State Public Pension Funds Have a Compelled Speech Problem

State public pension funds that have invested roughly $3 trillion according to environmental, social, and governance principles are risking more than just their returns. By using public employees’ retirement contributions to advance ESG, public pension funds expose themselves to First Amendment challenges that may cause these funds—and, by extension, state and local governments—significant financial distress.

To understand why, consider the landmark decision of Janus v. AFSCME. There, the US Supreme Court held that states couldn’t require non-union employees who disagreed with the speech of a public union to contribute to that union, even though the union was negotiating on behalf of those employees along with the employees who supported its cause. This was because such a requirement “violate[d] the free speech rights of nonmembers by compelling them to subsidize private speech on matters of substantial public concern.”

That rationale likewise applies to public pension funds’ use of mandatory state employee contributions to advance ESG objectives. Take, for instance, the California Public Employee’s Retirement System. As the nation’s largest public pension fund, CalPERS has more than two million members and a total fund market value of nearly $500 billion. By law, California state employees must contribute to CalPERS, which has a fiduciary responsibility to invest those funds to ensure payment of retirement benefits.

Yet CalPERS uses those contributions to amplify its views on controversial ESG topics in the financial market through public statements, engagements with corporations, and proxy votes. For example, CalPERS signed the Climate Action 100+ initiative and joined the United Nations Net Zero Asset Owner Alliance. In letters to its portfolio companies, it has instructed corporate boards and senior management to “[t]ake action to reduce greenhouse gas emissions across their value chain, consistent with the Paris Agreement’s goal.”

And, in proxy contests, CalPERS has voted its shares in favor of proposals that would have required companies, such as Lowe’s and Walmart, to strategize about how to address state laws restricting abortion access. The message to corporate boards—backed by CalPERS’ significant capital funded by employee contributions—is clear: adopt CalPERS’ stance on various ESG issues or face consequences.

Corporations are taking note. CalPERS, for instance, has engaged over 800 companies about adding diverse directors to their boards and roughly 73% of those companies have since done so. Similarly, 17 of the 22 companies that CalPERS engaged with regarding climate change have now set an emissions target of net zero by 2050.

Regardless of the merits of these actions, they go to matters of public concern. In Janus, the Supreme Court called climate change a “sensitive political topic” and the California state legislature itself was divided about laws requiring publicly traded companies to have women and racial and ethnic minorities on their boards or face financial penalties.

Of course, CalPERS will likely respond that it’s engaged in long-term value investing, and that such investing constitutes government speech outside the protection of the First Amendment. But even assuming that such initiatives do generate long-term value, that fact doesn’t preclude those initiatives from also expressing views on important political issues. Indeed, considering that certain red states, such as Florida and Texas, have or are considering legislation to prohibit ESG-based investing by their pension funds, it seems clear that ESG investing isn’t apolitical.

Plus, public pension funds may not be government speakers for First Amendment purposes, given that their own members often elect their boards and investment decisions are left to the discretion of the boards, not state legislatures. Many employees further retain some form of property interest in their contributions, given that those employees are often entitled to their contributions if they leave their employment and pension funds are bound by fiduciary duties when investing. Finally, compelled association with a group such as CalPERS can’t be government speech.

If the Supreme Court were to recognize such contributions as compelled speech, public pension funds would no longer be able to require employees to contribute to the funds without the employee’s consent. State employees, moreover, might withdraw all of their existing contributions from the fund—similar to lump sum buyouts in the private sector—if those funds persist in promoting ESG. Such withdrawals, combined with the reduction in ongoing contributions, would have serious fiscal effects for public pension funds—those funds are estimated to have funding ratios below that of the federal limitations on buyouts in the private sector.

Hence, public pension funds—and the state and local governments that have promised state employees generous pension benefits—aren’t just risking the stock market by endorsing ESG. They invite serious legal challenges that may leave taxpayers holding the bag.

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

Author Information

Mark Kubisch is assistant professor at Pepperdine University’s Caruso School of Law. His research focuses on ESG and corporate law issues.

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