A new report from the Pacific Research Institute details how the California Public Employees’ Retirement System (CalPERS) is generating a below-average investment return, in part because of its politicized investment strategy, which incorporates environmental, social, and governance (ESG) scoring.
ESG scores are essentially a risk assessment mechanism increasingly being used by investment firms and financial institutions that forces companies and agricultural concerns to focus upon politically motivated, subjective goals that often run counter to their financial interests and the interests of their customers. Companies are graded on these mandated commitments to promote, for example, climate or social justice objectives. Those that score poorly can be punished by divestment, reduced access to credit and capital, and a refusal from state and municipal governments to contract with them.
According to the report, CalPERS has generated a 10-year average annual return of 7.1 percent through June 30, 2023, significantly below the 9.8 percent average annual return of a typical 80-20 investment allocation (80 percent stock investments, 20 percent fixed income investments), and still well below the 7.9 percent average annual return it would have generated if it had a typical, lower risk 60-40 investment portfolio of 60 percent stock investments, 20 percent U.S. Treasury bonds, and 20 percent corporate bonds.
Moreover, as the report notes, the Pension Fund Return Tracker maintained by Pensions & Investment shows CalPERS ranked 67th out of 83 major public pension funds for its fiscal year (FY) current investment return, 45th out of 82 for its previous FY return, 64th out of 81 for its five-year return, and 46th out of 73 for its 10-year return. CalPERS’ current, five-year, and 10-year returns are both well below the S&P 500’s returns.
Overall, as of June 30, CalPERS has just 72 percent of the funds on hand it would need to fulfill its full retiree benefit obligations.
“There are legitimate concerns that CalPERS’ political views are conflicting with its fiduciary responsibilities. By adhering to ESG and other politicized investment strategies, CalPERS is securing lower returns while setting up financial roadblocks to future strong returns,” said Wayne Winegarden, author of the report, in an accompanying press release. “Ultimately, it is retirees and taxpayers who bear the risks from the underperformance we’re seeing from CalPERS’ politically driven investment strategies.”
CalPERS launched a $100 billion “Sustainable Investments 2030 Strategy” in November 2023.
“CalPERS has a very important social responsibility – maximize shareholder returns to ensure that all current and future beneficiaries can enjoy a prosperous retirement without imposing additional burdens on taxpayers,” the report concludes. “Fulfilling this responsibility is difficult enough. Attempts to pursue political agendas in addition to these financial responsibilities only makes serving this essential role more difficult. Despite this reality, several of CalPERS’ investment strategies and proxy positions raise concerns that political considerations are potentially conflicting with their fiduciary responsibilities, as exemplified by recent energy transition strategies and proxy voting positions. Ultimately, it is beneficiaries and taxpayers who bear the risks from any underperformance these political activities impose. Consequently, ensuring that the pension fund fulfills its essential social responsibilities, without distractions from ancillary political and social issues, is imperative.”
Legislators around the country should take note of what is happening in California and introduce legislation in their states to prevent public pension fund managers from using ESG to guide investment strategy. This legislation should declare that each state fiduciary shall discharge their duties regarding the investments and assets of the state’s retirement systems solely in the interests of plan participants and their beneficiaries and for the exclusive purpose of providing benefits to plan participants and their beneficiaries.
By clarifying the fiduciary duties of pension fund managers, and by insisting that maximizing the return on investment for clients be their only guiding principle, legislators across the country can help ensure the long-term fiscal health of their state’s pension systems and make sure that promises proffered to state pensioners will be kept.
The following documents provide more information about ESG.
Environmental, Social, and Governance (ESG) Scores: A Threat to Individual Liberty, Free Markets, and the U.S. Economy
https://heartland.org/wp-content/uploads/2023/04/2023-ESG-ReportvWeb-2.pdf
This policy paper by Heartland Institute research fellow Jack McPherrin provides a comprehensive overview of ESG and proposes specific policy recommendations to counteract ESG’s insidious influence.
ESG: A Simple Breakdown of its Components
https://heartland.org/wp-content/uploads/2022/12/PolicyTipSheetESG1.pdf
This Heartland Institute Policy Tip Sheet provides a brief description of each of the three categories comprising a company’s risk assessment based upon ESG metrics, using one of the most commonly used ESG frameworks developed by the International Business Council.
ESG: Financial Discrimination
https://heartland.org/wp-content/uploads/documents/PolicyTipSheetESG8src.pdf
This Heartland Institute Policy Tip Sheet discusses financial institutions’ discriminatory practices against consumers, and explains proposed solutions to the problem.
ESG: The Banking Industry
https://heartland.org/wp-content/uploads/documents/PolicyTipSheetESG7src.pdf
This Heartland Institute Policy Tip Sheet briefly summarizes how the banking industry has used its coercive market power to weaponize ESG compliance.
ESG: Central Bank Digital Currencies
https://heartland.org/wp-content/uploads/documents/PolicyTipSheetESG6.pdf
This Heartland Institute Policy Tip Sheet provides a brief summary of central bank digital currencies (CBDCs) and how they can be wielded against society to enforce ESG compliance.
ESG: Negative Effects on Food Supply and Agriculture
https://heartland.org/wp-content/uploads/documents/PolicyTipSheetESG5.pdf
This Heartland Institute Policy Tip Sheet provides a brief summary of how ESG is being weaponized against farmers, food production, and the agricultural industry as a whole.
ESG: The Effects Upon Free Markets
https://heartland.org/wp-content/uploads/documents/PolicyTipSheetESG3.pdf
This Heartland Institute Policy Tip Sheet offers a brief description of how ESG systems fundamentally alter free markets and the natural equilibrium of supply and demand.
ESG: The Role of the U.S. Securities and Exchange Commission
https://heartland.org/wp-content/uploads/documents/PolicyTipSheetESG2.pdf
This Heartland Institute Policy Tip Sheet offers a brief description of the role of the U.S. Securities and Exchange Commission (SEC) in coercing companies into ESG compliance.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Environment & Climate News, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Heartland’s Government Relations department, at [email protected] or 312/377-4000
Tim Benson joined The Heartland Institute in September 2015 as a policy analyst in the Government Relations Department.
