The Increasingly Politicized World of ESG Investing.

• Author: Barrett, Katherine
• Position: PERSPECTIVE

When people think about the management of pension plans, they typically focus on the importance of getting the best possible returns on the dollars contributed to the plans by both governmental entities and the employees themselves.

But increasingly there's more to it than that in the form of so-called ESG investing, an acronym which stands for the environmental, social, and governance factors that can be taken into account when considering an investment's risks and benefits. This method of selecting investments has gotten a fair amount of attention in the states of New York and California, and New York City, and it appears to be an increasingly prevalent practice across all levels of local government.

"I don't have empirical evidence to support it," Hank Kim, executive director of the National Conference on Public Employee Retirement Systems, said, "but when I think of the leading local plans, they are just as active in ESG as the California Public Employees' Retirement System or New York State, but they fly a little bit under the radar, which is to their benefit."

A lower profile in the world of ESG investing is likely advantageous because the practice has become politically charged over the past few years. In mid-April, to cite one particularly extreme example, an article in The American Conservative claimed that "progressives have succeeded in manipulating the $5.8 trillion state pension system into a vehicle for imposing their political agenda, while simultaneously fostering a lucrative system of patronage around it to co-opt nonbelievers into playing along." (1)

This perspective is disputed by Dave Wallack, executive director of For the Long Term, a nonprofit, nonpartisan group that advises state, city, county, and tribal treasurers. "I work with a broad group of state and municipal treasurers and comptrollers, and no one I'm talking to about ESG sees it as a morality issue," he said. "From a long-term perspective, they're talking about how we can do the best for our beneficiaries. Be it climate or good governance, it's the ability to mitigate risk. None of this is about morality. A fiduciary's job is to act in their beneficiaries' best interest, and that's fundamentally the opposite of closing your eyes to ESG or anything else."

Though the National Association of State Retirement Administrators (NASRA) hasn't taken a position on the utility of ESG investing, it lays out the logic behind the arguments made by mainstream pension fund...