Pension funds are challenging asset managers over ESG — What you need to know

Pension funds have been pivotal in shaping the evolution of sustainable finance since the adoption of the Principles for Responsible Investment in 2006. Under the patronage of the United Nations, these funds have pushed banks and asset managers to integrate environmental, social and governance (ESG) factors into investment decisions and shareholder voting practices. Their financial weight is substantial, as pension funds, together with other institutional investors, control the majority of shares in publicly listed companies.

While the largest pension funds manage a portion of their assets in-house, the majority delegate this responsibility to investment specialists, or asset managers. In addition to management, the delegation of voting rights is often entrusted to asset managers or specialised organisations. Historically, the interests of pension funds and asset managers have been relatively aligned. However, this congruence is now undergoing a significant shift. Today, some pension funds oppose the anti-ESG rhetoric and executive orders that have emerged under the Trump administration in the US, and they expect their service providers to follow suit—a challenging feat for many asset managers. 

The emergence of anti-ESG rhetoric

The ESG landscape has rapidly shifted since Donald Trump took office in January. Key developments, such as the US’ withdrawal from the Paris Climate Agreement, opposition to measures that promote diversity, equity, and inclusion, and suspension of regulations mandating large companies to disclose their CO2 emissions, have instigated an anti-ESG narrative. The momentum is set to accelerate in 2025, although the anti-ESG rhetoric had already been gaining ground in previous years, particularly within Republican circles in the US. In the same vein, critics claim that sustainable finance is a vehicle for a “woke” and unpatriotic agenda.

This polarisation is reflected in the behaviour of major US asset managers, who have withdrawn themselves from collective climate initiatives like the Net Zero Asset Managers (NZAM) and Climate Action 100+. Their support for shareholder resolutions on ESG topics have also declined significantly. In 2024, only 1.4% of such resolutions passed with a majority vote at general meetings of major corporations, a stark contrast to the 21% approval rate in 2021, thus marking an all-time low according to a February report by the ShareAction organisation.

Cracks appearing in the asset owner-manager relationship

The negative shift against ESG progression is increasing tensions between asset owners (pension funds) and asset managers. As NordSIP (Nordic Sustainable Investing Platform) notes, “cracks appear in asset owner and manager relations”. Pension funds are speaking out to reaffirm their ESG convictions, including in the United States. For example, CalSTRS, California's teachers' pension fund, has stated that diversity remains one of its “strategic priorities” in its corporate voting and engagement activities. Similarly, CalSTRS’ Vermont counterpart has pledged to vote against any proposals that would reduce diversity on corporate boards. Other pension funds in San Francisco and New York have also echoed similar sentiments.

In Europe, pension funds are putting pressure on asset managers to take greater account of their ESG convictions when voting at shareholder meetings. A recent campaign by Ethos and the Caisse de prévoyance de l'Etat de Genève have targeted major asset managers such as BlackRock, State Street and Vanguard, as well as UBS and Pictet in Switzerland. Additionally, an international coalition of some twenty pension funds has launched a similar initiative focused on climate issues.

When pension funds are dissatisfied with the performance of their asset managers, they may seek to replace them. For instance, The People's Pension in the UK announced at the end of February its decision to withdraw the management of £28 billion from State Street Global Advisors (SSGA), citing the fund’s prioritisation of and commitment to “sustainability, active stewardship and long-term value creation”. 

The fundamental approach

In March, AkademikerPension, a Danish pension fund, announced its termination of a management mandate previously entrusted to SSGA, citing a misalignment with the asset manager's evolving approach to active ownership and responsible investment. As the pension fund put it, “We believe that State Street's modified approach to active shareholding and responsible investment no longer meets our expectations”, and “Our asset managers must align with our fundamental approach and way we see the world”. Similarly, in the Netherlands, the PME pension fund is considering withdrawing from BlackRock's asset management services attributing the stance to a “retreat from responsible and sustainable investing”, according to an internal document reported by IPE at the end of January.

The current political climate is precipitating a rebalancing of power between institutional investors and asset managers, who have long enjoyed a period of relative stability due to their role as investment specialists. Pension funds are increasingly leveraging their position as clients and their weight as major stock market players to assert their preferences and uphold their strategic, ethical and societal values on behalf of policyholders, who are also citizens with vested interests in sustainable outcomes. 

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.