ESG Investing and Public Pensions: An Update

Public pension funds have engaged in social investing since the early 1970s, when several states passed laws to screen out ÒsinÓ stocks, such as tobacco, alcohol, and gambling. The practice was broadened in the early 1980s in the wake of a major campaign to encourage pension funds and others to divest from companies doing business in South Africa. States have also aimed to achieve domestic goals, such as promoting union workers, economic development, and homeownership. In the mid-2000s, the focus shifted to Òterror-freeÓ investing in response to the Darfur genocide and to weapons proliferation in Iran. And, after mass shootings in Aurora, CO and Newtown, CT, some public funds shed their holdings in gun manufacturers. In the last few years, state legislation has renewed the call to divest from Iran and has increasingly targeted fossil fuels to combat climate change. Interestingly, a ÒnewÓ form of investing Ð called ESG (environmental, social, and governance) Ð has gained traction among public plans themselves Ð as opposed to being imposed by state legislatures. A key tenet of ESG investing is that certain non-financial factors Ð such as a firmÕs environmental impact, its relationship with communities where it operates, and its management culture Ð are also relevant to longterm value. Proponents believe that, by integrating these ESG factors into existing methods of financial analysis, investors can both earn higher returns and promote socially beneficial practices and outcomes. This brief explores whether this new form of investing can fulfill its claims.