Rejecting Climate Change and ESG Risks Breach of Fiduciary Duties

At the behest of their fossil fuel backers, Republicans are waging a multifront war to strongarm bankers and pension fund managers into downplaying the financial risks posed by climate change. These tactics are chilling urgent climate action and may actually be fueling unlawful behavior.

Last year was another blockbuster of expensive climate-driven disasters, costing at least $165 billion in the US alone. Florida’s Hurricane Ian topped the list with $113 billion in insured and uninsured losses, threatening to financially ruin the state’s homeowners and insurers.

Anti-ESG Wave

Against this backdrop, Florida Governor Ron DeSantis has used his pulpit to attack any consideration of environmental, social, and corporate governance issues like climate change and employee well-being when deciding how to invest state retirement funds.

Republican governors are also prohibiting contracts with companies that consider sustainability, despite studies estimating that doing so could result in $97 to 361 million in additional interest costs for Florida alone—costs borne by the governor’s constituents.

More recently, US attorneys general from Florida and 24 other states filed a lawsuit to stop a newly promulgated federal rule that allows private retirement plans to consider ESG factors, even when they are relevant to financial risks and returns.

DeSantis claimed he is “prioritizing the financial security of the people of Florida over whimsical notions of a utopian tomorrow.” He apparently sees no relationship between the financial security of Floridians and the mounting risk posed by climate change, which is already wreaking physical and financial havoc on his constituency.

DeSantis’s assault on responsible investing mirrors dozens of other anti-ESG bills popping up across the country, including in Texas and Indiana, where studies show they would be financially costly.

A closer examination reveals these bills are originating from the American Legislative Exchange Council, a fossil fuel industry-funded think tank, calling into question whose interests are ultimately being served.

Financial Risk

Pension fund fiduciaries are required by law to act exclusively in the interest of retirement plan participants and beneficiaries—and to exercise prudence when doing so. Those duties require an eye to the future and attention to realities that may affect investment returns today and tomorrow.

Pension funds are uniquely obliged to protect the long-term value of their investments to maximize the financial well-being of current public retirees as well as future beneficiaries.

And prudence requires considering factors that are relevant to a particular investment or investment strategy. Both have clear implications with respect to climate change.

Most financial regulators and financial institutions agree climate change is a source of financial risk, particularly in the longer term. Swiss Re, a major insurance company, estimates that unaddressed climate change could cut global economic output by $23 trillion by 2050.

The US Financial Stability Oversight Council, authorized to identify and mitigate emerging threats to the country’s financial stability, also recognizes the dangers posed by climate change.

Climate-induced physical damage and shifts in consumer behavior and regulation could destabilize the normal functioning of the financial system and lead to serious negative consequences for the economy.

The production and use of fossil fuels and their derivatives are primary drivers of the climate crisis, representing the overwhelming majority of global emissions.

Unsurprisingly, the most significant climate-related financial risks to retirement savings are related to investments in fossil fuels, which could be substantially devalued as the clean energy transition accelerates and fossil fuel companies are hit with litigation.

A recent study found that the Colorado Public Employees’ Retirement Association lost $2.7 billion over the last decade by not divesting from fossil fuels.

The New York State Retirement Fund is undertaking a process to divest its $226 billion retirement fund from fossil fuels, and more states are following with climate action precisely because of their long-term financial risks.

Time to Act

Considering and addressing climate change is critical to protecting the multi-generational value of pension funds and supporting pensioners’ overall financial well-being.

The effects of climate change are being increasingly felt by households across the US, whether in the form of rising insurance premiums, house repairs, or moving costs in the face of forest fires and floods, or medical bills due to deadly heat waves and freezing blizzards.

These financial consequences are expected to increase as climate change worsens. Ignoring them could constitute a breach of pension fund managers’ fiduciary duties.

Instead of trying to mitigate these financial losses, the recent anti-ESG frenzy is poised to increase them. As the financial risks and economic realities of climate change become more apparent, anti-ESG initiatives in Florida and other states are very likely compromising long-term interests of state pensioners and beneficiaries for the sake of political gain.

This may not only be immoral—it could very well be unlawful.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Hana Heineken is a senior attorney in the climate and energy program at the Center for International Environmental Law.

Nikki Reisch is the director of the climate and energy program at the Center for International Environmental Law.