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Sustainable Investing

While Criticizing ESG Investing, Florida, Texas Public Pensions Have Overwhelmingly Supported ESG Resolutions, Morningstar Study Says

Florida also supported ESG in 2022 proxy season, analyst says.

Public pension funds from Florida and Texas, two states that have vocally criticized sustainable investing in recent months, have overwhelmingly voted for sustainable-investing practices in the past, new research from Morningstar has shown.

Recently, Florida Gov. Ron DeSantis and the State Board of Administration resolved to prohibit the state of Florida’s fund managers from considering all environmental, social, and governance issues. Many investors regard consideration of ESG information as part of their fiduciary duty to protect portfolios against risk and to seek out opportunities related to the carbon transition.

Meanwhile, Texas comptroller Glenn Hegar blacklisted BlackRock BLK, nine other asset managers, and nearly 350 mutual funds for supposedly “boycotting” the fossil fuel industry, after Texas passed a 2021 law to prevent state investment and pension funds from investing in funds that exclude fossil fuels.

Public Pensions Support ESG Resolutions

In a recent sample of U.S. state and local municipal defined-benefit public pension funds, which invest on behalf of almost 14 million participants across $3.4 trillion in assets, Morningstar found that public pension funds overwhelmingly voted in favor of 72 key resolutions on ESG issues, ranging from climate change and political spending to workers’ rights and pay equity, and found that public pension funds are among the strongest proponents of these issues.

On average, public pension plans voted 90% of the time in favor of ESG shareholder resolutions, while ESG-focused funds averaged 85%.

Florida Pension Voted 99% for ESG Resolutions

Indeed, in 2021, the Florida Retirement System voted 99% of the time for ESG resolutions. The Teacher Retirement System voted 97% of the time for ESG resolutions, and the Employees Retirement System of Texas voted in favor 85% of the time.

In December, Florida’s DeSantis said he would revoke all proxy-voting authority given to outside fund managers, “who may pursue social ideologies inconsistent with the state’s values or the financial interests of the state’s investments.” DeSantis, who some expect to seek the Republican presidential nomination in 2024, sat on the board of overseers for the Florida Retirement System in 2021 and continues to do so.

“When no one’s paying attention, how do people act?” says Morningstar analyst Janet Yang Rohr, who wrote the study with Michael Blakeslee. “They vote with an ESG-supportive lens.” Yang Rohr is Morningstar’s director for multi-asset and alternatives research. Separately, she is an elected Illinois state representative and works on legislation related to pensions and other topics.

The preliminary results show that, for Florida, “the 2022 overall results look very similar, though they’ve become less supportive of climate-related issues,” says Yang Rohr. She is still assessing the Texas votes.

ESG Is an Investment Risk Factor, Analyst Says

“Basically, they’re saying how ESG is so bad, but they are largely supporting ESG shareholder resolutions. That makes sense. It’s an investment risk factor,” says Yang Rohr.

Even as sustainable investing becomes a political football in the United States, pension funds and other asset owners in Europe and North America are adopting sustainable-investment practices for their portfolios, according to a separate study by Morningstar Indexes.

The “Voice of the Asset Owner” survey was based on 14 interviews with asset owners. They generally saw investing using ESG metrics “as a core element of investing rather than a specialist niche,” according to the study.

The respondents said their use of ESG was driven by both client demand and their conviction in the strategy. They used ESG factors because of wider public awareness and support, as well as regulation that endorses asset owners taking a broader view of their responsibilities, particularly in Europe.

“ESG is mainstream, material, and multifaceted,” said Thomas Kuh, head of Morningstar’s ESG indexes strategy. “We heard almost unanimously from the asset owners we interviewed that ESG is a critical part of their investment policy and day-to-day thinking.”

The respondents used ESG to enhance their investment processes and to help drive sustainable development. Most saw ESG as a financial factor and considered ESG objectives as valid goals when pursued alongside—but not at the expense of—financial objectives. There was also “broad agreement among respondents that ESG does not harm investment returns,” Morningstar wrote.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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