ESG, Public Pensions, and Compelled Speech

Abstract

Investing based on Environmental, Social, and Governance (“ESG”) principles has dramatically increased in recent years. Many institutional investors— including public pension funds funded by mandatory contributions from government employees—now incorporate ESG principles into their investment and engagement strategies even though certain aspects of ESG, such as investing to reduce carbon emissions, are politically controversial. Over this same period, courts have reaffirmed that the First Amendment protects individuals from being compelled to associate with or to subsidize the speech of third parties. Indeed, applying this compelled speech doctrine, the Supreme Court recently overruled a forty-year-old precedent that allowed states to force nonunion members to contribute to public unions engaged in collective bargaining on their behalf.
 This Article provides the first in-depth discussion of how the Court’s compelled speech doctrine might apply both in the wake of the Supreme Court’s landmark decision in Janus v. AFSCME and in light of the dramatic rise of ESG investing. In doing so, it explains how the Supreme Court’s post-Janus compelled speech doctrine will likely render state mandates requiring employees to contribute to public pension funds that invest according to ESG principles unconstitutional. And this Article also identifies two potentially serious consequences of the unconstitutionality of such mandates that current scholarship does not address. First, application of the compelled speech doctrine to public pensions may cause state and local governments significant financial distress, given that state employees might be able to withdraw all contributions (not just future contributions) to the public pension funds even as many of those funds are substantially underfunded. Second, extending the compelled speech doctrine to ESG investing might further hamper efforts to increase retirement savings among those least likely to save for retirement by precluding auto-enrollment of employees in retirement programs that invest according to ESG principles. Finally, this Article sketches some possible approaches to addressing these issues before concluding.