Report: Pension funds prioritize ESG policies, weaken returns Image By EPN Staff Political activism, rather than economic interest, has played a significant role in the investment decisions of Pennsylvania’s teacher pensions, according to a new report, “Putting Politics over Pensions,” from a nonpartisan economic advocacy group. The report evaluated how frequently investment management companies voted for “ESG” (environmental, social and governance) policies regulating the companies where they are investing. Fund managers overseeing the Pennsylvania Public School Employees Retirement System (PSERS) overwhelmingly supported an array of ESG resolutions, many of them diminishing economic returns and leading to a D rating in the report. Why it matters ESG resolutions have become more common in recent years, as progressive political activists have advocated for ideological policies that can run counter to a company’s economic well-being. But the increasingly expansive application of ESG has raised questions about its utility and whether it is sustainable, and led to growing calls to end the strategy altogether. How it works At publicly-traded companies’ annual meetings, shareholders vote on a wide range of corporate decisions. However, these votes are rarely swayed by individual investors, as institutional investment firms own 70% of all publicly-traded shares. These firms vote on behalf of their clients. Political activists have leveraged this institutional voting power, pressuring institutional investors (like pension funds) to advance an ESG social agenda without regard to fiscal impact. ESG resolutions include proposals that would force oil and gas companies to cease production along with proposals to force insurance companies to collect racial data in possible violation of state law. In 2023 alone, PSERS voted for several ESG resolutions that the report says are “at best incidental to, and at worst in conflict with, the profit path for the company.” These included the following: Calling on Amazon to assess it’s commitment to collective bargaining, including steps to remedy any managerial interference if employees decide to unionize. Directing Valero, the world's largest independent petroleum refiner, to accelerate its transition away from fossil fuels, the product that it sells. Requesting Boeing to report annually on pay gaps based on race and gender. Requiring Coterra Energy to produce a report on how their lobbying efforts run counter to the goals of the Paris Climate Accord. The bigger picture Most investors care about maximizing returns far more than enforcing a political agenda on the companies where their pensions are held. According to a recent Stanford Business study, enthusiasm for activist investment has declined dramatically among young people. In 2024, just 11% of Gen-Z investors said it was “extremely important” for fund managers to influence the environmental practices of the companies where they invest, compared to 44% in 2022. The SERS approach The Pennsylvania State Employees’ Retirement System (SERS) rejects the ESG agenda that the teacher’s fund has embraced. SERS received an A in the report, opposing activist-led efforts to thwart the profitability of their holdings. Some researchers are optimistic that more state pension funds will follow the example of SERS, hypothesizing that activists may have overstepped. Regardless, “Putting Politics over Pensions” does not advocate for investors to counter left-wing activism with right-wing activism. It urges a focus on the bottom line. “Money managers should not be inserting their personal political biases – from the left or right – into key investment decisions,” the report stated. “…They are violating a legal obligation to focus on maximizing shareholder returns.”
