September 12, 2023


Labor’s Green Capital

Pension funds, asset managers, and solar energy

Global investment in solar energy has skyrocketed in recent decades: from 1 TWh of solar power in 2000 to 1,284 TWh in 2022. The trend is likely to be magnified in the United States by the Inflation Reduction Act (IRA), which includes a wide array of tax credits and new sources of investment for renewable energy. Much of the investment in solar remains tied to private asset managers with little obligation to operate in line with the public interest. Among these investors, however, lies one group with duties to a broad swath of the public—pension funds. 

Pension fund investment in solar energy offers a lens through which to understand their involvement across the domestic economy. While they depend on the financial assets of workers, pension funds are managed by hired asset managers who may not have an interest in increasing innovative capacity and improving labor conditions. The ends towards which “labor’s capital”—in this case, workers’ pension funds—are directed ultimately depend on the economic policies that shape decision-making along the financial intermediation chain. The stakes are high. If pension funds do not proactively address the risks of climate change, it is those same workers—the current and future beneficiaries of pension funds—who will bear the burden.

Union pension funds call themselves “investors” rather than shareholders. This gives the impression that the funds, which include workers’ retirement assets as well as other pooled funds and retail shareholders, provide resources for real-world productivity and innovation. The specific form of real-world investment directly and dramatically shapes the lives of working people globally. In practice, however, financial institutions like asset managers pressure companies to increase financial gains by squeezing labor. If invested towards publicly beneficial ends, pension funds have enormous transformative potential. But harnessing this potential requires regaining control over the financial assets of future retirees—and preventing managers from extracting value for their own benefit.

Solar capital

As of 2022, US state and local public pension funds—trusts that hold portfolios of financial assets meant to sustain retirees—comprised $4.5 trillion in assets and distributed $323 billion annually. Roughly 6,000 state and locally administered public pension funds provide retirement security for 11.2 million current retirees, in addition to 14.7 million future beneficiaries who are currently working—a combined total that is 14 percent of the US workforce. 

These holdings have become a source of power for labor unions, leading to a widespread debate over the costs and benefits of what are commonly referred to as “capital strategies.” Economic historian Sanford Jacoby’s Labor in the Age of Finance demonstrates that while private sector union density fell, unions increasingly exercised power through shareholder activism—with labor leaders and public pension funds rallying institutional shareholders to pressure companies in which unions were campaigning. This strategy has won important gains but remains firmly entrenched in the framework of shareholder primacy and bound by fiduciary duties that can be narrowly interpreted towards maximizing the value of pension funds at the expense of other worker interests. It is notable that shareholder primacy has grown alongside shareholder activism.  

When managers do not side with trade unions, the interests of labor’s capital diverge from the interests of labor. While scholars like David Webber have argued that capital strategies constitute labor’s “last, best weapon,” others like Benjamin Braun have convincingly demonstrated that pension fund pools and their search for yield have driven financialization and precarity. 

The tension between these interpretations is highly visible in the solar industry. Solar is the most popular new renewable energy source and has been growing at an average of 30 percent over the past decade. The first commercial solar farm came online only in 1982, yet over the past forty years there has been a decline in costs by a factor of nearly 400, making solar the cheapest electricity source in history. However, to meet our net zero carbon goals, solar capacity needs to grow sevenfold in proportion to overall energy consumption. 

Asset managers have demonstrated that their primary focus in solar infrastructure rests with the sale of the assets they buy, rather than their maintenance for collective use. Major real asset manager Brookfield has $58 billion of assets under management in renewable energy, including hydropower, solar, and wind energy. In Brookfield’s recent investment of nearly $2 billion in a large solar company, Scout Clean Energy and Standard Solar, the largest commitments came from the pensions of Canadian teachers and federal workers. According to OECD research, while only 25 percent of pension fund assets invested in infrastructure were in “green” infrastructure in 2020, three-quarters of the assets that are directed to solar and other renewables are channeled through private (or “unlisted”) asset managers. Though US public pensions do sometimes hold direct stakes in solar companies, as, for example, CALPERS, California’s public employees fund, does in a solar holding company, funds usually delegate choices regarding real investment to asset managers. This separates pension fund trustees from actual renewable projects, narrowing the scope of accountability for company use of funds. 

Because solar is a new industry, it does not have the legacy of trade union density present in other segments of construction. Lee Harris has documented the difficult labor conditions for the solar workforce: “staffing agencies are notoriously unpredictable, known for nepotistic hiring and promotion, arbitrary firings, low pay, and zero transparency.” The public investments contained in the IRA will supercharge solar development in the Sun Belt, in states where unions are focused on making inroads into what is now the fastest-growing segment of the construction industry. The IRA’s centerpiece is tax credits for the manufacturing of clean energy technologies, which include incentives for employers to follow prevailing wage standards. But these requirements don’t apply to solar—Section 45X does not include the same prevailing wage standards as other provisions.  

If asset managers are focused on selling the solar infrastructure that is currently being built, what incentive do they have to invest in the solar workforce? Given the nascent industry’s low unionization rates and ongoing efforts to organize, the unionized and public-sector workforce investing in the same solar projects have the opportunity to exert their financial power to hold companies to higher employment standards. 

Capital gains

Asset managers’ involvement in the solar industry demonstrates that there is a vast difference between managing wealth for purposes of asset appreciation and organizing financial resources to support the innovative capacity of the economy. In other terms, there is a difference between trading financial assets and real-world investment. Asset managers trading pension fund assets are focused on increasing their fees, rather than stewarding the investment capacities of the economy. 

Asset managers have grown increasingly important amid two major shifts: financial institutions have moved from financing goods and services production to driving relentlessly for asset appreciation, and finance’s center of gravity has moved from banks to non-bank institutions. Though asset managers are intermediaries between corporations and households, they play a decisive role over portfolio holdings and through shareholder votes. Households, especially those whose only assets are in public sector pension funds, have an interest in reducing systemic risks like climate change, growing economic and social inequality, and macroeconomic instability. Yet private asset managers like BlackRock, Vanguard, and State Street have a clear record of voting against proposals to mitigate such systemic negative externalities. For decades, public and union pension funds could only hold safe assets. But in recent years, the widening appetite for risky assets has taken increasing proportions of funds out of publicly-traded equity and into private markets. Ultimately, asset managers most often trade for the sole purpose of maximizing capital gains. What do we lose by allowing asset managers to own, manage, and extract from systems needed for the energy transition?

The idea that asset managers and pension fund trustees act for financial gain is shaped by law, fiduciary duties, and a limited public imagination, . In a recent report, Rick Alexander and I challenge this notion, setting forth two new kinds of standards so that asset managers act instead for the fundamental interests of households whose money they manage. First, we propose that portfolios be required to strictly comply with the Paris Agreement to achieve carbon neutrality. Second, we propose a reinterpretation of fiduciary duties which expects asset managers to consider the total impact of their decisions on the economic beneficiaries—working households. Instead of only comparing the potential financial returns from renewable energy investments, asset managers would be required to consider the economic impacts that households would suffer from the devastating effects of climate change.

But reforming the responsibilities of private asset managers is not enough. The volatile nature of financial markets cannot form the basis for stable decarbonization. In another recent article, I make the case for a public asset manager with fiduciary duties in the public interest. Such an institution would manage public pension fund assets and serve as a public option for privately-held retirement assets. A public asset manager would evade the conflicts of interest that plague asset managers, who seek the business of corporations while voting in corporate governance decisions. A public asset manager’s fiduciary duties could be explicitly defined to recognize the systemic harms of climate change and mitigate its negative impacts on retirement security. This would implicate portfolio asset allocation decisions, redrawing the guardrails for voting on key pro-social shareholder proposals. Trillions of dollars of labor’s capital would be redirected from the financial system to working people and their families. 

A public solar option

While the IRA direct pay provisions will increase public and non-profit investment in renewable energy, the IRA does not directly take on the power of private asset managers. But increasing public control of pension funds is an important step towards achieving the legislation’s objectives. This could prove essential for a non-extractive energy transition—the $5.3 trillion in state and local public pension plans, along with the $735 billion in the federal employee plan, could provide a sufficient base for building out a public solar energy system. 

Public Solar NYC is an example of the kind of project that could utilize public pension funds for community benefit. The plan, proposed by Comptroller Brad Lander, aims to leverage the roughly $250 billion in financial assets held by New York City’s five Public Pension Funds to place 25,000 publicly-owned solar arrays on New York City apartment building rooftops over eight years, adding 600 megawatts of energy while creating an estimated 13,000 quality jobs.

The Comptroller, who has been a leader in recognizing climate change as a threat to retirement security, noted that “New York City pension funds have recognized a fiduciary duty to mitigate the systemic and company-specific risks that climate change poses to our portfolio,” and announced a “Net Zero by 2040” plan. The plan not only includes clear and straightforward disclosure about divestment (the City has divested $3.8 billion from fossil fuels) but it enumerates real investment in renewable energy systems, including the creation of a public option for solar in New York City. The IRA’s direct pay provisions offer federal funding to the city for solar development, which the plan proposes to channel into a City-capitalized and -controlled local development corporation. The City would establish a Solar Bond Issuer, with the proceeds going to Public Solar NYC, which would sign up rooftop owners, operate the process, install and maintain solar arrays, and require and enforce high labor standards. No private asset manager would be involved, and the financial benefits of solar would accrue to many residents, not only private homeowners who are disproportionately wealthy white households. While the program does not currently utilize public pension funds assets, New York City’s five retirement systems have $834 million invested across five Brookfield infrastructure funds, and $5.81 billion in infrastructure funds overall. It is worth considering how such funds could be utilized for direct public investment programs.

Although New York’s public solar is still in the planning stages, it is the kind of project that should push us to envision how public pension funds can directly support the renewable energy transition, without a private asset manager as an intermediary. For truly public energy, this form of direct public investment and decision-making capacity must be paired with broad-scale reforms to asset manager fiduciary duties, and crucially, the establishment of a public asset manager to direct the power of labor’s capital. These changes would constrain the influence of private asset management institutions and ensure that the gains of the energy transition serve the public interest.

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