Environmental, social, and governance (ESG) investing continues to gain momentum among U.S. pension investors and public defined benefit (DB) plans with the largest public DB plans moving quickly to build ESG considerations into investment processes, according to the latest Cerulli Edge—U.S. Institutional Edition.

Some of the largest public plans in the U.S. have blazed a trail toward full incorporation of ESG themes in their portfolios, especially those related to climate change. Approximately 20 U.S. DB plans, including the top-five public pension plans in the U.S., are now listed as members of Climate Action 100+, an initiative to fight climate change through engagement with corporate greenhouse gas emitters. These plans, while only a small portion of the group, represent a significant portion of assets given their collective asset base.

Many defined benefit plans—especially smaller plans—are reluctant to purse ESG considerations due to the murky regulatory environment, especially for ERISA-regulated corporate pensions. In late 2020, the Trump administration placed a ban on ESG investing for corporate DB plans that was quickly overturned by the Biden administration, moving regulation back in line with investor consensus on ESG and giving these institutional investors the freedom to pursue better performing portfolios by taking ESG risks into consideration along with traditional financial considerations.

Despite mixed signals from the Department of Labor, Cerulli believes that demand will remain high for ESG strategies. According to the research, over 90% of respondents feel that public pensions will have moderate to high demand for ESG strategies in the near future. Cerulli believes that managers that can demonstrate capabilities in this area and offer competitively priced products with strong net-of-fees performance will thrive as ESG continues to move into the investment mainstream. “Those who can communicate their genuine beliefs about ESG investing to pensioners, board members, and other stakeholders, sharing insights grounded in facts and empirical proof of ESG’s efficacy, will build lasting relationships based on a relatively new and deeply meaningful set of investment management criteria,” says Robert Nelson, director.