Some state and local governments have recently begun using public employee retirement funds to advance political policy goals, including the push to “decarbonize” the economy.
Observers warn that this kind of politicization undermines the principle that public pensions should serve solely the financial interests of beneficiaries rather than broader political goals.
The latest flashpoint: Brad Lander, outgoing comptroller of New York City Employees’ Retirement System (NYCERS) and the city’s larger pension network, has recommended the removal of $42.3 billion in publicly managed funds from BlackRock because the investment firm’s climate-decarbonization policies did not meet the city’s standards.
“The systemic risk of the climate crisis threatens the long-term value of New York City’s pension funds,” Lander said. “Our Net Zero plan a commitment to reach net zero emissions by 2040) is a core part of our fiduciary duty to protect these assets.”
Soon after, Lander launched his campaign as the progressive alternative to incumbent U.S. Rep. Dan Goldman (D-N.Y.) in a deep-blue New York City district, where he was promptly endorsed by Mayor-elect Zohran Mamdani.
Is Lander protecting pensioners, or promoting his politics?
Supporters of Lander’s politically-directed pension strategy cast it as prudent long-term risk management, a way to protect pension holders from the financial fallout of climate-related regulatory or physical risks resulting from a warming planet.
Seton Hall University’s Dr. Danielle Zanzalari, who studies financial markets and public policy, says using pension funds to influence issues like climate change appeals to politicians because it’s a way to take action without raising taxes or shifting money around in budgets.
Critics reject the entire premise, arguing that investment managers have a fiduciary duty to retirees to put their fiscal well-being first. Using retirement funds to advance political priorities threatens the financial security of hundreds of thousands of retirees whose livelihoods depend on market-driven returns. BlackRock called Lander’s actions “another instance of the politicization of public pension funds.”
The data show ESG funds underperform their peers, and Sanjai Bhagat at the Leeds School of Business at the University of Colorado Boulder says that may be the point.
“That result might be expected, and it is possible that investors would be happy to sacrifice financial returns in exchange for better ESG performance.”
Both political parties have wielded pension funds as a club. In 2021, Republican-controlled Texas passed a law prohibiting state pension funds from doing business with financial institutions the state defines as “boycotting” fossil-fuel companies — effectively blacklisting asset managers that adopt ESG strategies that penalize oil, gas, or energy firms.
That law reflects a growing trend in Republican-led states to resist what they view as ideological investing under the banner of ESG, which requires companies that adopt the policy to address such issues as climate change and claims of racism. Critics of ESG argue that such investing can put political or social goals ahead of returns and expose taxpayers and retirees to increased risk.
Ironically, the effort to use retirement funds to impact public policy may be futile.
A 2024 study by researchers at the University of Southern California and the University of Utah found that public pension funds wield surprisingly little influence over corporate climate practices. After analyzing the behavior of firms targeted by pension-fund divestment and engagement campaigns, the authors reported “no consistent evidence” that these efforts lowered companies’ carbon emissions. One reason: even these large funds don’t own enough stock in any one large company to redirect its operations.
Public sector pensioners could instead feel the real impact.
In New York, removing $42.3 billion from BlackRock may reduce diversification, complicate rebidding, or result in higher fees. Many retirees and municipal workers worry that their checks could be affected as a result.
According to Bhagat, “funds investing in companies that publicly embrace ESG sacrifice financial returns without gaining much, if anything, in terms of actually furthering ESG interests.”