Invest or Divest in Oil, Gas & Coal Companies? - State & City Pension Plans Are the Battleground

Consider the influence of the public sector employee retirement systems in the capital markets: the almost 6,000 pension plans (of states, cities, municipalities, etc.) cover about 15 million workers and families and manage about $4.5 trillion in assets of various classes.

In recent years, some plan managers have trimmed portfolio holdings of fossil fuel companies (oil, gas, coal) and even divested holdings partially or in the entirety. These actions have set up a showdown in some states between the retirement plan managers, or the asset management firms they use to help manage portfolios, and state controllers, treasurers, and lawmakers.

State treasurers and controllers and even governors are targeting asset management firms that have policies that limit or prohibit the ownership of investments in fossil fuel companies and are slamming pro-ESG investment policies as a threat to their constituents.

Bloomberg Green/ESG summed up the showdown (investors vs. states) with this Top Story below: “GOP Fury Over ESG Triggers Backlash with US Pensions at Risk.” Bloomberg’s Frances Schwartzkopff explains, “Investment professionals are warning that a Republican campaign seeking to wipe ESG off the financial map puts at risk the savings of ordinary Americans caught in the political crossfire.”

A prime example: The state of Texas, home to major oil and natural gas producers, has warned major Wall Street asset management firms that those who discriminate against oil and gas companies will not be selected to help manage state finances (such as issuance of bond funds). Texas Comptroller Glenn Hegar is “investigating” investment companies to see if there is a “boycott” of the oil and gas companies and will soon publish “a list” of offenders.

Florida Governor Ron DeSantis, thought to be a presidential candidate come 2024, banned his state’s pension funds from screening for ESG risks. This will “protect the state’s voters from ESG, which he called a “perversion of investing.” Perhaps in a contrary move, the governor called for more than $1 billion to be invested in protecting the state from coastal flooding (the state borders include miles of Atlantic Ocean and Gulf of Mexico waters).

A Blue state elected comptroller – Brad Lander of New York City who helps manage five city pension funds with $240 billion in AUM -- struck back at red state interests, saying “Republican-led states (like West Virginia and Texas) moves “are just a cover to defend the interests of oil companies.” The top New York City financial officer said that Republican treasurers and lawmakers are putting their states at risk with extra costs to constituents and longer-term harm to retirement plan portfolios and the planet.

Who is keeping a scorecard of the actions of the states? The law firm of Ropes & Gray is surveying the action. “The growing divide in the ESG regulatory landscape in different states became clear with the passage of contradictory legislation in Maine and Texas in 2021. This growing divide deepened in 2022 as more than a dozen states introduced new initiatives to divest state pension funds from gun and ammunition companies or oil and gas companies and coal companies – or conversely, to require pension fund divestment from companies that boycott fossil fuel companies."

In our Top Stories, we have provided the Ropes & Gray commentary with a link to their “Full Alert.” These stories explain the latest “great divide “in American politics between fossil fuel interests and ESG, and the debate over future investment or divestment of oil, gas, and coal companies at the center of the battle. The G&A team looks forward to keeping you updated on this critically important issue that will impact all companies committed to ESG and sustainability.

This is just the introduction of G&A's Sustainability Highlights newsletter this week. Click here to view the full issue.