Part 2: What Pension Funds Can Do to Protect Themselves and Advance Responsible Investing
With increasing federal and state-level challenges to responsible investing, pension funds must proactively defend their fiduciary duty and investment strategies. As regulatory oversight weakens and political attacks escalate, funds that fail to solidify their policies and engagement strategies risk losing control over their ability to manage long-term financial risks, particularly those tied to climate change.
Fortunately, pension funds have powerful tools at their disposal—from strengthening investment policy statements and proxy voting guidelines to conducting risk analysis and enhancing stakeholder engagement. Keep reading to discover actionable strategies to ensure funds remain resilient and advance responsible investment practices despite shifting policies.
Strengthening investment policies, enhancing proxy voting guidelines, and proactively engaging stakeholders can protect financial health and the ability to influence corporate accountability.
Fortify foundational policies to make the explicit and evidence-based connections between sustainable investing and stewardship as core to its fiduciary duty
Investment Policy Statement
The Investment Policy Statement and the Corporate Governance or “Stewardship” Policy are foundational policies. Ensure those policies explicitly name the responsibility to tackle climate risk and confirm that effective investment practices, proxy voting, and corporate engagement are core to its responsibility to handle materiality and financial risk. Amid the ERISA rule rollback, this can also offer clarity and cover (pg 8) that accounting for environmental and social implications in risk and opportunity management is essential for long-term value creation and fund resilience.
Strategic Asset Allocation
A fund’s Asset Allocation Strategy that proactively manages and mitigates climate risk is essential to connect its sustainable investment decisions to its fiduciary duty. This tool in investors' toolbox helps them responsibly transition from high-risk portfolios, such as investments in companies exposed to climate-related vulnerabilities, to more sustainable, resilient investments-- making it clear that this is the fund's core responsibility of protecting retirement security for all its beneficiaries. See here for five factors of a strong SAA.
Proxy Voting Guidelines and Corporate Governance Policies
Four ways to protect your capacity for shareholder engagement to help protect from risk:
Make sure your guidelines include direction that the fund will vote out directors of companies that fail to align their business practices consistent with 1.5 C degree warming; and will vote for resolutions calling companies to disclose their climate emissions, climate and environmental impacts, transition plans, and lobbying activities.
Clearly define ESG-related issues to address through proxy voting as a matter of material risk management, including climate risk– and state the intersection between the impact of climate, racial and economic equity, and governance practices.
Incorporate stewardship mandates into voting, and establish clear voting rationales for votes that are needed to demonstrate fulfillment of fiduciary obligations.
Develop corporate engagement priorities, plans, and goals that directly speak to where the fund has higher risk and/or opportunity.
Due Diligence policies and capacity for implementation
Amid increasing uncertainty and chilling effects among asset managers, a strong and explicit due diligence policy will ensure that external asset managers' investment decisions, engagement and proxy voting performance put your investment goals and corporate engagement strategies into practice. See here for sample benchmarks and practices, including:
External asset managers: Develop standards, questionnaires, and evaluations to fully understand how asset managers integrate climate risk into mandates.
Stewardship: Make sure the pension fund has the necessary staff direction and capacity to maintain regular communication before, during, and after the shareholder season. This will facilitate access to data and implementation procedures from asset managers and proxy service providers, ensuring alignment with the Proxy Voting Guidelines (PVG) across public equities. If the fund relies on proxy service providers, consider creating custom proxy voting guidelines to ensure they align with the fund’s objectives.
Private Markets: Set expectations for PE general partners to provide transparency reports on fees, returns, and audits of the companies they invest in; and incorporate labor and climate-related risk management in how they manage the companies they invest in. Consider developing specific labor principles for PE general partners.
Conduct risk analysis to demonstrate investment, transition finance, and corporate engagement efforts directly serving the fund’s risk management and opportunity.
Integrate a formal risk analysis and research capacity to understand exactly where risk resides, along with a transition-readiness analysis to better forecast where risk will emerge if not addressed. Pursuing an opportunity analysis will also make a strong fiduciary case for deliberate commitments and strategies toward investments that support climate solutions, sustainable working conditions, and a just transition for local workforce and community prosperity.
These analyses, grounded in strong data frameworks, set up a fund to develop corporate engagement priorities and action plans for optimal fiduciary protection and impact.
Stronger information accessibility, communications, and stakeholder engagement.
The federal strategy aims to instill fear among institutional investors, with the goals to both hinder progress and weaken their ability to form a strong coalition for protection.
A deliberate strategy to enhance transparency and engage with the fund’s key stakeholders—such as financial officers, trustees, staff, beneficiaries, and public officials responsible for oversight—is essential. Shying away from ensuring these stakeholders are aware of pension developments geared to protect the long-term health of the fund creates a missed opportunity for building a strong case, establishing credibility, and providing protection against politically ideological attacks on responsible fund management. Stronger communications can lead to more shared understanding and support for pension protection and responsible oversight.
There are several ways a fund can make improvements, as seen here. The lynchpin is to ground all enhancements and new practices as directly serving the pension system’s effective governance.
Tools for Resilient and Responsible Investment Strategies
As pension funds navigate increasing political and regulatory challenges, reinforcing fiduciary stewardship and responsible investment strategies is more critical than ever. Strengthening investment policies, enhancing proxy voting guidelines, and proactively engaging stakeholders can protect financial health and the ability to influence corporate accountability.
But these efforts don’t happen in isolation—staying ahead requires collaboration, continued learning, and strategic action. Explore CFA’s resources to dive deeper into fiduciary stewardship, shareholder power, and climate-risk mitigation strategies that protect both investments and the dignity of retirement for workers.
