U.S. public pension plans are some of the environmental, social, and governance movement’s biggest supporters. Divisions along political party lines might change that.
In a Morningstar analysis of the most recently available 2021 public fund proxy votes on 72 key ESG shareholder resolutions published Tuesday, U.S. public pension funds in both red and blue states showed higher rates of support for almost all of the measures compared to general shareholders and ESG-focused funds. The analysis included 29 public pension plans — including the nation’s largest plans like California Public Employees’ Retirement System, New York State Common Retirement Fund, and the State of Wisconsin Investment Board— that directly voted in their proxies and that collectively represented $3.4 trillion in assets under management.
“We came in with the hypothesis that public pensions would be supportive,” Janet Yang Rohr, director for multi-asset and alternatives research at Morningstar, told Institutional Investor. “When you look at other things they’ve done — they were early signers of the UNPRI [Principles for Responsible Investment] — and when you look at general news stories, you see that they’re leading the net zero portfolio movement.”
Specifically, 90 percent of public pension funds — including 98 percent of funds in blue states and 80 percent of pensions in red states — showed support for key ESG resolutions in 2021.
ESG investing has come under recent political scrutiny as Republican-led states are putting pressure on asset managers that use ESG practices. Last week, Florida Governor Ron DeSantis announced that Florida State Board of Administration would no longer be permitted to include ESG considerations in its investment process, and Texas Comptroller Glenn Hegar published a list of asset managers that the state could no longer work with due to their policies on divesting from energy companies.
While Morningstar’s data is from the 2021 proxy season, hints of the politicization of ESG could be seen in the data. Morningstar looked at individual public pension plans in Democratic- and Republican-leaning states and found a clear partisan lean (i.e. pension plans in red states voted more frequently against ESG resolutions while pensions in blue states voted in favor of them). Most notably, the Teachers Retirement System of Georgia voted against 99 percent of the ESG resolutions it was eligible to vote in and Ohio’s Public Pension voted against 67 percent of ESG resolutions. Six public pension plans — all in blue states — voted 100 percent in favor of ESG resolutions.
However, the 2021 proxy season showed some evidence of bipartisanship. For example, The Teacher Retirement System of Texas and the Employees Retirement System of Texas voted in support of ESG resolutions 97 percent and 85 percent of the time, respectively.
“ESG is being painted as all good or all bad, depending on what party you’re with, but this research and its results really show that, outside of that political rhetoric, there’s actually a lot more agreement that ESG investing is just good investing,” Yang said.
ESG shareholder resolutions reached a record level of support in 2021 and a record number of resolutions in 2022, the report said. Support for ESG resolutions in 2021 reached 34 percent, up from 27 percent in 2019. By 2022, ESG resolutions — which are typically proposed at annual shareholder meetings between April and June every year — gained 30 percent support from shareholders at U.S. public companies.
More surprisingly to Yang, public pension funds also showed greater backing for ESG proposals when compared to support from ESG-focused funds. Public pension funds' support for key ESG measures landed at 90 percent, while ESG funds backed 85 percent of the resolutions. The top 10 asset managers in the U.S., including BlackRock, State Street Global Advisors, and Vanguard, trailed behind both public pension plans and ESG-focused funds.
Yang said the Morningstar team was “super surprised” that ESG-focused funds lagged pension plans in their support, noting that it left the team “puzzled” as to why. However, she said that public pension plans are more likely to vote against company management in a shareholder resolution than asset managers, who often have close relationships with upper level management at their portfolio companies.
“When you vote for ESG shareholder resolutions, you are usually voting against management,” Yang said. “Basically, public pensions have been more willing to take a public stance in that case.”
Instead, asset managers like BlackRock and State Street often feel it’s more effective to vote with management and have “side conversations” to effect change, Yang added.