BOSTON: When Florida governor Ron DeSantis emerged as one of the most vocal critics of so-called woke money managers, he thrust the state’s pension funds into a red-hot debate.
On one side are Republicans, who say environmental, social and governance (ESG) investment strategies leave returns on the table for the sake of political correctness. On the other are Democrats who argue failing to account for climate change will exact steep financial costs in the long term. Both say they’re upholding their fiduciary duty to act in the best interests of clients.
Making investment decisions based on anything other than performance would violate that obligation.
But some research has found that politically motivated investment decisions can hurt long-term performance, costing some state pension funds billions of dollars as they’re struggling to keep the promises made to retirees.
Republicans in Missouri, Louisiana and South Carolina pledged to pull a combined US$1.5bil (RM6.9bil) of public pension and state treasury funding from BlackRock Inc after the world’s biggest asset manager became a prominent backer of ESG investing strategies.
Meanwhile, those in more liberal states, including New York and Minnesota, proposed divesting from the fossil-fuel industry.
The current debate is reminiscent of the 1990s and early 2000s, when several retirement systems voted to divest from so-called sin stocks such as tobacco or weapons manufacturers. States including Massachusetts, Maryland and Florida purged tobacco investments from their pension funds.
A 2001 tobacco industry divestment ultimately cost the California Public Employees’ Retirement System US$3.69bil (RM16.8bil) over almost two decades, according to a report last year by Wilshire Associates.
In October 2020, the Centre for Retirement Research at Boston College reported an analysis of 176 pension funds, roughly two-thirds of which had “a social investing state mandate or an ESG policy in place.” — Bloomberg