Environmental, social and governance issues have become more and more important for institutional investors, and public pension funds are no different. However, it seems most U.S. public pension funds are lagging when it comes to the climate initiatives in the United Nations’ Sustainable Development Goals.
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According to Top1000Funds, just 16 of the 74 biggest public pension funds in the U.S. mention either ESG or responsible investing in their public documentation. Just two of the 74 reference the UN's Sustainable Development Goals.
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The new fiduciary duty
The site added that over the last 12 months, many major institutions rejected the traditional definition of fiduciary duty. These institutions have taken it another step further to cover long-term investing and the integration of ESG factors. They have also taken fiduciary duty to include investing with environmental stewardship and the fight against climate change in mind.
Top1000Funds argues that interest in climate change has been soaring and noted that pension funds are lagging other institutional investors when it comes to ESG initiatives. For example, the site noted that Larry Fink made climate change a key focus of Blackrock's business strategy. Children's Investment Fund CEO Chris Hohn called for asset owners to get rid of fund managers if they don't push portfolio companies to cut back on greenhouse gas emissions.
The Global Sustainable Investment Alliance reports that total capital invested in funds with an ESG focus has been increasing by 30% per annum since 2012. Capital invested in ESG funds surpassed $30 trillion in 2019. U.S. funds accounted for 40% of that amount, and bout 25% of total fund investment in the U.S. was related to ESG issues.
Public pension funds are lagging on climate issues
Citing data from the Responsible Asset Allocator Initiative at New America, Top1000Funds reports that very few public pension funds have done well at implementing ESG standards in their holdings. Just 22% of the U.S. public pension funds that were analyzed even used the terms "ESG" or "responsible investing" in their public documentation, which includes annual reports, websites and other public documents.
On the other hand, 78% of the global public pensions reviewed by RAAI have issued statements on their responsible investing policies.
Three public pension funds in the U.S. did earn positions among the top 25 in the world. They are CalPERS, CalSTRS and UC Regents Investment Funds. The Colorado Public Employees Retirement Association, New York State Common Retirement Fund and Washington State Investment Board also made the list of finalists.
These placements put the U.S. in second place on the list of the countries with the most public pension plans in the top quartile of responsible investors. However, 80% of the rated public pension funds finished in the third and fourth quartiles for climate issues.
The RAAI also looked at mentions of the UN's Sustainable Development Goals and found that just 3% of U.S. public pensions referenced these goals in their investment strategy, compared to one-quarter of their global peers.
Why do U.S. public pensions lag on climate and ESG?
One of the issues identified by the RAAI is the direction of the U.S. government on ESG issues. The organization said the federal government's moves like pulling out of the Paris Climate Accord discourages public pension plans from focusing on climate and other ESG issues.
It also said the Department of Labor introduced new regulations for pension funds in 2018, and those regulations are confusing when it comes to ESG and climate issues. For example, the regulations state that fiduciaries must first emphasize the fund's economic interests before taking into account ESG, which suggests that ESG issues might not be economic.
Additionally, the regulations indicate that investment policy statements don't need to include ESG. If such statements do include ESG factors, the regulations state that "it does not imply that fiduciaries managing plan assets always have to adhere to them."
Further, national industry associations targeted at public pensions offer very little guidance on ESG factors. The RAAI noted that many public pension funds follow the Government Fund Officials Association and the National Association for Retirement System Administrators. However, neither of these associations say anything about ESG issues.
The organization also argues that many public pension funds in the U.S. still believe that considering ESG factors could jeopardize financial returns even though there is lots of academic evidence indicating that this isn't true.