Workforce and Climate Standards Are Essential to Securing Pension Investments
In 2023, the Wharton Business School and the Canada Pension Plan Investment Board published a study that reviewed more than 40,000 annual reports from 2,900 companies across developed and emerging markets over a three-year period.
Investigators checked which companies expressed a commitment to improving employee wages, benefits, health and safety, and other metrics, and disclosed outcomes. The conclusion may have surprised Wharton’s most famous alumnus and sworn enemy of all things “woke,” if he read it: companies that invest in employees are associated with a 4.0% higher return on invested capital compared to companies that don’t.
For long-term asset owners like public pension funds, this finding speaks directly to how workforce practices influence durable value creation. To fulfill their fiduciary duty to beneficiaries, pension trustees and investment officers have long understood that funds must assess and manage climate-related material risks to portfolio companies, and consider systemic risks to market sectors and economies.
Just as climate risk exposes vulnerabilities in physical assets and supply chains, workforce practices reveal operational risks that directly affect long-term performance. Forward-thinking Fund trustees and staff are increasingly aware that disclosure and standards for employment conditions can benefit investors. Conversely, exposure to companies that contribute to lowering standards for workers can pose risks to retirement portfolios that range from low productivity, high turnover costs, and loss of expertise to supply chains that include forced labor.
Increasingly, state pension boards are adopting their own Responsible Workforce Management Policies. These policies typically assess external investment managers based on:
Fair pay and benefits
Freedom of association and collective bargaining rights
Elimination of forced and child labor
Health and safety standards
Workforce standards can be particularly useful in private market investments, which are subject to fewer disclosure requirements than publicly traded securities. Private equity funds, especially leveraged buyout companies, are controversial for eliminating jobs and shuttering businesses. Pension funds can establish criteria for selecting General Partners that integrate labor and climate-related risk management policies into their investment strategies.
The Massachusetts Pension Reserves Investment Management is the latest board to adopt a workforce policy, which focuses on the due diligence phase, requiring private market managers to: 1) attest to receiving the policy, 2) reference the policy in legal contracts, and 3) demonstrate a track record during the hiring process. That Responsible Workforce Management Policy states:
“Practices such as safe and humane working conditions, fair pay, and workplace practices and respect for human rights and labor rights create an engaged and stable workforce that can create a long-term competitive advantage.”
While there isn't a single official "rating agency" for pension labor standards, several organizations monitor and assess state pension funds' investment behaviors regarding labor principles. These policies also point to a broader truth: long-term pension security depends on alignment across labor, climate, and capital.
CFA believes that leveraging public capital for a sustainable, pro-people economy requires the integration of both climate and labor standards. After all, “sustainable” investments must be built to last, in terms of climate impact as well as impact on jobs and communities. Just as we partner with worker beneficiaries to support sustainable, climate-resilient investments, we encourage environmental organizations to embrace investment standards that uphold labor rights.
Our shared interest in good jobs in climate-resilient sectors can be the basis for strong coalitions, which we will need to push pension funds to adopt new policies. Advocates for labor, the environment, and a secure retirement can work together and win.
