The Power of Pension Funds: How to Win Friends and Influence Others

Posted on March 6, 2018 by Gail Port

While both tout their desire to reduce the State’s carbon footprint and address climate change,  New York Governor Andrew Cuomo and State Comptroller Thomas DiNapoli have  their differences when it comes to  New York State pension fund’s fossil fuel investments.   

The New York state pension fund (known as the New York State Common Retirement Fund) is the third largest pension fund in the United States, with an audited value as of March 2017 of $192.4 billion in assets.  The pension fund holds and invests assets of over one million state and local government employees, retirees, and beneficiaries. At issue are holdings of at least 50 oil and gas companies with significant carbon-intensive operations.  Comptroller DiNapoli is the sole trustee of the pension fund, and is advised by several independent advisory committees.

DiNapoli is under pressure from Cuomo, State Senator Liz Krueger, and certain environmental groups to divest the pension fund from fossil-fuel investments.  DiNapoli has pushed back on immediate divestment on several grounds, most importantly, that as a fiduciary his first priority is to earn a good return for the approximately 1.1 million New Yorkers who rely on the state pension system for their retirement security.  While recognizing that the effects of climate change represent a systemic risk to the returns of the pension fund, the economy and the welfare of the people of the State, DiNapoli believes that he can be more effective in managing those systemic climate change risks by the use of the significant power of the pension fund to influence the policies of oil and gas companies.  That includes shareholder activism (i.e., filing shareholder resolutions), voting proxies, investor collaborations and corporate engagement programs.

On the latter point, Comptroller DiNapoli has cited ExxonMobil’s agreement to implement a shareholder proposal, co-filed by the state pension fund and the Church of England, which caused ExxonMobil to agree to assess how it might be impacted by the Paris Agreement goals to reduce global warming. Duke Energy has responded to a similar shareholder resolution seeking to require it to analyze how the Paris Agreement will impact its business and plans to produce a climate risk assessment in the first quarter of 2018. DiNapoli asserts that because these oil and gas companies will not go out of business as a consequence of divestment of the pension fund’s holdings, he can be more effective by having a seat at the table as a shareholder to influence companies’ actions and disclosures.  Critics of this view, including State Senator Krueger, believe the shareholder influence is limited and that divestment sends a stronger message than does the Comptroller’s more nuanced and varied approach. 

Another investment strategy recently employed by the Comptroller was to double the pension fund’s investment-- to $4 billion-- in a low-emissions index designed by Goldman Sachs Asset Management.  That index is more geared toward stocks, such as Apple Inc. and Microsoft Corp., than higher carbon-emitters, such as ExxonMobil and Chevron.  DiNapoli has said that since 2016 the Goldman Sachs designed index has delivered returns comparable to the Russell 1000, thereby yielding strong investment returns with the benefit of significantly reducing the carbon footprint associated with that investment.

Although DiNapoli has expressed reservations about allowing pension fund investments to be influenced by political forces, he recently agreed to join forces with Governor Cuomo and others on decarbonization strategies for the pension fund investment portfolio.  While there are no immediate plans to divest the energy holdings of the pension fund, DiNapoli and Cuomo have agreed to create an independent advisory committee to develop a low carbon future roadmap for the fund.  In his January 2018 State of the State Address, Cuomo called for an end to fossil fuel related activities in the pension fund and stated his intent to work with DiNapoli so New York can “put our money where our mouth is.” Cuomo then asked for a round of applause for Comptroller DiNapoli and his efforts.

Regardless of whether DiNapoli takes immediate moves to decarbonize the portfolio, the movement towards divestment is gaining momentum. California ended its pension fund investments in coal companies in 2015 and is facing pressure to decarbonize its portfolio. On January 10, New York City Mayor Bill de Blasio and Comptroller Scott Stringer announced that NYC plans to divest its five pension funds from fossil fuel investments, which will be the largest divestment of any municipality to date. Stringer stated, “[T]his a first-in-the-nation step to protect our future and our planet – for this generation and the next. Safeguarding the retirement of our city’s police officers, teachers, firefighters and city workers is our top priority, and we believe that their financial future is linked to the sustainability of the planet.” De Blasio and Stringer were praised by environmental activists after the announcement and by State Senator Kruger who continued her call for State Comptroller DiNapoli to follow suit with respect to the New York State pension fund investments.

Lots of good intentions, lots of ideas and a bunch of strange bedfellows--only time will tell if these investment (and divestment) initiatives will continue to gain traction and make a difference. And what about us-- shouldn’t we too be employing low-emissions/decarbonization investment strategies with our portfolios?



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