Potential vulnerability in climate risk management within U.S. state pension funds exposes vast sums of money at risk
In the face of growing climate risks, U.S. state pension funds are grappling with significant challenges and mixed dynamics. This is particularly evident in the areas of proxy voting, anti-ESG legislation, and the integration of climate considerations into investment decisions.
Pension Funds and Climate Risks
While some pension funds, such as the UK-based USS, have publicly committed to integrating climate risks into investment decisions, the pace and extent of this integration among U.S. state funds vary. Some funds, like Oregon's Public Employee Retirement Fund (OPERF), face criticism for heavy fossil fuel exposure, high fees, limited transparency, and underperformance. This has led to legislative efforts like the Pause Act in Oregon’s 2025 session, although it was not enacted.
Proxy Voting and Shareholder Advocacy
Recent SEC guidance has strengthened company authority to exclude shareholder proposals on ESG policies from proxy statements, effectively limiting shareholders’ capacity, including pension funds, to use proxy voting to push ESG initiatives.
Anti-ESG Legislation and Federal Government Actions
The federal government, under the Trump administration, has rolled back ESG-focused regulatory measures and taken legal action against asset managers on ESG grounds. An executive order also directed actions against the enforcement of certain state ESG laws, complicating the ability of pension funds to manage climate risks.
The Report's Findings
A report produced jointly by the Sierra Club and Stand.earth assessed proxy voting guidelines and voting records for 32 major public pension systems. The report found that approximately half of equity holdings in these systems could be at risk if emissions are not addressed. States with anti-ESG legislation, such as Arizona, Texas, and Florida, scored poorly due to policies restricting climate-related considerations in proxy voting.
On the other hand, New York State Common Retirement Fund received an A grade, while Massachusetts Pension Reserves Investment Management (MassPRIM) and CalPERS were among the strong performers. However, only eight pension funds received top grades of A or B for effectively tackling climate-related risks. Two-thirds of the pension systems analyzed received D or F grades, indicating poor management of climate-related financial risks.
The Future of Proxy Voting
The Protecting Americans' Retirement Savings from Politics Act H.R. 4767 could make it significantly harder for U.S. state pension funds to conduct proxy voting. The bill, if passed, would outlaw the outsourcing of proxy voting and exclude passively managed funds from voting.
Amidst these challenges, Amy Gray, associate director of Climate Finance at Stand.earth, emphasizes the need for pension funds to do more to wield their investor power and protect pensioners and the climate. Some funds, like Oregon PERS, MassPRIM, and the NYC Pension Funds, are pushing companies beyond disclosure by supporting shareholder proposals that encourage decarbonization or other climate-related policies. Others, like California University and the Michigan Retirement System, take a middle-ground approach, supporting enhanced disclosure and target-setting but not advocating for concrete actions like developing public transition plans.
In conclusion, the integration of climate risk into U.S. state pension funds’ investment strategies and proxy voting remains contested and uneven across jurisdictions. The evolving regulatory landscape, entrenched investments in fossil fuels, and state-level legislative resistance create a complex environment for pension funds seeking to manage climate risks effectively.
Science can play a crucial role in helping pension funds comprehend the potential financial impacts of climate-change on their investments, thereby informing more informed investing decisions in the environmental-science field. Moreover, with the increasing need to balance climate-change considerations against financial interests, strategic investments in promising climate-focused technologies could potentially offer profitable opportunities for pension funds looking to future-proof their portfolios.
