Building Worker Power in Cities & States:
ESG and Responsible Investment Practices

Background

The past few years have seen a coordinated attack on responsible investment and the associated practice of incorporating Environmental, Social, and Governance (ESG) information into investment decision-making.¹ These attacks have included public outcry over ESG as so-called “woke investing” in public media, congressional hearings targeting responsible investment practices as misguided and pernicious, and, most relevant for this forum, state legislation and other efforts restricting or banning the use of ESG in public investment vehicles such as public pension plans. Coordination comes from funder networks and think tanks, including the American Legislative Exchange Council, the State Financial Officers Foundation, and the National Center for Public Policy Research.² 

Objective of State Intervention

The discrediting of responsible investment, backed by fossil fuel and anti-labor advocates, is meant to constrain investors from integrating environmental and social issues into their investment and shareholder engagement strategies. This is despite the fact that many of those issues, such as fair labor practices, carbon mitigation strategies, or diversity in investment management, are often seen by investors themselves as presenting material long-term and systemic challenges for investment performance. State protections for responsible investment strategies that consider labor standards in investment decisions can play important roles in ensuring pension funds’ ability to manage risk and invest successfully. They can also align pension fund investments with better outcomes for the workers and communities they are built to serve. 

This section outlines policies states and cities can adopt to guide the development of responsible investment practices that support workers’ rights as well as protect such practices from anti-ESG attacks.

Preemption Risk

As long as state protections for pro-worker responsible investment strategies do not interpose the state in the relationship between employers and employees, the preemption risk is low. States have broad authority to account for risk and return strategies for public investment funds, such as state employee pension funds.

Options for State or Local Action

Pension Investment Principles

At the pension fund level, whether public or private, it is important to have active and enforceable investment principles that support the investment beliefs of the fund and its members.³ Both private industry pension funds and public pension funds have adopted investment principles and policies that consider labor standards as a material factor in investment decision-making. Most recently, concerned about the growing asset allocation to alternative investments, funds have begun to adopt labor principles for specific asset classes, like private equity. 

In 2021, the Maryland State Retirement and Pension System adopted a new Responsible Contractor Policy that applies to their operations as well as construction of their real estate and infrastructure assets. The policy encourages neutrality during union organizing campaigns. In 2023, the National Electrical Benefit Fund (NEBF) adopted the Principles of Responsible Workforce Management in Private Equity.⁴ That same year, California Public Employees’ Retirement System also adopted their own Labor Principles for Private Equity.⁵  Other funds and asset managers are poised to adopt similar principles in 2024. Key provisions of the NEBF principles include:

• General Partners will adopt policies covering all portfolio companies and their supply chains to guarantee respect for the International Labour Organization’s (ILO) Core Conventions on freedom of association and effective recognition of the right to collective bargaining, elimination of all forms of forced or obligatory labor, the effective abolition of child labor, and the elimination of discrimination in employment and occupation.
• General Partners shall direct management teams of portfolio companies to maintain a position of neutrality when workers seek to exercise their freedom to join together in a union, and when applicable, will enter into neutrality agreements with labor organizations that contain the following provisions:
  • A commitment to non-interference in union organizing, including a prohibition on the use of “union avoidance” persuaders and captive audience meetings; 
  • Reasonable accommodations for unions to access worksites and to communicate with employees; 
  • A voluntary recognition or expedited election procedure for determining majority support for a union; and 
  • Arbitration of disputes and first contract if no agreement is reached after a specified period of time. 
• General Partners shall direct the management teams of portfolio companies to negotiate in good faith with their union-represented workforces to reach mutually beneficial collective bargaining agreements. 

Proactive ESG Protections That States Can Adopt

Advocates for responsible investment have organized stakeholders to resist anti-ESG attacks on the grounds that they may create costs and constrain investment choices, harming fund performance. For instance, studies have pointed to potential costs to state and municipal budgets if ESG boycotts restrict the pool of potential underwriters.⁶ The Kentucky Bankers Association and Kentucky Teachers Pension Fund both resisted anti-ESG efforts by the state attorney general, arguing that climate risk is a material concern for investors and that anti-ESG rules unnecessarily restrict investors’ ability to do their work.⁷ 

As Lenore Palladino, Jordan Haedtler, and Kristina Karlsson write regarding climate finance, states have the potential to “strengthen state pension codes to incorporate systemic risks into the definition of fiduciary duty,” which would ensure that longer-term risks are considered alongside immediate “pecuniary” interests. Further, they argue, state laws can “clarify that pension funds can and should act in the interests of the workers who pay into them … [and] affirm and codify federal court rulings that have found that pension funds may consider factors relevant to the economic interest of fund beneficiaries beyond maximizing returns.”⁸ 

Read:

State Pension Funds and Climate Risk: A Roadmap for Navigating the Energy Transition

by Lenore Palladino, Jordan Haedtler, and Kristina Karlsson | Roosevelt Institute

These authors and others lay the groundwork for affirmative ESG protections that do not depend on cost/benefit analysis of particular state legislation. Rather they authorize an expanded scope for investor attention and action, in line with financial theory that emphasizes the importance of longer time horizons and health of economic systems for sustainable long-term investment.⁹ 

Spotlight: Integrating Sustainability in Investment Policy – Americans for Financial Reform Model Bill

Proactive ESG legislation in states more favorable to responsible investment may strengthen existing defenses against anti-ESG legislation in other states and send signals that counteract the potential chilling effects of anti-ESG discourse and political activity. Natalia Renta, senior policy counsel at Americans for Financial Reform (AFR), and attorney Beth Young drafted legislative language that can be adapted and used for state-level efforts. The bill clarifies fiduciary duty to align investment decision-making with long-term viability of pension funds, creates a process for funds’ consideration of sustainability factors, and requires disclosures from the asset managers that contract with the fund. This effort was based on the Illinois Sustainable Investing Act, which requires pension funds to have a sustainable investment policy integrating sustainability factors in five categories:

• Corporate governance and leadership
• Environmental
• Social
• Human capital
• Business model and innovation

In 2023, the Illinois bill was amended to include annual disclosures from asset managers on how they integrate sustainability factors. The AFR model broadens the Illinois bill.¹⁰ Key recommendations include:

Requiring further disclosures from asset managers that work for pension funds and those being considered for retention and making them publicly available.

Considering both sustainability factors that may impact individual investments and those that may impact the fund as a whole.

Adding specific sustainability factors, including compliance with fundamental the labor rights of freedom of association, collective bargaining, and the elimination of forced labor, child labor, and employment discrimination.

Proxy Voting and Worker Rights

In recent years, shareholders like the New York City Employees’ Retirement System have filed resolutions to support the rights of workers. Shareholder resolutions are a powerful way for worker-owned pension funds to hold companies in their portfolio accountable or to call for change company governance. New York City Comptroller Brad Lander, along with other investors from the religious and labor communities, has been an outspoken supporter of resolutions calling for audits of company practices on freedom of association, racial equity, and other workplace issues considered “material factors relevant to the sustainability of business.”¹¹

In 2024, a legislative initiative related to worker rights and proxy voting was initiated in Colorado. The legislature considered language requiring pension funds to develop and publish proxy voting guidelines that commit the board to support certain shareholder resolutions related to freedom of association, collective bargaining, and climate-risk mitigation, unless there are extraordinary circumstances. It also requires pension funds to consider these issues when making decisions about director votes.¹²

1. For one example of such a policy, the DOL’s Employee Benefits Security Administration (EBSA) recognized in its ESG rule that unions and workers’ voice can result in material financial benefits for employee engagement and representation. See 87 Fed. Reg. 73,822, 73,869, https://www.govinfo.gov/content/pkg/FR-2022-12-01/pdf/2022-25783.pdf. ↩︎
2. Investors Appeal to Legislators to Safeguard Workers’ Pensions by Opposing Politically Motivated Threats to ESG Investing, Interfaith Center on Corporate Responsibility (June 5, 2023), https://www.iccr.org/investors-appeal-to-legislators-to-safeguard-workers-pensions-by-opposing-politically-motivated-threats-to-esg-investing/. ↩︎
3. Steve Lydenberg, Investment Belief Statements, Institute for Responsible Investment Working Paper (Oct. 30, 2011). ↩︎
4. National Electric Benefit Fund, Principles of Responsible Workforce Management in Private Equity (May 11, 2023). ↩︎
5. California Public Employees’ Retirement System, Revisions to the Total Fund Policy: Governance and Sustainability Principles First Reading (September 18, 2023),
   https://www.calpers.ca.gov/docs/board-agendas/202309/invest/item05a-01_a.pdf. ↩︎
6. See e.g., Daniel Garrett & Ivan Ivanov, Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies, Brookings (Apr. 12, 2023), https://www.brookings.edu/articles/gas-guns-and-governments/. ↩︎
7. Tom Sanzillo, “Kentucky Bankers Sue State Over Right to Classify Climate Risk as Financial Risk,” Institute for Energy Economics and Financial Analysis (Dec. 2, 2022), https://ieefa.org/resources/kentucky-bankers-sue-state-over-right-classify-climate-risk-financial-risk. ↩︎
8. Palladino et al, “State Pension Funds and Climate Risk: A Roadmap for Navigating the Energy Transition,” Roosevelt Institute (Mar. 7, 2023), https://rooseveltinstitute.org/publications/state-pension-funds-and-climate-risk/. ↩︎
9. See e.g., Jon Lukomnik and James Hawley, Moving Beyond Modern Portfolio Theory: Investing that Matters (Routledge 2021). ↩︎
10. The full AFR model bill is available here: https://ourfinancialsecurity.org/wp-content/uploads/2024/05/4.12.24-Model-state-bill-on-consideration-of-sustainability-factors.pdf. ↩︎
11. Press Release, New York City Comptroller Brad Lander, NYC Comptroller Lander and City Pension Funds’ 2023 Shareowner Initiatives Postseason Report Highlights Leadership on Responsible Investment (December 27, 2023). https://comptroller.nyc.gov/newsroom/nyc-comptroller-lander-and-city-pension-funds-2023-shareowner-initiatives-postseason-report-highlights-leadership-on-responsible-investment/#:~:text=In%20a%20joint%20statement%2C%20the,is%20not%20political%20or%20ideological. ↩︎
12. New York City Government, New York City Retirement Systems 2023 Shareowner Initiatives Postseason Report, Office of the Comptroller (Dec. 2023), https://comptroller.nyc.gov/reports/shareholder-initiatives-postseason-report/. ↩︎