Majority of US Pensions Disappoint on Climate
Sierra Club has emphasised the importance of proxy voting tools to demonstrate climate-related ambition across states.
Most US state pensions are failing to take adequate steps to address climate-related financial risks through their proxy voting guidelines and practices, according to a new report.
For a second year, US NGO Sierra Club has partnered with grassroots environmental organisation Stand.earth to assess the 2024 proxy voting records and voting transparency of 32 US public pension funds collectively representing over US$3.8 trillion in assets under management.
Last year’s report focused on self-identified climate leaders, while the second iteration has expanded its scope to include laggards based in states where the anti-ESG movement is especially prominent.
“[While] none of the pension funds we tracked in both 2023 and 2024 walked back any of their guidelines or reduced their commitment to supporting climate resolutions, we are disappointed to see a continuation of pensions not embracing all of the tools available to them to address climate risks,” Allie Lindstrom, Senior Strategist for NGO Sierra Club’s Sustainable Finance Campaign, told ESG Investor.
Of the 32 assessed pension funds, only Massachusetts Pension Reserves Investment Management (MassPRIM) received an ‘A’ grade, with nine receiving a ‘B’ or ‘C’ for having transparent voting records and good-to-moderate proxy voting guidelines. Fourteen received ‘D’ or ‘F’ grades for transparent voting records but moderate-to-poor proxy voting guidelines leading to poor proxy voting outcomes.
Eight pensions were given ‘incomplete’ grades for failing to disclose their voting records.
Public pensions varied greatly in data transparency, the report said. While many publish their proxy voting guidelines and voting records, some were only available via a Freedom of Information Act (FOIA) request.
As such, pension systems in Alabama, South Carolina and Utah were omitted from the report after FOIA requests were denied.
The pool of assessed funds includes pensions for New York City, Los Angeles County, Florida, Indiana, Nevada and Oregon.
Widening divide
Pension funds identified as climate leaders continued to strengthen their proxy voting guidelines each year and pull away from the laggards, the report said.
MassPRIM and the Connecticut Retirement Plans and Trust Funds (CRPTF) demonstrated climate leadership by approving new guidelines on biodiversity, board of director accountability, and human rights.
“Whether it’s greenhouse gas emissions, environmental justice or just transition, MassPRIM in particular has looked at the many facets of climate risk and has effective policies in place,” said Lindstrom.
In the evaluation of proxy voting guidelines, the New York State Common Retirement Fund received an ‘A’ grade for its guidelines, with the report noting that the asset owner had proactively addressed the full scope of risk mitigation measures on key systemic risks.
“However, some of [the assessed] funds are facing anti-ESG restrictions that limit their ability to use their proxy voting voice,” said Lindstrom.
Eight pensions in “anti-ESG states” scored lower than their peers, the report said.
“In comparison, pensions with the strongest guidelines had people on staff and on their boards that really understand the risks that climate change poses,” said Lindstrom.
“In conversations we had about the impacts of the anti-ESG movement and how this is changing the ecosystem for investors, they remained steadfast in their commitment that it’s important to address climate risks.”
Multi-pronged engagement
Many of the assessed pension funds work with proxy advisers or defer to their external asset managers to engage and vote on their behalf. This risks a lowering of climate ambition, the report said.
“These pensions need to adopt stronger language to ensure that portfolio companies are responding to climate risks and that their asset managers vote according to their responsible investment guidelines,” said Lindstrom.
The report pointed to efforts made by the New York City Comptroller’s Office to engage with one of their asset managers – BlackRock – asking them to improve their climate stewardship and related investment strategies.
When engaging with asset managers and serve providers, US pension funds should ask them to amend their benchmark proxy voting strategies to include provisions to mitigate systemic risks and support measures calling for the adoption of policies, targets or strategies that mitigate negative ESG-related impacts, the report said.
Where managers or service providers have specialty or thematic policies, the asset owners should advocate for the incorporation of systemic risk mitigation strategies, it added.
“It is not enough for pensions to manage these risks by themselves; effective management of systemic risk requires engagement from other investors, including the asset managers that manage the pensions’ funds,” the report said.
More broadly, the report recommended that US pension funds update their guidelines to reflect emerging best practices biennially and publicly disclose these updates. This includes publishing their proxy votes for the most recent voting season by 1 October each year and maintaining a publicly available record, it said.
Pension funds should also amend practices to allow for pre-declaration and publishing of rationales for key votes, among other means of amplification, the report said.
Future unknown
Going into the 2025 proxy season, Lindstrom said she is “uncertain” what the effect of President Donald Trump will be on shareholder support for ESG-focused resolutions.
“It’s too early to know what this year’s proxy season will look like, and what is going to be up for vote – but the risks are the same, if not more extreme, now that we know there will not be federal regulation and action to reduce climate risk,” said Lindstrom.
For US corporate pension schemes, there is concern that the rules relating to ESG will change under the Employee Retirement Income Security Act (ERISA), which sets minimum standards for private sector pension schemes.
In 2022, looser rules were introduced to give pension schemes more freedom to factor ESG-related concerns into their investment decision-making. Under Trump, this is expected to be reversed.
“Our call to action would be for public pension funds to continue with the robust risk analysis that they have been using, and for them to continue to stand their ground,” said Lindstrom.
“If there are no resolutions on the ballot to vote for, they still have other engagement tools available to them, and they must use those to continue to push for an energy transition that serves the communities these companies are based in and contributes to a smooth transition and less economic upheaval.”
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