Progressive state and city officials are pushing back against the right's war on 'woke capitalism.' They could be doing even more with trillions of dollars in pension funds.

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Illustration by Alex Nabaum

This article appears as part of a special issue of The American Prospect magazine on state policy divergence and aggression. Subscribe here.

Public pension funds hold about $5.85 trillion in assets to finance worker retirement. These amount to America's largest pools of public capital. They are subject to a variety of federal fiduciary rules under the IRS as well as state laws. The prime duty of pension fund trustees is to serve current and future pensioners by optimizing the rate of return, consistent with prudence. However, as long as they do not depart from that investment imperative, they have wide latitude to serve other social goals.

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Among those are conditioning pension fund investments on good labor practices; affirmatively investing in housing and other social goods; and serving broader goals often known as ESG, which stands for environmental, social, and governance. Several state and local pension funds, like the California retirement funds for public employees (CalPERS) and teachers (CalSTRS), have long used ESG criteria in directing their investments. CalPERS's latest labor standards, which apply to its entire portfolio, include freedom of association and the right to collectively bargain; a ban on forced labor, child labor, and discrimination; and provisions on a safe, healthy work environment.

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Progressive city and state treasurers also sometimes intervene in proxy fights over labor or ESG policies, or use their investments as direct leverage over company practices. In addition to pension funds, states raise serious money in the bond market, which also gives them potential influence over the practices of financial firms. The municipal bond market contains $4.1 trillion in outstanding loans.

Blue states and cities hold much more public capital, yet the most aggressive actions in corporate governance lately have been taken by red states. This literally leaves money on the table that could be used to pursue broad public goals and resist red-state efforts to intimidate corporations. This money power is among the most high-impact strategies available to counter conservative aggression at the state level.

CONSERVATIVE INTELLECTUALS AND RIGHT-WING OFFICIALS in states such as Texas and Florida have declared war on what they call "woke capitalism." They are demanding that public pension plans in their states and cities boycott corporations that subscribe to ESG principles (as feeble as many are), as well as pressuring large financial firms that hold pension investments or underwrite bonds to disavow ESG. A major co-conspirator in this effort is the oil and gas industry, which stands to lose as corporations and financial companies commit to zero-carbon targets.

Texas's far-right attorney general Ken Paxton has been on a crusade to leverage Texas bond placements to undermine the climate commitments of financial companies. Last November, Paxton sent a letter to all bond counsel, warning that under Texas law, Barclays, a member of the Net Zero Alliance, which seeks to align financial investments with eliminating greenhouse gas emissions, could be classified as a "fossil fuel boycotter." In January, Paxton followed up with a letter declaring that Barclays would no longer be allowed to participate in Texas bond markets.

Paxton's actions are partly ideological and partly aimed at defending Texas oil and gas interests from green-energy incursions, based on a 2021 law known as SB 13, which bars Texas from investing in or contracting with businesses that, in the state's view, "boycott" the oil and gas industry. Paxton's close ally, Texas Comptroller Glenn Hegar, maintains a blacklist of 16 financial companies and more than 350 investment funds whose ESG policies he believes impermissibly target fossil fuel-based energy. These include some of the largest financial companies, such as BlackRock. In March, the Texas Permanent School Fund said it would yank $8.5 billion of assets under management from BlackRock.

One vexing challenge for socially engaged pensions funds is what to do about private equity.

While most large financial companies have not caved in to this pressure, a few have. In August 2023, in response to legal threats by the Texas attorney general, S&P Global Ratings announced it would no longer publish new ESG credit indicators or update outstanding ESG credit indicators.

Attorneys general in Democratic states have begun pushing back on this, with some assistance from the Biden administration. In 2022, the U.S. Department of Labor issued a rule explicitly permitting the use of ESG criteria in pension investments it oversees as long as they were financially prudent. The action overturned a 2020 Trump administration rule intended to discourage such investments.

This enraged the right. In response, Republican legislators and state officials mounted a pressure campaign to repeal the rule. Bills were introduced in Congress, with titles like the "Roll Back ESG to Increase Retirement Earnings Act." In January 2023, Paxton and other Republican AGs sued the Biden administration, demanding that the Labor Department rule be revoked.

The lawsuit failed, but is on appeal. Paxton's strategy is more about intimidating pension funds and financial companies that hold public assets. Democratic AGs, led by Keith Ellison of Minnesota, fought back. Last December, Ellison and 17 other AGs sent a 27-page legal brief to congressional members and leaders laying out both the legal and financial case for ESG criteria in pension fund investments, adding that slowing climate change improves overall economic performance and that "a company's exposure to climate change risks is often a material factor under a long-term investment horizon."

BEYOND THIS TIT FOR TAT, WHAT ARE BLUE STATES and cities doing proactively? Among the most creative is New York City, whose five public employee pension funds are together the nation's third-largest pool of state pension fund capital, after CalPERS and CalSTRS. New York City has become even more creative since Brad Lander, a Working Families Party-endorsed former city councilman, was elected comptroller in 2021.

In New York, the comptroller has a great deal of influence over pension fund investment allocations. Some of this takes the form of affirmative investments. Often it involves pressuring or negotiating with companies in which the city pension funds invest, either as direct investments or through financial companies.

Earlier this year, it came to Lander's attention that the one large non-union hotel on the Las Vegas strip, the Venetian/Palazzo, previously owned by the notorious Sheldon Adelson, had been sold after Adelson's death to Apollo, a private equity company. As it happened, New York pension funds had money invested in Apollo.

"They wanted us to put in another billion dollars," Lander told me. So he began negotiations with Apollo to end the union busting. The result was a card-check neutrality commitment, made in June 2023. The hotel's more than 4,000 workers voted union and are now proud members of Nevada's powerful Culinary Workers Union, Local 226 of UNITE HERE, as well as Bartenders Union Local 165. In late August, they ratified the Venetian's first-ever union contract, making the entire Las Vegas Strip 100 percent union.

Key New York unions, such as the United Federation of Teachers, two SEIU locals, and AFSCME, encouraged Lander's tough stance, as did the AFL-CIO. This victory was something of a fortuitous one-off, but it reflects the ongoing commitment of Lander and the New York City pension funds to look for points of leverage that go well beyond boilerplate ESG commitments.

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The Venetian/Palazzo hotel in Las Vegas was unionized thanks to pressure from New York pension funds.

Another such area is housing. Not only do city pension funds invest directly in affordable housing, but Lander and his colleagues have developed Responsible Property Management Standards for landlords, which took effect this past July, and set permissible criteria for evictions and rent increases.

In a charming turnabout, a prime target of these standards is a Texas state fund that invests in housing. As a Brooklyn city council member, Lander began hearing about steep rent hikes that some of his constituents faced after their buildings were bought by a private equity company. The source of some of the capital was the same Texas Permanent School Fund that has been pressuring financial companies to drop ESG. The School Fund is the Texas version of a sovereign wealth fund backed by oil and gas revenues.

After Lander became comptroller, a local housing activist reminded him of private equity abuses by landlords, so Lander decided to act. According to The Wall Street Journal, the new standards are the first time that a public pension fund in the U.S. has adopted tenant protection rules for private equity investments in housing.

The standards specify that annual rent increases are limited to 5 percent plus inflation. Landlords must send a 30-day pre-eviction notice to renters who fall behind on payments, giving time to work out a resolution. Landlords must also disclose eviction rates, reasons for tenant exits, and average time to resolve maintenance requests. And in a reversal of the efforts by Texas and other red states to export their rules to blue states, Lander's tenant protection standards apply to all of a company's real estate nationwide, if they want any investment from New York City's $85 billion Employees' Retirement System.

Since 2017, the NYC Teachers' Retirement System, one of the city's five public pension plans, has had a Responsible Contractor Policy. To qualify for preferred investment by the system's funds, a contractor must be neutral in labor disputes, pay for worker safety training, be supportive of minority- and women-owned businesses, and meet other labor and social objectives.

As comptroller, Lander has also created a comprehensive dashboard of New York labor law violators, and works with other city and state agencies to mount concerted campaigns against offenders. These include some local employers, as well as national ones like Uber, Lyft, Amazon, and Gucci, all of which have been forced to pay fines or restitution.

AT THE STATE LEVEL, A KEY LEADER using pension fund investments to improve business practices has been the Illinois treasurer, Michael Frerichs. With Illinois pension funds also invested in Apollo, Frerichs worked closely with Lander to force a fair vote on unionization of the Venetian Hotel. Frerichs has also been aggressive in using pension fund holdings to challenge corporations that lag on climate commitments, like the Southern Company, the largest wholesale utility provider in the Southeast.

Frerichs has used or threatened proxy rights to press management to bring more people of color and women onto corporate boards, through a project called the Midwest Investors Diversity Initiative, which has the backing of several other municipal and state financial officials in the region. I could not persuade him to give me names of specific companies -- he cites ongoing confidential conversations -- but he reports that thanks to this pressure, 55 large corporations diversified their boards, adding 114 people of color and women. Many previously had none.

"The goal is not just diversity for its own sake," Frerichs told me, invoking his responsibilities as a fiduciary. "If a corporate board has only white males, that's not good for the business. They are more prone to groupthink. They are more likely to miss opportunities."

One large corporation Frerichs was happy to name was Starbucks. He, Lander, and other progressives engaged in a proxy battle to induce Starbucks to change its anti-union labor policies. Citing his fiduciary role, Frerichs said, "If you have anti-worker policies, you have higher turnover costs and reputational damage." In the proxy fight, owners of 52 percent of Starbucks shares voted to direct the Starbucks board to commission an independent outside report on the company's labor policies. Starbucks has recently been working with the hundreds of stores that have unionized on a master template contract.

Both Frerichs and Lander have worked closely with a group called For the Long Term, which serves progressive state and city financial officials in 19 states to develop and coordinate pension fund strategies on climate and social objectives. Dave Wallack, the group's executive director, told me, "The right wing is eager to cast this as a red states-blue states fight, but it's really red states versus the rest of the world. When you look at the whole world and the growing commitment to climate and social goals, it's a small amount of capital versus a massive amount of capital."

ONE VEXING CHALLENGE TO SOCIALLY ENGAGED pension funds is what do to about private equity. Despite the occasional successes in changing private equity behavior for the better, as in the case of the Venetian Hotel or Lander's policy boycotting bad-actor private equity landlords, the larger issue is whether pension funds should be investing in private equity at all.

Remarkably, about half of all private equity money comes from public pension funds. These funds are deferred worker wages.

Though some private equity firms are worse than others, the dominant private equity business model is to borrow money to acquire operating companies, load up the company's balance sheet with that debt, extract windfall profits up front, and then ruthlessly slash costs in order to somehow make the numbers work. Though the story told by private equity is that this increases company efficiency, which is true in some cases, too often the costs that are slashed are worker jobs and wages, as well as worker retirement funds.

Private equity is often extractive in other ways, doing sale-leaseback deals to take out windfall profits and then sticking the operating company with costly rental obligations. When all this extraction drives the company into the ground, the private equity owner often abuses the Chapter 11 bankruptcy process. As the Prospect has documented, this business model has been particularly devastating for retail and for private equity-owned nursing homes and other health facilities.

Pension funds could be much more proactive in advancing social standards, especially labor standards.

But this anti-worker strategy has succeeded in giving private equity firms a rate of return that averaged as much as four percentage points over a conventional portfolio of stocks and bonds in the period between 2000 and 2020. Since 2022, however, the index of private equity investments has lagged the S&P index. Though pension fund trustees are all too aware of the anti-worker abuses of private equity, the extra yield that some private equity funds still provide is too great a temptation.

This is compounded by the underfunding of many state and municipal pension funds and the need to compensate with high yield. The effort to have public pension funds boycott private equity has gone nowhere, and the one-off successful pressures on particular private equity firms that occasionally offer targets of opportunity, such as the Venetian Hotel, are less than comprehensive.

An excellent July 2024 report by the American Federation of Teachers, whose 1.8 million members' pension funds hold assets totaling over $3 trillion, criticized private equity abuses and provided details on the labor practices of the ten largest PE companies, all of which have pension fund investors. In each case, the AFT and other unions or pension fund trustees attempted to engage with the companies to gain commitments to reverse anti-worker practices, such as mass layoffs, the use of child labor, and union busting.

Several of the largest private equity firms, including KKR, Carlyle, and Warburg Pincus, declined to even respond to the AFT. Others made general commitments. In a handful of other cases, real progress was made. For instance, Blackstone owns Packers Sanitation Services, Inc. (PSSI), a contract cleaning company for food processing plants. PSSI was hit by multiple complaints and fines in eight states for child labor violations. The pressure on Blackstone resulted in a card-check neutrality agreement; some 1,200 PSSI workers now have union contracts as members of the United Food and Commercial Workers.

Though victories like this are impressive and well worth pursuing, it would be remarkable if a sector whose core business model is extractive can be transformed by engagement with one company at a time.

Many progressive officials responsible for pension fund investing contend that some private equity firms are better than others. They argue that the good ones acquire failing companies, bring in new management, execute turnarounds, and even sometimes put in new capital rather than being purely extractive.

Brad Lander was more candid. "I'm not going to tell you there is good private equity," he said. "We don't want to be investing in PE companies whose model is anti-worker, but there are also very serious problems with publicly traded companies. We try to engage with both."

Another problem with private equity is lock-in. With most PE investments, the trade-off is the potential of higher yield against the fact that money can't be withdrawn for a period of time, often years, without a loss.

New York's pension funds are invested in the Platinum Fund IV. One of the fund's operating companies is a scandal-ridden prison telephone operation called Securus that gets contracts for inmate calls and then overcharges them. Securus charges as much as $8.25 for a 15-minute call. But Securus has been going broke, in part because Platinum loaded up the company with over a billion dollars in debt to pay for the costs of acquiring it, and in part because of a campaign against it by prison reform groups. Securus is now close to bankruptcy.

Lander told me, "We can't easily get our money out. We've told Platinum that unless you commit to reform of Securus, we won't invest anymore."

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LEV RADIN/SIPA USA VIA AP

New York City Comptroller Brad Lander has used his influence with powerful pension funds to deliver wins for workers and renters.

As a longtime admirer of Lander, I can't resist observing that a better strategy might be to avoid extractive PE companies in the first place. Indeed, you have to wonder why nobody in the progressive pension fund universe has created a comprehensive list of private equity companies considered suitable for investments and those considered extractive.

Jim Baker, executive director of the Private Equity Stakeholder Project, told me, "Pension funds, university endowments, foundations, insurance companies, and others that invest in private equity should halt new investments to private equity firms that repeatedly harm workers, patients, communities and the planet." Last June, CalPERS began moving in that direction by issuing a list of PE firms that it was avoiding because of their labor practices.

How about a general list of the 100 worst private equity companies? A boycott strategy against extractive PE might be more effective than one-by-one constructive engagement.

Damon Silvers, former policy director at the AFL-CIO and one of the founders of labor's Capital Stewardship program, told me, "I have known some very talented private equity managers who have contributed real value to the firms they invest in. But taken as a whole, the model tilts toward value destruction from an economic perspective because of unsustainable return targets, high leverage, and relatively short portfolio holding periods combined with unjustifiable regulatory and tax subsidies."

Silvers, who made clear that he is speaking just for himself, added that investors in private equity need to take a close look at which funds "are really generating value, or are playing a game of smash and grab. At this point, it is pretty easy to make a list of those funds that have adopted labor standards, or are meeting the disclosure requirements in the SEC's private fund rule, and those that aren't."

The pension fund vogue for private equity investments may yet fall of its own weight, because as the PE industry has grown exponentially to about $14.7 trillion, the opportunities for extra-normal yields have narrowed. Some fans of private equity attribute this weakening to the prevailing high interest rates, which make PE's strategy of using heavy borrowing more costly. But with PE so large, even with lower prevailing interest rates, it becomes harder to believe that PE will keep beating the market averages except via extraction.

IF THEY WERE TO THINK FURTHER OUTSIDE THE BOX, how much more might blue state and city AGs, treasurers, and comptrollers do? One challenge is that people like Ken Paxton, who is on an intimidation crusade, are more willing to break the law, while blue-state officials take their fiduciary responsibilities seriously.

There could be more targeted pushback that takes the struggle deep into red-state territory, like the case of Brad Lander conditioning investments in the Texas Permanent School Fund on decent landlord behavior. The virtue of this approach is that it covers not just investments in New York but nationwide. Going further, pension funds could be a force for discouraging private equity and other corporate landlords from investing in single-family housing entirely.

Pension funds could similarly invest in utilities, water resources, or clean-energy projects in red states, and force those entities to conform to better standards. An example of how this could work can be seen in how Oregon and Washington utilities that own the transmission wires between coal plants in Montana and the West Coast have forced a transition to wind power to meet their states' climate goals. Pensions could also make investment decisions that burrow into red-state territory and require changes that meet both fiduciary and social goals at once.

As one close observer of this tug-of-war told me, a lot of blue-state action is devoted to promoting ESG. While climate goals are crucially important, ESG has become so mainstream that it's almost too easy. Some of it is just greenwashing. That helps explain why the intimidation by Paxton and others has reversed few commitments by the largest financial companies.

Just as important as the E in ESG -- for environment -- is the S. Pension funds could be much more proactive in advancing social standards, especially labor standards. And as some of the leaders in the field, such as Illinois's Frerichs, have recognized, equally important is the G, for corporate governance.

When Ronnie Chatterji ran for state treasurer of North Carolina in 2020, one of his ideas was to use the various forms of public capital that he supervised for state economic development. The Prospect profiled him in that campaign. Chatterji, who went on to be in charge of implementation of the CHIPS and Science Act under Biden, lost that election, but the idea is worth taking seriously.

Given the various fiduciary rules for pension fund investments, however, there are limits to how much they can invest directly in possibly risky direct investments. But they have a lot more latitude in conditioning their financial investments on the behavior of those they invest in. Then it is the private company that bears the risk.

Thanks to the Biden industrial policies under the CHIPS and Science Act and the Inflation Reduction Act, a lot of new factories are being built and jobs being created. At a time of a national shortage of affordable housing, one question is where those workers are going to live, especially when jobs in a large facility are concentrated in areas where housing is already scarce. Pension funds might invest in construction of targeted housing, or they might invest in companies that agree to develop such housing.

Nearly $6 billion in public workers' deferred wages is a massive amount of money. It's great that some pension fund trustees are being creative in how that money is invested for good, and how it can be used to deter bad anti-social and anti-worker corporate policies. The right's crusade against woke capitalism is, unintentionally, a wake-up call. The blue states are more generous with public pensions, and they have a lot more money. They could be even more creative.