Red versus Blue: Do Political Dimensions Influence the Investment Preferences of State Pension Funds?

Studying the equity holdings of 31 U.S. state pension funds, we find evidence that the political leaning of their members and political pressures by state politicians impact funds’ investment decisions. State pension funds from states with Democratic leaning members tend to tilt their portfolios more strongly towards companies that perform well on environmental, social and governance (ESG) issues, as compared to their Republican counterparts. This tendency is especially strong if the majority of the state government are Democrats. State pension funds intensify their ESG investing when their members’ political leaning changes from Republican to Democratic, and vice versa, suggesting that these funds align their ESG investment approach with the political leaning of their members. Finally, we find that the state pension funds in our sample neither under- nor outperform on their politically-motivated ESG holdings, implying that their ESG preferences are unlikely financially-driven.