Senate Bill 6304 would force ideological climate and social mandates into our state’s public pension investment strategy. The bill's vague language transforms pension investment into a political exercise, gambles with the retirement security of public employees, and creates a looming liability for taxpayers, who must bridge any funding gaps.
This bill would mandate that the Washington State Investment Board (WSIB) incorporate a lengthy list of environmental, social, and governance (ESG) exclusions into its investment decisions for our public pension funds.
The timing couldn't be worse.
The financial industry that once stood firmly behind ESG is rapidly retreating from it, the argument for superior returns has collapsed, and Washington's pension systems are already taking on additional risk through optimistic return assumptions and deferred debt payments.
WSIB's mission is to “maximize returns at a prudent level of risk” for the exclusive benefit of beneficiaries. The board evaluates ESG factors only as they affect long-term investment performance. This approach seems to be working as Washington's public pension systems are among the best funded in the country.
In fact, WSIB has explicitly rejected divestment as a strategy, calling active ownership "superior" because divestment reduces diversification, creates unintended portfolio risks, and hands voting power to shareholders with shorter-term interests.
SB 6304 would directly undermine this sensible approach. Instead of discretionary consideration, the bill mandates rigid statutory exclusions for fossil fuels, prisons, immigration detention, tobacco, and vague categories like "unacceptable greenhouse gas emissions." It would also require the board to support shareholder resolutions calling for reduced "violations of responsible investment principles."
According to WSIB's data, about $7.4 billion is invested in the energy sector, including $5.5 billion in oil and gas. The bill's coal provision would force divestment from companies deriving 10% or more of revenue from coal. The vague provisions around "unacceptable greenhouse gas emissions" could sweep in far more.
ESG Pitfalls
The California Public Employees Retirement System (CalPERS) was the first major public pension to learn the dangers of divestment. Their 2000 decision to divest from tobacco stock, under immense pressure from public unions and climate activists, cost $3.5 billion in foregone returns. The tobacco stocks simply went to other buyers with zero impact on the industry. CalPERS has repeatedly pushed back against legislative intervention to force divestment ever since.
Much of the global shift away from ESG is because ESG investment returns are poor. A Pacific Research Institute study found that a $10,000 ESG portfolio would be 43.9% smaller than an equivalent S&P 500 investment over 10 years. Sustainability funds faced their worst year on record in 2023, with investors pulling $13 billion. ESG funds also charge higher fees, with expense ratios 2.7 to 5 times higher than comparable non-ESG funds.
ESG ratings themselves are also deeply unreliable. Analysis of Morningstar's Sustainalytics ratings found that defense contractors like Northrop Grumman, Raytheon, Lockheed Martin, and Boeing all score better on ESG than Vital Farms, a company explicitly committed to ethical, pasture-raised farming. When weapons manufacturers outscore sustainable food companies, the rating system has lost all meaning.
Larry Fink, CEO of BlackRock and once ESG's most prominent advocate, announced in 2023 he would no longer use the term and was "ashamed" to be part of the debate. His 2024 investor letter made no mention of ESG, instead emphasizing "energy pragmatism."
The "Big Three" asset managers have also slashed their support for ESG shareholder proposals. In 2024, Vanguard supported zero environmental and social proposals out of 400 evaluated. BlackRock's support dropped from 41% of proposals to 4%. State Street fell from 43% to 6%. Vanguard left the Net Zero Asset Managers Alliance. State Street departed Climate Action 100+. JPMorgan, Pimco, and Invesco have also exited.
The ESG gig is up. If these sophisticated institutional investors are retreating from mandatory ESG frameworks, why would Washington lock itself into one?
Impacts on Washington State
In 2025, the legislature increased our pension systems’ assumed rate of return to 7.25%, an overly optimistic target requiring strong performance to avoid growing unfunded liabilities. The legislature has also taken a holiday on paying down Plan 1 unfunded liabilities, deferring costs to future taxpayers.
Therefore, the board needs every tool available to hit that 7.25% target. Adding statutory constraints that force divestment and restrict future decisions is the opposite of prudent risk management.
Washington's public employees hold diverse political views. Who decides what constitutes "unacceptable greenhouse gas emissions"? What happens when climate goals change with the next election? Converting discretionary financial analysis into mandatory political exclusions would sacrifice investment flexibility for ideological purity, and our pension systems would pay the price.
Senate Bill 6304 is scheduled for a public hearing this Thursday, January 29 in the Senate Committee on Ways & Means at 4:00PM.
