Lead the Way on Climate, US Pensions Told

New research from Sierra Club shows proxy voting guidelines do not account sufficiently for climate-related risks. 

US state pension funds have been told they must become leaders on climate action by establishing clear proxy voting guidelines to address related risks, regardless of the anti-ESG movement that has been snowballing across the country.  

New research from non-profit organisation Sierra Club has analysed the scope and depth of the climate-focused proxy voting records, guidelines and disclosures of 24 US public funds, which collectively manage over US$2 trillion in assets, ahead of the 2024 proxy season.  

Although these funds have taken positive steps by making net zero pledges and investing in climate solutions, the report noted that climate-related financial risks are still not sufficiently addressed in their proxy voting strategies.   

Sierra Club undertook the analysis alongside grassroots environmental organisation and the Stop the Money Pipeline campaign, which targets the financial sector’s support of the climate crisis. The scorecard will now be updated and published annually, aiming to provide pension funds with a clear benchmark and establish a gold standard on proxy voting guidelines. 

“There is a strong understanding among US pension funds that climate risk is not something that can be ignored, despite the political context,” Allie Lindstrom, Senior Campaign Strategist at Sierra Club, told ESG Investor. “But we need more leadership from them, where they make it clear that climate change is a systemic risk pension funds have a responsibility to their beneficiaries to manage.” 

If pension funds are more transparent concerning their stance on a variety of climate-related risks, asset managers and other asset owners would have a better grasp of their position, and would then either align with or oppose them during investee companies’ annual general meetings (AGMs).  

Increased transparency and disclosure is especially important during a period of political uncertainty, Lindstrom insisted. 

Facing headwinds 

The anti-ESG movement has gained considerable ground in recent months in the US, particularly in the context of the upcoming presidential campaign, prompting many financial institutions to step back from climate-focused initiatives and downplay their ESG-focused credentials and products. 

Late last year, Tennessee Attorney General Jonathan Skrmetti challenged BlackRock, the world’s largest asset manager, for allegedly misleading investors about the role of ESG considerations in investment decisions.  

However, US investors have pushed back, with some claiming that ESG investment has reached such critical mass that it cannot be deterred by anti-ESG rhetoric.  

Although the anti-ESG movement is generally most powerful in Republican-controlled states, the Sierra Club report mostly focused on pension funds in Democratic states. 

Three of the New York City pension funds included in the report received B grades for their proxy voting guidelines, demonstrating strong performance on systemic risk and climate and lobbying resolutions. None of the 24 assessed pension funds received an A grade.

It’s also worth mentioning that half of the funds included in the analysis received F grades for their proxy voting guidelines, including pensions based in Washington, New Mexico, and Colorado. Performance on voting was stronger, with several state pensions across New York, California, Massachusetts and Oregon receiving A grades on this. 

“We are hoping to see pension funds move beyond just requesting disclosures of emissions and towards supporting not only the setting of emissions reduction targets, but also pre-declaring their votes,” said Lindstrom. “It is important that pension funds aim to perform more consistently across all sustainability-related themes.”  

By way of example, the California Public Employees’ Retirement System (CalPERS) scored highly on well-established issues like climate change but performed poorly on nature and biodiversity-related resolutions when compared to other peers.  

“The anti-ESG movement is not limited to climate,” Lindstrom pointed out.  

Time for change 

The report also outlined recommendations to help eradicate inconsistencies and strengthen the overall robustness of US pension funds’ voting guidelines before the upcoming proxy season.  

It suggested that pension funds should adopt a universal owner or systemic risk framework to guide proxy voting, setting an explicit mandate to reduce systemic risks. Pension funds should also clearly express their support for shareholder resolutions calling for ESG-focused disclosures, target-setting and strengthening, and alignment of operational strategy and political activities with internationally recognised sustainability goals – including the Paris Agreement and the Global Biodiversity Framework.  

In addition, proxy voting guidelines should be paired with portfolio management policies to better address instances where an investee company may be unresponsive to escalating risks and set clear deadlines for action past which they can phase out holdings.  

“It is not enough for pensions to manage these risks by themselves,” the report read. “Effective management of systemic risk requires engagement from other investors, too.”  

Other recommendations for pension funds to adopt between now and the end of Q3 include the need for the assessed asset owners to implement policies requiring both new and existing asset managers to publish a plan for achieving net zero across their entire portfolios. They should also search for new proxy advisers if existing providers have failed to provide analysis of climate-related risks, and review the voting records of existing asset managers to ensure those are aligned with their proxy voting guidelines.  

“As long-term investors, pension funds [and their asset managers] need to build a holistic understanding of how increased global carbon emissions can and will impact their portfolios – whether it’s through biodiversity loss or damage to physical assets,” said Lindstrom.  

“We have heard from a number of assessed funds that they would update their proxy guidelines over the next few months, and hope some of them will adopt some of our recommendations.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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