Progressives have succeeded in manipulating the $5.8 trillion state pension system into a vehicle for imposing their political agenda, while simultaneously fostering a lucrative system of patronage around it to co-opt non-believers into playing along.
State pension fund managers who have declared that they will include environmental and social justice goals in their investment decisions collectively control more than $3 trillion in retirement assets and include the five largest public pension plans in the U.S. Among them are The California Public Employees Retirement System (CalPERS), California State Teachers Retirement System (CalSTRS), the Teachers Retirement System of Texas, New York City pension funds, New York State Common Retirement Fund, Maryland State Retirement and Pension System, and the New York State Teachers Retirement System.
Perhaps their most high-profile success came in June 2021, when CalSTRS, CalPERS, and NY State Common Retirement Fund joined three of the world’s largest asset managers, BlackRock, Vanguard, and State Street, in voting to elect clean-energy advocates to the board of Exxon and divert its investments away from oil and gas and toward alternative fuels. All of these pension fund and money managers except Vanguard are members of Climate Action 100+, an initiative dedicated to making fossil fuel companies “take necessary action on climate change.”
But state officials are starting to question what they see as a misappropriation of public money and whether climate and social investing is actually delivering any benefit in return.
“People with a woke agenda vote the shares, they get control of the board, and Exxon’s days are now numbered,” said Pennsylvania State Rep. Frank Ryan.
Missouri State Treasurer Scott Fitzpatrick said that progressive asset managers are “using our money, the people of Missouri’s money, to try to force their own political will on these companies. When we give them these resources, we’re giving them the power to speak for us.”
“States are recognizing that the financial system is being weaponized against industries that are the lifeblood of a lot of heartland states,” said Jonathan Berry, former regulatory head at the Department of Labor and a partner at Boyden Gray. “Pension plan proxy votes are often being used against both the economic and political interests of a lot of government workers.”
Derek Kreifels, CEO of the State Financial Officers Foundation, said corporate executives often confide to him that “they hear from folks on the left on a daily basis. Up until the fall of last year, they rarely heard from those of us who were right of center.”
Kreifels said it takes time to explain to people how their retirement money is being used to promote a progressive agenda. “But once you do, frankly people are pretty outraged by it.”
In an attempt to de-politicize their pensions, state officials are working to hold fund managers personally liable if they misuse retirees’ money. Last week, a conference of state officials, working through the American Legislative Exchange Council (ALEC), crafted model legislation that compels state pension fund managers to invest solely according to financial considerations. It also prohibits fund managers from voting the shares owned by the pension fund “to further non-pecuniary or non-financial social, political, ideological or other goals.”
If pension fund managers “use politically based investing that costs pensioners their return on investments,” said ALEC Chief Economist Jonathan Williams, “people need to be held accountable.” Maximizing returns becomes more critical in light of what ALEC reports is a $5.8 trillion shortfall in states’ ability to pay their pension obligations.
In December, the state of Florida revoked all proxy voting authority given to outside fund managers. According to Gov. Ron DeSantis, this action was taken to “combat woke corporate ideology” and to “clarify the state’s expectation that all fund managers should act solely in the financial interest of the state’s funds.”
Many state pension funds outsource asset management to firms like BlackRock, State Street, and Vanguard, which are among the 236 asset managers who signed on to the Net Zero Asset Management Initiative. These signatories, which collectively control $57 trillion in assets, pledged to achieve “emissions reductions” and to cast shareholder votes that are “consistent with our ambition for all assets under management to achieve net-zero emissions by 2050 or sooner.”
Signatories also pledged to “create investment products aligned with net-zero emissions.” True to their word, they created a lucrative industry of Environmental, Social and Corporate Governance (ESG) investment funds, ESG rating agencies, and ESG consultants.
When a pension fund buys shares in a company, those shares include rights to vote on company policies and elect company executives. Fund managers are often unable to track every voting issue, so proxy agents advise them how to vote their shares, and in some cases vote on their behalf.
The top proxy agents are Institutional Shareholder Services (ISS) and Glass Lewis, which together control more than 90 percent of this market. These two agencies are also ESG advocates and provide ESG rating and consulting services. ISS’s “ESG Solutions” business line includes ESG Rankings and Ratings, Climate Solutions and ESG Advisory Services. In February, Glass Lewis announced the launch of its own ESG scoring and analytics business.
As the ESG industry grows, corporate activism has proliferated. According to the U.S. SIF Foundation, which tracks “sustainable” investing, 149 institutional investors and 56 investment managers filed shareholder resolutions on ESG issues between 2018 and 2020.
The largest and, some believe, most activist asset manager is BlackRock, with approximately $10 trillion in assets under management. “Every company and every industry will be transformed by the transition to a net zero world,” BlackRock chief executive Larry Fink wrote in his 2022 letter to CEOs. At a public forum in March, he stated that “behaviors are going to have to change, and this is one thing we’re asking companies. You have to force behaviors and at BlackRock, we are forcing behaviors.”
BlackRock has aggressively pushed the idea of “stakeholder capitalism,” which means that companies must look beyond profitability to social and environmental causes. JPMorgan Chase CEO Jamie Dimon echoed this sentiment when he joined with 180 other CEOs to announce that stakeholder capitalism had replaced shareholder returns as the “modern standard for corporate responsibility.”
Wall Street has profited from this altruism. According to Bloomberg Intelligence’s ESG Outlook report for 2021, ESG assets exceeded $35 trillion in 2020 and are on track to reach $50 trillion by 2025, more than a third of the $140 trillion global assets under management. Because ESG funds are actively managed, they carry higher fees than passively managed index funds.
Advocates of ESG investing say that it is forward-thinking and delivers better returns, as well as social benefits, but some are questioning whether these funds achieve either goal.
A study by the Boston College Center for Retirement Research in October 2020 found that for state pensions, ESG investing reduced pensioners’ returns by 0.70 to 0.90 percent per year. It attributed much of this underperformance to ESG fund fees, which were on average 0.80 percent higher than non-managed funds for the same asset type.
“Before this explosion of ESG investing,” said Jean-Pierre Aubry, co-author of the study, “most asset management firms were being squeezed in terms of fees” because investors were opting for low-fee “passive” index funds rather than pay asset managers to try to actively to pick winners and losers. ESG, he said, “just seems like a repackaging of active management.”
In addition, an April 2021 report by researchers at Columbia University and London School of Economics found that companies in ESG funds have “worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions,” and that ESG ratings are driven more by companies’ public statements than by what they actually do. An example is Disney’s public protest against a Florida law banning sex ed for children in Kindergarten through third grade, while the company continues to support the oppressive regime in China.
Regarding returns, this report found that “ESG funds appear to underperform financially, relative to other funds within the same asset manager and year, and charge higher fees.”
When trying to gauge ESG fund performance, the time segment used to analyze returns is critical. Shunning oil companies would have yielded above-market returns in 2020 during Covid lockdowns. However, over the past year, an index of energy companies delivered a return of more than 60 percent.
Regarding “stakeholder capitalism,” an August 2021 study at the University of South Carolina and the University of Northern Iowa found that “the push for stakeholder-focused objectives provides managers with a convenient excuse that reduces accountability for poor firm performance.” Specifically, the report found a correlation between CEO’s underperformance and how vocal they were in supporting more nebulous, less quantifiable ESG goals.
“The original promise of ESG is that you could do well by doing good; it turns out you do less well, and you’re not doing any good either,” said financial analyst and author Stephen Soukup. “So the basic promise of ESG is a fraud on both ends.”
If ESG investments fail to deliver, the losers will be pensioners and taxpayers, Aubry said. “Not Wall Street.”
In 1974, in response to rampant misuse of private companies’ pension money, the federal government passed the bi-partisan Employee Retirement Investment Security Act (ERISA), which established that pension managers had a legal obligation to act solely in the interests of retirees. But ERISA does not apply to public pensions, leaving state pension managers more leeway to invest for ideological reasons.
Indeed, the Boston College Center for Retirement Research report found that, while “public pensions applied ESG to at least $3 trillion in assets, which represents more than half of all assets in public pension funds,” private-sector defined benefit pensions own “virtually none of the institutional ESG assets. This reflects the U.S. Department of Labor’s stringent interpretation of ERISA’s duties of loyalty and prudence” for private pensions.
But while state officials work to bring ERISA protections to public pensions, the Biden Administration announced in October 2021 that it will not enforce ERISA rules that make it illegal to compromise pension returns for environmental and social goals.
“Under ERISA, there is already a single ESG goal baked into the law,” Berry said. “That is, the social goal of protecting retirement security. That is an incredibly important social goal.”
“If individuals believe in the cause of however they define ESG and they want to spend their own money and sacrifice their own returns and pay higher fees, God bless them,” Williams said. “But don’t put that on the backs of state workers and pensioners that are relying on those checks in retirement.”
BlackRock was contacted regarding this article but declined to comment. ISS and Glass Lewis did not respond to requests for comment.