Blue State Pensions Urged to Use Proxy Votes on Climate Policies

Climate advocacy groups are calling on state public pension systems to use their proxy voting power to address environmental-related financial risk, arguing that even blue states lag in influencing corporate behavior.

The effort includes a report released Tuesday by the Sierra Club, Stand.earth, and Stop the Money Pipeline that analyzed public pension proxy voting guidelines, records, and transparency in states mostly led by Democrats. The report recommends state pensions strengthen policies around climate-related risk and argues that mitigating those risks falls under their fiduciary duty.

The push highlights the growing policy divide over how states should manage public pension assets that collectively total trillions of dollars with regards to environmental, social, and governance factors. Report authors said their guidance provides a counterweight to the wave of anti-ESG pension laws enacted in Republican-led states.

Many of those GOP-backed laws also take aim at proxy voting, such as limiting vote considerations to only financial factors. Supporters of such measures argue that weighing ESG factors penalizes the fossil fuel and other industries based on ideology.

“This report is one more little part of how we’re responding to the anti-ESG stuff and the Republican attacks on responsible investing,” said Amy Gray, associate director of climate finance at Stand.earth and contributing author to the report. “We’re offering pragmatic, tangible guidelines on how states can address the financial risks of climate change.”

Climate Risk

The report graded 24 public pensions in several categories from states such as California, Maryland, and Washington, as well as New York City. States were chosen if they have a financial officer who’s a member of the sustainable investing organization For the Long Term, an indication of interest in issues such as protecting against climate risk, according to the report.

“When it comes down to putting those words into practice, that’s what we wanted to see,” Gray said.

The California Public Employees’ Retirement System (CalPERS), for instance, received high marks for its proxy vote transparency and voting record but a C grade for its guidelines. The guidelines evaluation included an assessment of voting policies with regards to climate and environmental issues as well as environmental justice and indigenous rights.

CalPERS has long addressed climate change and climate-related risks, Drew Hambly, global equities investment director for CalPERS, said in a statement. The system’s proxy voting guidelines “clearly lay out the importance of climate risk oversight as well as environmental proposals,” Hambly said.

The report aims to boost accountability, Gray said. Recommendations include that pension systems update their proxy voting guidelines before the 2024 proxy season so that they include elements such as ensuring support for certain climate and human-rights goals resolutions as well as voting transparency measures.

State pensions are important institutional investors with the power to shape corporate activity, said Jordan Haedtler, a climate financial policy consultant. Anti-ESG laws in states such as Arkansas and West Virginia have already had a chilling effect on ESG pronouncements and commitments from financial institutions, he said.

“What we’re seeing, as the report makes very clear, is that most public pension funds in Democratic trifecta states are not managing their climate risk in a way that is putting any kind of counterweight to the effect that the anti-ESG laws are having,” Haedtler said.

The Sierra Club has received funding from Bloomberg Philanthropies, the charitable organization founded by Michael Bloomberg. Bloomberg Law is operated by entities controlled by Michael Bloomberg.

Legislation Diverges

Democratic and Republican lawmakers will again diverge this year in their state pension proposals. Legislation active in states such as Arizona and South Carolina would limit ESG considerations in proxy voting.

In Democratic-led states, Maryland and Colorado previously passed laws requiring climate risk assessments while a new Illinois law requires disclosures on factors such as greenhouse gas emissions by investment managers working with public pensions. A bill introduced last week in Washington state would add new requirements around sustainability and risk for the Washington State Investment Board.

“The first step is a climate risk assessment like Maryland and Colorado put in place and then a strengthening of the risk factors that fiduciaries and public pension fund managers are required to examine and take into consideration,” Haedtler said.

The focus of the report is on mitigating climate risks. The report’s proxy voting recommendations, however, also complement organizing around requiring pension systems to divest from fossil fuels, said Gray, whose organization backs such efforts.

“They have to go hand in hand for us to change a system that can’t be changed with just a few divestments,” she said.

Stand.earth still supports a California bill that stalled in the legislature last year that would require CalPERS and the California State Teachers’ Retirement System to divest billions of dollars in oil and gas companies. Oregon and Vermont are other states to watch this year for action on divestment, Gray said.