Mass. pension fund ready to send climate change message

Just as they have used their position to push companies on racial and gender diversity, managers of the state's $104 billion pension fund took another step on Thursday toward trying to use the size of the state's investment portfolio to force corporate executives into taking action to address climate change.

The Pension Reserves Investment Management Board later this month will consider a new rule that would direct the fund to vote against directors of companies that don't align their corporate policies with global and state emission reduction targets at annual shareholder meetings.

An alternative to divestment, the strategy is preferred by board chair and state Treasurer Deb Goldberg, who sees the potential to influence corporate behavior by engaging with companies while maintaining the pension fund's fiduciary duty to beneficiaries. The pension fund enjoyed a record setting year in 2021 as it grew to $104.3 billion, a 20.1% increase worth $17.4 billion.

The PRIM Administration and Audit Committee voted unanimously on Thursday to recommend to the full board that pension fund managers vote against directors at companies that have "failed to align their business plans with the goals of limiting global warming to 1.5 degrees Celsius, as set forth in the Paris Climate Agreement, and/or that have failed to establish a plan to achieve net zero emissions by 2050."

"This is the best kind of work to be doing because it not only benefits our beneficiaries but it also has external benefits and it's a productive approach to ensuring economic stability," Goldberg said.

Goldberg last year outlined her intentions to seek this policy change at PRIM in February, building on her efforts over the past seven years to also use PRIM's proxy voting power to push for more racial and gender diversity at companies in which the pension fund invests.

Since taking office in 2015, Goldberg has been behind the move at PRIM to increase its diversity demands of corporations. The fund now has a policy requiring it to oppose or withhold its vote for board nominees at companies where at least 35% of the board isn't diverse in terms of race and gender. The threshold has been increased over time from 25%, and PRIM beginning last year no longer combines racial and gender equity when calculating diversity for the purpose of proxy voting.

Ellen Hennessy, compliance analyst and records access officer at PRIM, said the proxy voting policies resulted in a significant uptick of negative votes in director elections in 2021.

PRIM voted against management in 28% of all votes in 2021, according to Hennessy, and voted no in 94.9% of director elections. The votes against corporate directors were up from 64.9% in 2020 when PRIM calculated diversity by combining gender and race to get to 35%.

Goldberg defended the proxy-voting approach to achieving social change, though she acknowledged that PRIM on its own can't force companies to comply with diversity and climate directives.

"Investors overall — pension funds, foundations and actual investors — have collaboratively begun voting along similar guidelines," Goldberg said. "Consequently, you will begin to see increased compliance and interest and again this is a far better approach in terms of activist shareholders because we in total see this as a true fiduciary duty because of the business risk involved."

While Goldberg and pension officials said they believe companies have begun to take notice of shareholder voting patterns and improve corporate diversity while also producing strong returns for investors, officials said it's "too early" to tell what impact shareholder engagement will have on corporate climate policy.

The approach stands in contrast to actions taken by Boston Mayor Michelle Wu and advocated by some lawmakers and advocates for divestment of pension funds from fossil fuels. Wu signed an ordinance in November to divest $65 million in city investments from companies that profit off fossil fuels.

"Climate change will take longer to show those results, but clearly it is having an effect because companies are aware this is happening," said Theresa McGoldrick, a PRIM Board member and national executive vice president of the National Association of Government Employees.

A Treasury official told the committee that it was monitoring the fate of bills related to divestment, PRIM membership and the incorporation of environmental, social and governance factors into fiduciary duty, and would report back at a future meeting after the deadline for committees to take action passed on Wednesday.

The official also noted that Baker, in his fiscal 2023 budget proposal, proposed a $250 million supplemental transfer to pension fund.

The Administration and Audit Committee voted in support of Goldberg's motion on Thursday to recommend to the PRIM board the establishment of an environmental, social, and governance committee to advise the board on ESG-related matters.

Among its goals for 2022, PRIM officials said they intend to move forward with the investment of $1 billion in capital with diverse and emerging fund managers as part of it progress toward compliance with a 2021 diversity law signed by Baker requiring PRIM to increase the diversity of its vendors to 20%.