School teachers, bus drivers, park rangers, and millions of state and local employees across the US contribute a part of their salary to pension funds, but climate change might leave them short-changed when the time comes to collect their returns. The outcomes of a changing climate—such as drought, wildfires, and skyrocketing temperatures—are already putting a burden on economic systems by impacting food production and the health and safety of workers in many industries. There are “more days where it's too hot to work, more workers being too sick to work, [and] crops declining,” said Allie Lindstrom, a senior strategist at the Sierra Club. That will make a huge dent in economic output. Some estimates suggest that climate change will lead to a 50 percent drop in the global GDP by 2070. If realized, the direct cost of a climate-change-driven economic downturn could be catastrophic for people’s long-term investments. 

While workers may not be able to directly protect their investments against this future, people who manage pension funds can. A report published today by the Sierra Club and Stand.earth found, however, that while some pensions are taking active steps to shield their customers’ finances from risks related to climate change, most of them are not. This report, which also came out last year, highlights the critical role state and local pension fund managers—who are collectively responsible for $3.8 trillion in assets—could and should play in closing that gap. 

Pension funds are distributed across several major corporations and count as shareholders in those companies, meaning they can vote on new projects, appointments to the board, company disclosures on climate and biodiversity impacts, and the adoption of sustainability targets. Through their proxy votes, these types of large shareholders have outsized influence on corporate decisions. On the other hand, pensions have diverse portfolios, which makes them vulnerable to systemic risks that could affect the broader economy. Beyond the profits of an individual company, fund managers have to consider the ripple effect of a company's activities, such as its lobbying practices and supply chains, said Lindstrom, who coauthored this report. Along with Jessye Waxman, coauthor of the report and a campaign adviser at the Sierra Club, Lindstrom sifted through voting guidelines the pensions have laid down for themselves, as well as their voting pattern on climate change and sustainability issues, and found some evidence of strong commitments amid wider inaction. 

Both in last year’s report and this year’s, New York State Common Retirement Fund was graded very highly. Going back to 2019, Thomas DiNapoli, state comptroller and trustee of the Common Retirement Fund (NYS CRF), worked with then–New York State Governor Andrew Cuomo and a panel of experts to create a Climate Action Plan to make the fund sustainable over the next decade. Their website states that managing climate change risks is “integral to protecting the Fund’s investments” and “capitalizing on the opportunities that arise from the transition to a net-zero economy is similarly critical to ensuring that the Fund is best-positioned for market changes stemming from the transition.” Since last year’s report, Massachusetts Pension Reserves Investment Management (MassPRIM), Connecticut Retirement Plans and Trust Funds (CRPTF), and others have also moved to take a stronger position on climate risks. The change in position at MassPRIM came about through calls from Massachusetts community organizations who met the pension managers to consult on their new voting guidelines. 

In 2024, these pensions, as well as those in California, voted in favor of corporations disclosing and committing to reducing the climate impacts of their businesses, but they did not take a strong position on biodiversity conservation and environmental justice. No pension held any of the board of directors accountable to these commitments. Sierra reached out to MassPRIM, NYS CRF, CRPTF, and New York City Retirement Systems, but the pensions either declined to comment on the report or did not respond to requests for comment.

Measures to protect against broader systemic risks of climate change are a core part of the fund manager’s job, which requires them to take the long view to account for “a nurse who's retiring today, but also for that school teacher who's just stepping foot in her classroom [...] to have that compensation available to her in 30 years,” said Frances Sawyer who is a founder at Pleiades Strategy. 

Most of the pensions Lindstrom and colleagues analyzed did not account for climate risks in their voting guidelines or voting patterns, however. “The pensions that have done better, like MassPRIM, had the support of their beneficiaries or individuals who provided the internal impetus for that change in thinking,” said Lindstrom 

Efforts to block climate action may also be an important factor, which Sawyer and her team at Pleiades Strategy track. In recent years, she said rising awareness of climate-related risks and shareholders demanding corporate accountability has led to a backlash from right-wing groups and think tanks against frameworks that look at the broader social and environmental implications of business practices—also known as environmental, social, and governance, or ESG. 

Many states that failed the report’s grading criteria, such as Arizona, Florida, Indiana, Missouri, North Carolina, Tennessee, Texas, and Virginia also have strong anti-ESG laws. To date, there are 44 such laws in 21 states—19 of which specifically target pension investments. 

Anti-ESG efforts focus on limiting public sector pensions from dealing with corporations that have climate goals and stifling their ability to leverage voting power. In June 2023, for example, North Carolina’s state legislature passed H750, a bill that prevents the state from using ESG criteria to select contractors. “It's shrinking the pool of available contractors for pension funds,” Sawyer said. These anti-ESG laws, which effectively ask fund managers to put on blinders for the risks of climate change, are, according to Sawyer, deeply unpopular even in the banking and business sectors, where they are seen as government overreach. So much so, that “only about 10 percent of the proposed laws have passed,” she said. 

Despite being unpopular, though, they contribute to a broader “chilling effect,” Lindstrom said, which may prevent fund managers from considering factors other than the short-term performance of their investments. Regardless, “it is the responsibility of these big fund managers to see through the political rhetoric and to be able to act in the best interest of their plan members,” said Sawyer.  

Pension beneficiaries and community members can also voice their concerns, Lindstrom said. And the next couple of months will be crucial. Most companies have their annual general meetings between March and May. Leading up to these meetings, fund managers will be approving new guidelines. 

In the next year, Lindstrom expects the anti-ESG actions to continue particularly in states where they are already most prevalent, but the managers will “continue to refine their strategies. They will continue to see pressure from beneficiaries who are retired or want to be assured that they will get their pension benefit 30 years from now,” she said. “It is a challenging environment to do this work, but … if anything, it becomes more important as the federal regulatory environment changes,” she added.