Institutional Investors Are Flexing Their ESG Muscles

People tend to associate environmental, social and governance investing with stock-picking, a way to sort through companies based on their ESG practices. But not every investor can be choosy about the companies they own. Big pension, endowment and sovereign wealth funds oversee tens of billions and even trillions of dollars, which means they have to own practically everything. If they avoid companies that fall short of their ESG standards, they quickly run out of places to park their money.

Instead, these so-called universal owners are trying to bolster companies’ ESG practices by supporting ESG-related proposals and removing directors who stand in the way. The California State Teachers’ Retirement System, the second-largest pension fund in the U.S. with more than $300 billion in assets, announced recently that beginning with the 2022 proxy season, it will oppose directors who are moving too slowly on diversity and climate change and support shareholder proposals that seek to reduce carbon emissions.