasurer determines are boycotting oil and gas companies. 
On the other end of the spectrum, several pension funds in blue states have implemented investment policies designed to divest from fossil fuels and/or achieve net zero emissions in their investment portfolios. There has also been legislation introduced to mandate divestment from certain industries. Maine adopted legislation prohibiting Maine PERS from investing in the 200 largest publicly traded fossil fuel companies. New York City pension funds, for example, announced plans to reach their goal of net zero emissions in their investment portfolios by 2040. 
These pro- and anti-ESG policies have resulted in several key lawsuits—the results of which will likely have last implications for public pensions across the country.
The first, Wong et al. vs. New York City Employees' Retirement System et al., was filed on behalf of four participants within the New York City Retirement Systems in May 2023, claiming the funds' divestment from fossil fuel investments violated their fiduciary duties. “Defendants breached those duties by subordinating the retirement security of plan participants to the trustees' pursuit of a 'green' climate agenda," the suit alleges. The action was sponsored by the conservative, anti-union organization Americans for Fair Treatment (AFFT).
The New York City funds have since filed a motion to dismiss the complaint with prejudice, and the plaintiffs responded with a motion to reject the dismissal. In October, the Corporation Counsel of the City of New York and Groom Law Group filed a memorandum in which they argue that the plaintiffs' standing claims hinges on “three fundamental legal errors.”
The case is currently awaiting decision by the court. “It is not difficult to imagine how AFFT and other conservative activists could deploy the same model to launch litigations challenging the use of ESG investing more generally on the same fiduciary duty theory … It would further appear that the anti-ESG interests behind the NYC suit are motivated and well-funded,” Amy Roy and Robert Skinner of Ropes & Gray wrote in a recent article.
In the second key case for public pensions to watch, a retired Oklahoma state employee alleges the state's Energy Discrimination Elimination Act is unconstitutional and violates the First Amendment because it prevents state-managed pension funds from operating for the “exclusive benefit” of their beneficiaries.
The 2022 law has allowed Treasurer Todd Ross to maintain a list of firms that are essentially blacklisted for factoring ESG issues into their investment decision making. Keenan also claims in the suit that the law gives Russ “a lot of leeway” in determining which firms are discriminating against the oil and gas industry. The lawsuit is part of a coalition effort led by Keep Oklahoma's Promises Coalition, Oklahoma Retired Educators Association and the Oklahoma Public Employees Association.
Looking at the two cases, we're seeing a pattern of outside organizations with their own agendas working with individual plan participants to pursue litigation to restrict how pension funds can invest. NCPERS views these restrictions as potentially dangerous, as they ultimately can impact diversification and the long-term returns by reducing the universe of investments. With these restrictions, there are also often increased overhead costs and administrative challenges for funds.
As a result of the politicization of ESG, we're also starting to see a shift in the terminology companies and public pensions are using when talking about their policies. For example, MassPRIM's board recently voted to change the name of the fund's ESG Committee to the Stewardship and Sustainability Committee, noting the shift would make the committee's work easier for the public to understand.
Looking ahead, it's worth considering how these policies restricting investment decisions will impact the broader markets and, more specifically, municipal bonds. Last month, Citigroup became the second large bank to shutter its municipal bond division—nearly one year after the Texas Attorney General Ken Paxton banned the firm from working on muni deals in the state.
Many believe Citi's decision is related to the broader bank boycotts by conservative politicians, and the exit reflects the political risks involved with staying in the municipal bond market. The result, however, could mean less competition and higher borrowing costs. In the first eight months, Texas incurred an estimated $300-500 million in additional interest costs on municipal bonds as a result its 2021 anti-ESG policies.
As cities and states reckon with the need to improve failing infrastructure or the desire to invest public funds in shiny new sports stadiums, it's important to consider these increased costs that ultimately fall on taxpayers and potentially impact the ability to meet actuarially determined contributions.
NCPERS will continue to keep its members informed on any newly proposed legislation and any related lawsuits or developments in this space. If you have any questions, please contact to connect with the appropriate NCPERS staff person.


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