With the rise of investing based on environmental, social, and governance (ESG) factors has come controversy. While some see ESG investing as a way to create sustainable shareholder value, others view it as a means for advancing contested values outside of the political process. Yet even as the debate continues, public pension funds have invested roughly $3 trillion based on ESG principles.
At the same time, recent Supreme Court and appellate court decisions have expanded the First Amendment’s protection against compelled speech and association. Most prominently, in Janus v. AFSCME, the Supreme Court held that states could not require non-union employees who opposed union speech and policies to contribute to public unions. In Janus, an Illinois state employee challenged a state statute that required him to pay an annual agency fee to AFSCME, the union for state employees, in lieu of membership dues. The Supreme Court ultimately agreed with the employee that the statute was unconstitutional, reasoning that such a fee “violate[d] the free speech rights of nonmembers by compelling them to subsidize private speech on matters of substantial public concern.”
In a new paper, I argue that, in light of these decisions, the Supreme Court’s current compelled speech doctrine likely renders public pension funds and other funds unconstitutional if the investments are based on ESG factors. Specifically, there are three potential lines of reasoning under the First Amendment that may apply to public pension funds: compelled association with the public pension fund, compelled subsidization of the speech of the public pension fund, and compelled subsidization of the speech of investment managers and other entities connected to the fund.
While responses based on the long-term value of ESG investing and the government speech doctrine exist, there are reasons to suspect that the Supreme Court could find those responses unavailing. Regardless of whether ESG investing and stewardship efforts promote long-term shareholder value, the court may find that attempting to differentiate between “permissible” and “impermissible” ESG efforts generates line-drawing issues like those identified in Janus that are best addressed by adopting an express opt-in requirement. Likewise, the government speech doctrine may be a difficult fit for several reasons: (1) the government speech doctrine is not a defense to the forced association claim because such a claim is not a speech claim, (2) the pension fund may not be a government speaker for purposes of the government speech doctrine and thus that doctrine may not apply to the fund’s speech, and (3) many employees retain a property interest in their contributions, thus making it more difficult to argue that this speech is clearly government and not private speech. Thus, while there are obstacles to the compelled speech rationales identified above, none appears insurmountable, particularly for a Supreme Court sympathetic to a broader understanding of the First Amendment.
There are two serious potential ramifications from applying the compelled speech doctrine to public pension funds. First, doing so retrospectively to past contributions may have serious consequences for state and local finances, particularly given that many state and local pension funds are underfunded. While Janus raised the possibility of retrospective liability for unions regarding collected agency fees, that possibility did not come to pass because of the defense of good-faith – the unions were able to argue that they did not owe damages because collecting fees was lawful at the time of collection. That argument may not be available to public pension funds, however, because employees will not be seeking damages for past wrongs but instead the return of current property. Many state employees have some form of property interest in their retirement contributions, meaning that state employees could potentially demand the return of all their contributed funds if the pension funds continued to engage in ESG investing. Consequently, states and local governments are ignoring developments in compelled speech doctrine at significant financial risk.
Second, Janus’ opt-in requirement will affect policymakers’ efforts to promote retirement savings through the use of automatic enrollment in individual retirement accounts. At present, federal and state legislatures have enacted – or are considering enacting – automatic enrollment programs in individual retirement accounts to ensure that individuals least likely to have some form of retirement savings begin contributing to their long-term financial security. Many of these funds are, however, likely to be managed according to ESG principles, including using proxy voting to advance ESG proposals. Janus’ requirement that individuals must be given the chance to opt-in rather than opt-out of associations that engage in political speech would clash with this auto-enrollment feature, thus limiting a significant way to promote retirement savings for those most at risk.
 See, e.g., Larry Fink, Larry Fink’s 2020 Letter to CEOs: A Fundamental Reshaping of Finance, Blackrock (Jan. 14, 2020), https://www.blackrock.com/corporate/investor-relations/2020-larry-finkceo-Letter (“[W]ith the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”).
 See, e.g., Benjamin Zycher, Other People’s Money: ESG Investing and the Conflicts of the Consultant Class, Am. Enter. Inst. (Dec. 17, 2018), https://www.aei.org/articles/other-peoples-money-esg-investing-and-the-conflicts-of-the-consultant-class/ (“ESG investment choices substitute an amorphous range of political goals in place of maximizing the funds’ economic value . . . .”).
 Jean-Pierre Aubry et al., ESG Investing and Public Pensions: An Update, Ctr. for Ret. Rsch., Oct. 2020, at 1.
 138 S. Ct. 2448 (2018).
 138 S. Ct. at 2461–62.
 Id. at 2460.
This post comes to us from Professor Mark Kubisch at Pepperdine University’s Caruso School of Law. It is based on his article, “ESG, Public Pensions, and Compelled Speech,” available here.