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Pension Funds Stand Firm on Climate Commitments Amidst ESG Backlash
Despite a recent trend of major U.S. banks and asset managers withdrawing from net zero alliances – groups promoting ambitious carbon reduction targets and international collaboration on sustainability – some financial institutions are doubling down on their environmental pledges. In a notable move, the New York City Employees’ Retirement System (NYCERS), a significant pension fund, joined the Net Zero Asset Owner Alliance, a United Nations-affiliated climate action group for long-term investors, signaling a continued commitment to sustainable investment and climate risk management even as ESG (Environmental, Social, and Governance) principles face increasing scrutiny.
NYC Pension Fund Joins UN Climate Alliance
NYCERS’ decision to join the Net Zero Asset Owner Alliance shortly after Donald J. Trump’s re-election victory was not pre-planned, according to Brad Lander, the city comptroller overseeing New York City’s finances. However, Lander, now a mayoral candidate, acknowledged that “we were pleased that the timing sent an important signal,” underscoring the significance of collective action by major asset owners on climate change.
“It is far more important than it was for pension funds and other large asset owners to take collective action at this moment,” Mr. Lander emphasized, highlighting the urgency of addressing climate risks within investment strategies.
Pension Funds as Bulwarks Against Climate Risk Sidelines
Amidst growing opposition to environmental, social, and governance (ESG) goals and investment strategies, pension funds, particularly in politically liberal states and Europe, have become key defenders against attempts to diminish the importance of climate-related risks. These institutions, positioned at the apex of the investment hierarchy, have intensified their engagement with asset managers and corporations regarding climate objectives.
Public commitments to deploying their financial influence to curb carbon emissions remain steadfast. In certain instances, this dedication has led to a preference for European asset managers, who have demonstrated greater resilience in upholding climate commitments compared to some of their American counterparts.
NYC Pension Funds Lead Shareholder Engagement
Mr. Lander’s office manages investments for five public pension funds serving 700,000 current and former city employees. These funds are actively pursuing engagement strategies, presenting more shareholder resolutions to banks demanding transparency on the proportion of their fossil fuel investments versus clean energy ventures. Similar resolutions are being directed to utility companies concerning their climate targets.
A recent court ruling, which upheld the dismissal of a lawsuit against three of the funds for divesting from certain fossil fuel investments, has further emboldened their approach.
Fiduciary Duty Drives Climate-Focused Investments
Pension fund managers, including Mr. Lander, assert that their motivations are rooted in fiduciary duty and long-term financial sustainability, rather than political ideologies or purely environmental agendas. They maintain that considering climate risks is paramount to securing sustainable returns for beneficiaries who depend on these funds for retirement income decades into the future.
PensionDanmark Highlights Alliance’s Fiduciary Focus
Peter Stensgaard Morch, CEO of PensionDanmark and a steering group member of the Net Zero Asset Owner Alliance, clarified that the alliance’s work is “the opposite” of activism. In a written statement, he emphasized that their efforts are fundamentally driven by the fiduciary responsibility of its members to pursue optimal returns for their beneficiaries within a framework that recognizes climate-related financial risks.
Diverging Approaches to Climate Action
Pension funds’ recent actions contrast sharply with other institutions that are moderating their climate commitments. For example, a net zero banking group is contemplating scaling back its pledge to align bank portfolios with the 1.5 degrees Celsius global warming limit. Furthermore, some major energy corporations, such as BP, have reduced their investments in renewable energy sources. Adding to this trend, the European Commission recently proposed easing climate reporting regulations for businesses, voicing concerns that the existing rules were overly burdensome and could hinder economic growth.
Political Pressure Divides US and European Approaches
The UN asset owner group, comprising pension funds, insurers, foundations, and other long-term investors, has shown greater resilience compared to its counterparts. Asset managers, facing pressure from clients in both conservative and liberal states, have retreated from previous public pledges related to climate goals. The UN group for asset managers, which previously included BlackRock, has suspended operations, and the banking sector’s net zero group has witnessed the departure of 17 major members in recent months.
Intense political and legal challenges in the United States, particularly from states with anti-ESG legislation, have pressured asset managers to withdraw from climate action groups. This pressure has widened the divide between Europe and the United States regarding sustainability initiatives.
British Fund Shifts Assets to European Managers
The People’s Pension, a British fund with approximately £32 billion ($41 billion) in assets managing pensions for nearly seven million individuals, recently shifted a significant portion of its assets away from State Street, its sole U.S.-based asset manager. The fund opted for Amundi, a French company, and Invesco, seeking asset managers with stronger sustainability credentials that aligned with its responsible investment principles, according to Dan Mikulskis, the chief investment officer.
“We don’t interact directly with companies,” Mr. Mikulskis explained. “We rely on asset managers to do that for us,” emphasizing the critical role of asset managers in implementing responsible investment strategies.
Asset Manager Divergence on Climate Stewardship
During the year-long search process, Mr. Mikulskis noted a “divergence” in approaches among asset managers regarding climate action. This divergence, while challenging, ultimately facilitated the identification of managers whose approaches best suited his fund’s requirements.
Recently, a coalition of 27 pension funds, predominantly from Europe, issued a call to asset managers globally, urging them to enhance their stewardship practices in addressing climate change risks and to remain engaged in collaborative initiatives. They highlighted a “divergence” between the expectations of asset owners and the actions of asset managers regarding climate stewardship.
Study Confirms Asset Owner – Manager Discrepancy
This perspective is supported by a study conducted by Principles for Responsible Investment, which revealed that among its roughly 3,000 signatories, asset owners were considerably more inclined to adopt a long-term perspective in identifying climate risk and to utilize climate scenario analysis compared to the asset managers they entrusted with investment responsibilities. This underscores the need for closer alignment between asset owners and managers in climate-conscious investing.
Short-Term Pressures Slow Climate Progress
Diandra Soobiah, head of responsible investment at Nest, a British state-backed pension fund managing £48 billion ($62 billion) in assets, observed that progress on corporate climate action is decelerating due to immediate pressures, such as escalating energy prices. These short-term economic factors are creating headwinds for long-term sustainability transitions.
“These pressures have had an impact, but what we are trying to do as long-term investors is really talk about the importance in managing these long-term risks,” Ms. Soobiah stated, reiterating the enduring need for businesses to prepare for a global energy transition. “We still believe the world is going to have to transition, and want them to be prepared,” she concluded, emphasizing the long-term financial imperatives of climate preparedness.
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Philanthropy Under Strain Amidst Federal Cuts
As federal spending reductions take effect across Washington, nonprofit organizations are preparing for significant financial challenges. Government funding is crucial for the nonprofit sector, and impending cuts pose a serious threat to their operations and ability to serve communities.
The federal government allocates approximately $303 billion annually to over 100,000 U.S. nonprofit entities, supporting a wide array of initiatives from local community projects to international aid programs, according to Candid, a research organization tracking the nonprofit sector. These funds are now increasingly at risk.
Deep spending cuts at agencies including the United States Agency for International Development (USAID) and the National Institutes of Health (NIH), in line with the administration’s agenda to reduce government spending and curtail support for issues like climate action and diversity initiatives, are putting these vital funds in jeopardy. Elon Musk recently characterized nonprofits as “a giant graft machine,” adding to the challenging environment faced by these organizations.
Nonprofits have been actively engaged in strategic planning, holding discussions in boardrooms and via video conferences to determine the best strategies to sustain their operations in the face of anticipated funding shortfalls. A primary solution under consideration is seeking increased financial support from private donors and foundations. However, the capacity of private philanthropy to fully compensate for government cuts is limited.
Limited Capacity of Private Philanthropy
“Filling the gaps would be impossible,” stated Rick Cohen, chief operations officer for the National Council of Nonprofits in Washington, in an interview with DealBook. He estimates that government contracts account for approximately 30 percent of nonprofit revenues, highlighting the significant impact of potential funding reductions.
The central question facing nonprofits is: “So what now?” How can they navigate this challenging funding landscape and maintain their essential services?
Philanthropic Giants Respond to Funding Gap
Some major philanthropic organizations have indeed responded to the anticipated federal cuts by increasing their giving. The MacArthur Foundation, with assets of $8.6 billion supporting programs in arts, environmental protection, and other areas, has announced increased grant spending for a minimum of two years, demonstrating a commitment to mitigating the impact of government funding reductions. Similarly, Michael Bloomberg, founder of Bloomberg Philanthropies, announced that his organization would address funding shortfalls in climate projects, mirroring their actions during the previous administration.
However, foundations, which currently provide approximately $107 billion annually to nonprofits, according to Candid, cannot fully offset government funding cuts. Furthermore, some experts caution that attempting to do so might inadvertently undermine the case for continued government support.
Concerns of Creating Illusion of Stability
Increasing private donations carries the risk of creating a false impression of financial stability. Nonprofit organizations and philanthropy experts have expressed concerns to DealBook that increased private giving might mistakenly signal to the public and policymakers that nonprofits can operate effectively without government assistance. This misperception could have detrimental long-term consequences for the sector’s funding landscape.
“We cannot in any way create the conditions for the argument of ‘Send it all in our direction,’” cautioned Jeff Moore, chief strategy officer for Independent Sector, a coalition of U.S. corporate and nonprofit philanthropies based in Washington. “There is not enough money in the philanthropic universe to do what the federal government does,” he asserted, underscoring the crucial and irreplaceable role of government funding for the nonprofit sector.
Nonprofits Scramble for Resources Amidst Bureaucratic Hurdles
Nonprofits are facing a frantic scramble for funding from various sources. Even in cases where federal grant programs remain active, staffing reductions within government agencies have significantly hampered grant processing. “There’s nobody there to send their application for funding to,” remarked Mr. Cohen, highlighting the operational challenges created by government office staff shortages.
Simultaneously, non-governmental donors are experiencing an overwhelming surge in requests for financial support. Laetitia Cairoli, development director for Oasis Haven for Women and Children in Paterson, N.J., explained that while seeking to replace an anticipated $500,000 in federal grant losses, she has been informed by both New Jersey state officials and private donors that they are inundated with funding requests. “They are seeing increased pressure on the funds,” she noted, illustrating the widespread financial strain across the philanthropic landscape.
Private Funding Also at Risk Amid Political Climate
Even private funding sources are becoming less secure due to the current political climate. Corporate executives are increasingly cautious about any activities perceived as politically sensitive, including the philanthropic programs their companies support. This heightened sensitivity is impacting funding decisions across various sectors.
The Howard Hughes Medical Institute, for instance, canceled a $60 million program aimed at enhancing student diversity in science and medical education. Similarly, the Chan Zuckerberg Initiative, Mark Zuckerberg’s philanthropic organization, discontinued funding for diversity and immigration-reform programs, citing “the shifting regulatory and legal landscape” as a key factor in their decision. Adding to this trend, the Gates Foundation recently implemented significant cuts to its climate program, Breakthrough Energy, as Bill Gates seeks to improve his relationship with the current administration.
“There has been a big backing away from anything that could be seen as woke,” observed Mr. Bishop, highlighting the chilling effect of political polarization on philanthropic giving. He suggested that even supporting events like gay pride marches or local libraries might now be considered too risky for some donors. “Companies don’t want to bring attention to themselves,” he explained, indicating a growing risk aversion among corporate donors.
Looming Tax Policy Battles
An impending tax policy debate in Congress could further exacerbate the financial challenges faced by nonprofits. As Congress works on the annual budget bill, the tax-exempt status of nonprofit organizations is emerging as a contentious issue. Philanthropic organizations are advocating for a universal charitable deduction, which would allow taxpayers who utilize standard deductions to still deduct charitable donations on their tax returns. Conversely, the administration is seeking to scrutinize and potentially eliminate tax exemptions for organizations deemed to be engaged in political activities. Losing tax-exempt status represents a worst-case scenario for nonprofits. “That could cost them millions and millions of dollars,” Mr. Bishop warned, emphasizing the high stakes of this policy debate.
Nonprofits in Triage Mode
Nonprofit organizations find themselves in “triage mode,” focusing on immediate survival and resource allocation. Operational adjustments, which proved sufficient during previous periods of uncertainty such as the prior administration and the pandemic, are no longer adequate to address the scale of the current funding crisis. “The cuts are so broad and so deep, food banks cannot get the food they were promised,” stated Mr. Cohen, illustrating the severity of the impact. His organization, the National Council of Nonprofits, representing 30,000 nonprofits and donors, was involved in a lawsuit that successfully secured a temporary injunction against the administration’s blanket federal funding freeze in January. The final outcome of this legal challenge remains undecided.
For the foreseeable future, nonprofits are likely to prioritize triage tactics, preserving essential programs while scaling back operations. “Figuring out which programs you really need to survive is an important strategic question,” advised Mr. Bishop, emphasizing the need for difficult resource allocation decisions. “It’s necessary to be ruthless in cutting free those you don’t feel are essential and doubling down on those that are right,” he concluded, highlighting the difficult strategic choices nonprofits must make to navigate the current funding climate.
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