UPDATED: BlackRock finds axing fossil fuels may boost performance in study for US pension funds

Note: Since publication, BlackRock has contacted RI to clarify that it makes "no claim about future performance in our research. Our work was purely a backward-looking study."

Investment behemoth BlackRock has concluded that, based on backward-looking analysis, divesting fossil fuels does not harm – and may even boost – returns, in a long-awaited draft report commissioned on behalf of New York City’s pension funds.

New York City Comptroller Scott Stringer sought advice last year about the possibility of the city’s five pension funds exiting fossil fuels holdings  on climate grounds. BlackRock has now concluded that divestment would be a “suitable approach” for New York City, “given the 1) historical validation of underperformance of fossil fuel linked securities, 2) historical outperformance of the representative divested portfolios, and 3) minimal impact on risks and costs under each [divestment] option”.

‘We find that the [New York City] Systems can prudently divest from fossil fuel reserve owners using a variety of approaches’ – Meketa

Similar conclusions are reached in a separate commissioned study by Massachusetts-based consultant Meketa Investment Group, which found that the divestment options it considered “generally result in higher returns, lower risk and greater risk efficiency compared to current portfolios”.

“We find that the [New York City] Systems can prudently divest from fossil fuel reserve owners using a variety of approaches, including all of the options provided in this report,” Meketa concludes.

The redacted versions of the studies were published by the Institute for Energy Economics and Financial Analysis (IEEFA) yesterday. 

Both firms were appointed by New York City funds in January 2020 to help them develop a “comprehensive and prudent divestment strategy”. BlackRock's contract was specifically with the New York City Teachers’ Retirement System.

The awarding of the contracts followed the landmark announcement in 2018 by Stringer, who oversees the funds as a trustee, that the City’s five funds would explore axing fossil fuels. Earlier this year, the three remaining participating funds voted to divest their fossil fuel securities, estimated to be worth in excess of $4bn. They are: New York City Employees’ Retirement System and New York City Teachers’ Retirement System and The New York City Board of Education Retirement System. 

In addition to announcing New York City’s divestment goal in 2018, Comptroller Stringer also set a target to invest $4bn in climate change solutions by 2021. Today he announced that the City’s funds have now approved allocations that will take those investments to $6bn. 

As part of their work on behalf of New York City, BlackRock and Meketa each produced three draft reports related to divestment: 

1) A survey of asset owners that divested and those that did not divest; 

2) An analysis of the types of financial, environmental and climate risks faced by fossil fuel companies and standards for readiness to address the transition; and 

3) An assessment of divestment options and portfolio performance.