Earlier this year, Reason Foundation highlighted an analysis revealing that public pension funds were more committed to environmental, social, and governance (ESG) shareholder proposals than even so-called sustainable funds. Public pension funds supported 90% of ESG proposals in 2021, according to Morningstar, the investment research and management services firm behind the report.
Morningstar recently updated its findings with 2022 data and found continuing support for ESG: Public pension funds voted in favor of 88% of ESG proposals in 2022.
The Morningstar report examines proxy votes of 28 public pension funds in 2022. The previous year’s analysis included 29 pension funds, which were included based on “sufficient proxy-voting records.” For 2022, the Teacher Retirement System of Georgia is not included in the report, and a previously anonymous Ohio pension fund now appears as the State Teachers Retirement System of Ohio.
Publicly traded companies hold annual shareholder meetings in which shareholders can vote on various proposals, such as who is on the board of directors. Increasingly, ESG-related proposals are filed and voted on. For example, in the 2022 proxy season, both Tesla and Berkshire Hathaway voted on proposals related to reporting on diversity, equity, and inclusion (DEI) efforts. All the public pension systems in Morningstar’s analysis voted for these proposals at considerably higher rates than general shareholders.
In 2022, public pension plans' support of ESG proposals was again higher than sustainable funds' (74%) support for ESG proposals and far above general shareholders' support (56%).
For public pension funds, the danger with ESG activism, whether in proxy voting or investment strategy, is the potential reorientation of public funds away from focusing on funding earned retirement benefits of public workers and engaging in inherently political activities. ESG standards and proposals often involve social causes and controversial political topics, including energy policy, climate change, abortion, gun control, and foreign policy.
The non-pecuniary nature of ESG resulted in Vanguard pulling out of the Net Zero Asset Managers (NZAM) initiative (a group of asset managers committed to net zero greenhouse gas emissions by or before 2050). In an interview earlier this year, Tim Buckley, The Vanguard Group CEO, said the company is "not in the game of politics" and plainly stated, "Our research indicates ESG investing does not have any advantage over broad-based investing."
The Morningstar report observes the partisan nature of ESG, finding that support for ESG proposals moves up as a state's partisan leaning moves more toward the left, using FiveThirtyEight's Partisan Lean Score for states. But proxy-voting records indicate that most states—right and left—have public pension plans that lean into ESG priorities. Only one public pension plan, the State Teachers Retirement System of Ohio, had lower support than general shareholders for ESG proposals.
Interestingly, Morningstar's report reveals that even in Republican-leaning states, public pension funds supported ESG proposals at a rate of 66%, 10% higher than general shareholders.
These results show the divergence between public pension funds and general shareholders' support for proposals across environmental, social, and governance subcategories. The magnitude of this divergence varies depending on the subcategory within ESG.
If a clear bias exists in how public funds are being managed, it is essential for the public to know and for policymakers to address the practices. Public pension funds should be focused on fully funding retirement benefits promised to public workers and minimizing financial risks for taxpayers. Through transparency, policymakers can help prevent politically driven investing and proxy voting by public pension plans. The public should be able to view proxy votes well before they are cast and access annual reports showing all of a pension plan's proxy votes. This transparency would put the behaviors and decision-making driving these public pension funds out in the open.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.