Public pension funds strongly support environmental, social and governance shareholder resolutions, Morningstar data show.
According to a Morningstar research report released this month, public pension funds’ average rate of support for ESG resolutions was 90% in 2021, compared with 85% of ESG-focused funds and 63% of general shareholders.
“Basically, public pension funds’ voting behavior looks very similar to mutual funds and [exchange-traded funds] that focus on ESG issues,” says Janet Yang Rohr, director for multi-asset and alternatives research, North America at Morningstar. “[Public pension funds] actually vote more strongly with ESG issues compared with ESG-focused funds, where the reason for being is to support ESG items.”
ESG shareholder resolutions reached a record high of 273 in 2022, from 171 in 2021, the research shows. Morningstar’s report says that, on average, ESG resolutions earned 34% of public pensions’ support in 2021, an increase from 27% in 2019. In 2021, 36 ESG resolutions passed with majority support, an increase from 20 in 2020. And in 2022, ESG resolutions reached 30% support, with 40 resolutions passed, the report says.
“Proxy-voting results can directly affect company behavior and economic results, so there’s good reason to know how public funds use their market power to influence these outcomes,” the report states.
A Morningstar research report published in July also found that ESG considerations are integral to defined benefit plans. The firm’s Voice of the Asset Owner Survey found that institutional asset owners at pension funds currently view sustainable investing as a fundamental element of investing, not as an esoteric approach that could damage potential returns.
Morningstar’s new research comes at a politically tempestuous time for ESG investing, which has lately come under attack in several states led by Republican governors, including Florida and Texas. In early August, a group of 19 attorneys general co-wrote a letter to BlackRock CEO Larry Fink, criticizing the asset manager for using state pension fund assets in ESG investments that they claimed “force the phase-out of fossil fuels, increase energy prices, drive inflation and weaken the national security of the United States.” And, on August 23, the trustees of Florida’s State Board of Administration voted to ban ESG considerations from the asset allocator’s investment decisions.
“Given that there’s a lot of political chatter around ESG investing, we also wanted to look at the results along party lines,” Yang Rohr says. “We took the pension funds that we looked at … and matched them up to the state where they belong and looked at their Partisan Lean Scores from the online publication FiveThirtyEight, and basically assigned them into three buckets.”
Among states with a Democratic lean, average support in 2021 for ESG resolutions was 98%, compared with 85% for split states without a partisan lean and 80% in states that lean Republican, the research found.
Yang Rohr explains that “the support for ESG resolutions goes down in a stair step: state pensions in Democratic states have very strong support, but maybe the more surprising thing is even Republican states have relatively high support.”
She adds, “[Republican support] falls only a little bit below ESG-focused funds, but it’s considerably ahead of general shareholders.”
The Morningstar research notes that because reporting from many public pensions can considerably lag proxy voting season—between April and June of each year, when U.S. public companies hold their annual shareholder meetings—the findings in the paper were focused on the 2021 proxy vote outcomes.
“No matter the political lean of their state, public pensions across the country have plenty of room to improve when it comes to providing more transparency on how they voted and describing the rationales for their votes,” the report says.
The Morningstar findings are based on a data sample of state and local defined benefit pension funds that represent the assets of 14 million workers and retired plan participants with a total of $3.4 trillion in assets. Researchers used lists of the largest public plans and culled the data to identify the top 30 from the U.S. Census Bureau’s annual survey of U.S. pension funds, Yang Rohr says.