Public pensions for teachers or other public employees are getting caught up in politics. More investors have started to consider governance, social and environmental issues, like risks from climate change, but there has been pushback at the state level.
A is among the latest that would prevent state pension boards from considering ESG (environmental, social and governance) investments. Sixteen states have already passed laws to limit this kind of investing, and there have been over 150 bills on this issue in 37 states.
What is ESG?
It stands for Environmental, Social and Governance. Over time, more investors have been considering these factors in identifying risks, as well as growth opportunities. According to the consulting firm McKinsey & Company, more than publish ESG reports.
In ESG, the 鈥楽,鈥� the Social aspect of an organization, includes things like fair wages, labor standards and diversity, while the 鈥楪,鈥� the Governance, is about its leadership.
The 鈥楨,鈥� the Environmental factors, might include a company鈥檚 use of natural resources, how it disposes of waste, its greenhouse gas emissions, and how ready it is to deal with climate change risks, like heat waves, fires, or flooding.
鈥淭he sea levels are rising鈥ome real estate is going to be underwater. Are we taking that into account when we鈥檙e thinking about the 20- or 30-year valuation of an asset?鈥� said Witold Henisz, vice dean and faculty director of the at the Wharton School of the University of Pennsylvania.
Henisz said there are many reasons investors might care about these issues. He gives the example of the value of an oil or gas field.
鈥淚f we shift away from using fossil fuels to using solar and using hydro or using wind, what鈥檚 the value of a deepwater oil field in 2050 or 2060? Maybe it鈥檚 zero. And are we incorporating that in the value of ExxonMobil today?鈥� he asked. If we鈥檙e not doing that, Henisz said we鈥檙e not accurately valuing those assets, The ESG framework is a way of correcting that, he said.
States React to the ESG Movement
, such as Illinois and Maryland, have laws or policies requiring state pension boards or local governments to consider ESG factors in their investment strategies. The law in Maine goes further and requires the public pension board to divest from fossil fuel interests.
But many more states are heading in the opposite direction.
The American Legislative Exchange Council, known as ALEC, has created ALEC is made up of conservative legislators and is mostly funded by large corporations, including the fossil fuel industry, and others, like the Koch brothers, well-known climate change deniers.
鈥淭he aim of this model policy is to strengthen fiduciary rules to protect pensioners from politically driven investment strategies,鈥� said Lee Schalk, vice president of policy at ALEC.
The push against ESG investing is to protect retirement investments, according to Schalk, 鈥溾�o ensure that those who are managing the state pension funds are only doing so in the best interest of taxpayers and pensioners.鈥�
Schalk said many public sector employees may not understand that th