Blue States Counter Anti-ESG Laws With Pension, Climate Measures

A schism is widening between how Democratic and Republican states direct their pension plans to approach ESG investing, with Colorado and Illinois among states advancing new climate requirements for their funds this year.

Investment managers working with public pensions in Illinois would have to disclose how they integrate factors such as greenhouse gas emissions and labor practices into their decisions and analyses under a measure (H.B. 2782) awaiting action by the governor. A separate Illinois measure (S.B. 2152) would require additional disclosures related to pension proxy voting, while a new Colorado law requires climate risk reporting by the state’s public retirement association.

The measures stand in contrast to the torrent of bills pushed by Republican state legislators to restrict the use of ESG factors in state contracts and pensions. Those laws have succeeded throughout the country, though many were watered down from initial proposals due to concerns from pension administrators, business groups, and others.

In Illinois, the disclosure measure adds to an existing law that directs public agencies to implement “sustainable investment policies” considering factors such as corporate governance, human rights, and the impacts of climate change. The bill, which would apply starting Jan. 1 to an investment manager that’s a fiduciary to the retirement system, public fund, or pension fund, aims to strengthen public investments and provide more information to taxpayers, said state Rep. Ann Williams (D), chief sponsor of the legislation.

“I would like to see us continue down this road of exploring how we can make our pension fund investments even more transparent and provide for even more accountability,” she said.

Climate Risk

Republicans this year have sought anti-ESG policies to prohibit business and investment decisions that they contend discriminate against certain industries, such as oil and gas. Blue state approaches have been less mandate-focused, with some considering new disclosures or making it clear that pension fiduciaries can consider ESG factors, said Jennifer Schulp, director of financial regulation studies at the Cato Institute’s Center for Monetary and Financial Alternatives.

“I think there’s certainly less blanket rules compared to what’s been happening on the anti-ESG side,” she said.

A Colorado law (S.B. 23-016) enacted in May to reduce greenhouse gas emissions will require the Colorado Public Employees’ Retirement Association to report annually on financial risks related to climate change, including risks to its investment portfolio. The law, which requires that the information be made publicly available, aims to raise the standard of evaluating climate risk, said state Sen. Chris Hansen (D), who led the legislative efforts.

“Divestment was not in this proposal at all, and that was very much on purpose,” Hansen said in an interview last month. “I think there are other policy options that can have a much more immediate impact.”

California is weighing a measure (S.B. 261) that goes beyond pensions to require some companies to report on financial risks related to climate. The California Senate also approved a bill (S.B. 252) that would require fossil fuel divestment by the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, which faces opposition from fund managers.

Other bills to require state pension funds to divest from certain industries—such as a Vermont measure proposing fossil fuel divestment—faltered this year.

Some Democratic state officials have also joined a coordinated call for the “freedom to invest,” meaning asset managers can consider all financial risks and opportunities in their decisions, including climate change.

Existing state laws already support considering all factors, said Josh Lichtenstein, partner and head of the ERISA fiduciary practice at Ropes & Gray LLP. That more neutral position means there’s less of a need for ESG legislation, he said.

“A lot of the blue states aren’t necessarily taking a pro-ESG stance so much as a ‘let us invest’ stance,” Lichtenstein said.

Viewing state actions through a wider lens shows other initiatives to address climate change and changing economies—such as green banks and measures to attract Inflation Reduction Act funding, said Frances Sawyer, founder of Pleiades Strategy. The research-and-advisory firm tracked the fate of anti-ESG bills this year in statehouses and the coordination among them.

“I think that the broader picture is really around what are the investments that we’re making from a policy perspective across the economy that are disrupting some of the incumbent industries that are behind this anti-ESG push,” Sawyer said.

Republican Pushback

Republicans increased collaboration across states this year on anti-ESG policies and enforcement, Lichtenstein said. In statehouses, though, lawmakers also faced a “very, very big delta” between what was proposed and what passed, he said.

“The takeaway there is that it isn’t maybe quite so easy as it might have seemed to actually legislate in the area,” Lichtenstein said.

States such as Indiana limited their anti-ESG laws based on pension concerns. Laws elsewhere defied that trend, including Florida’s sweeping new restrictions.

“I think we’re going to continue to hear a lot about anti-ESG in the states, but there has been a lot more pushback and a lot more nuanced thinking from state legislators about a what it means to be anti-ESG and what the costs of legislating in that space might be,” Schulp said.

States considering pension legislation on any side of the ESG debate should consider if new requirements are necessary, Schulp said. Pension managers already have fiduciary duties that are largely well-defined, she said.

“In a lot of circumstances, it’s not clear that monkeying with the language around those duties really changes much other than potentially adding some administrative costs,” Schulp said.