ESG USA keynote: Thomas Di Napoli, New York State Comptroller, Trustee, New York State Common fund

State finance chief talks ESG, engagement, BP, fracking and climate change.

First and foremost, I’d like to applaud for putting together yet another impressive and thought-provoking conference.
Link to ESG USA 2011 conference brochure
Link to ESG USA 2012 web site
And I have to tell you how heartening it is to be among so many whose pointed words and concerted actions continue to promote sustainable economic growth here in the US and across the globe. The Office of State Comptroller, as trustee of the New York Common Retirement Fund, has been an active participant in efforts — often in partnership with many in this room — to promote the incorporation of environmental, social and governance factors into the investment process. As a large institutional shareholder focused on ensuring the long term value of our investments, we can’t afford not to be. As everyone in this room knows, at the most basic level our economy represents our adaptation to the environment. The global economy is made up of the multitude of interactions that allow us to meet our basic needs, and increasingly, much more than our basic needs. If we take more out of the environment than is sustainable, or if we fail to work together, we threaten our economy. This is the germ of the concept of sustainability, and our partners in this effort such as Ceres, Council of Institutional Investors and the Principles for Responsible Investment provide us with the tools and structure to help us move our economy in that direction.The New York State Common Retirement Fund is currently valued at approximately $140bn. The fund is responsible for the retirement futures of one million state and local employees, retirees and beneficiaries. Every one of those one million members is a shareholder, and their interests drive each investment choice we make. Some have referred to large institutional funds like ours as perpetual investors. It’s an appropriate description. We’re investing today for employees who will retire in 30 or 40 years. We have a perpetual investment horizon. We must take the responsible approach, weighing risk against opportunity, always with that long-term horizon in mind. Our approach has been successful. According to the Pew Center and Governing Magazine, New York State’s is among the best-funded public retirement systems in America. Over the past twenty years, 83% of retiree benefits our fund pays out have been financed directly from investment returns, a number that’s significantly higher than the national average of 68%. This is the result of sustained sound investing, our conservative actuarial methods and the discipline to make our annual required contribution. By necessity, our fund – like similar large institutional funds – is highly diversified and invested in every sector of the economy, and it tends to rise or fall based on the state of the economy and the markets. And as our investments grow and diversify, our performance is increasingly tied to

the health of the global economy and global markets. Ultimately, our goal is simple: we want long term sustainable economic growth. And we have found from experience that comprehensively integrating environmental, social and governance considerations into the investment process is essential to achieving that goal. As the trustee of a large fund, my approach may be somewhat different from others who are concerned with this issue. We have a lot of money that needs to be invested and a lot of investments to manage, so we must be efficient. The majority of the New York State Common Retirement Fund’s equity assets are public equities held in index funds.
As long-term buy-and-hold shareholders, the fund must align its interests to the long term success of the companies. To do that, we need a clear picture of risks and liabilities at the company that may negatively impact the environment, our economy and ultimately our shareholders.
And we are obligated to take action when, either through negligent or irresponsible management practices, that investment is threatened. To that end, we employ an active, sometimes aggressive, corporate governance program. Last year, dramatic accidents and natural disasters like the Massey mine explosion and the BP oil spill have helped bring into focus the environmental and human toll that can result from poor management practices. And in both cases, we aggressively pressed the companies as large investors. In the case of the BP oil spill, the economic fallout was not only acutely felt throughout the states and nations bordering on the Gulf of Mexico, but also around the world through the accident’s effect on the global energy market.The fund held an estimated 19 million shares in BP at the time of the event, which led to a significant decline in shareholder value. We are now a co-lead plaintiff in the class action lawsuit against BP, along with the Ohio Attorney General, that alleges that BP distorted its safety procedures and its level of preparedness to respond to a catastrophe and misled investors in its ability to clean up the spill in a timely manner. Similarly, the Massey mine disaster put in clear focus the devastating human toll that can result from failing to protect worker health and safety. As many of you know, Massey Energy’s former Chairman and CEO was a coal industry leader known for fighting regulations designed to address climate change and as an opponent of regulations to protect worker health and safety. As an investor with more than 300,000 shares in Massey, we had been pressing the company to improve its management practices long before last year’s disaster took the lives of 29 miners. At the end of 2009, after pressuring Massey for the previous three years to address climate change concerns related to the combustion of coal, I filed a shareholder resolution calling on the company to restructure its board to require all board members stand for election on an annual basis. After the proposal received the extraordinary support of 97% of votes cast, Massey agreed to my restructuring proposal and adopted rules requiring all board members to stand for election every year. In the wake of the Upper Big Branch mine disaster in April of last year, I was the first major investor who demanded the resignation of Massey’s Chairman and CEO Don Blankenship from all his roles at the Company. In December 2010, Blankenship resigned, removing what had been coined by some investors the “Blankenship discount.”

In June of this year, Massey Energy was sold to Alpha Natural Resources for a hefty premium of 21.1% over Massey’s closing price of $57.23, the last full day of trading prior to announcement of the transaction. This represents an appreciable gain and it is attributable to investors’ active ownership. Obviously, BP’s Deep Water Horizon explosion and the Massey mine tragedy are catastrophic events with obvious negative impacts – to the environment, to workers, and to our economy. Each also had a clear damaging effect on the company’s value and on us as shareholders. But what about the economic impacts that result from environmental and economic damage that isn’t as dramatic, immediate or obvious? What about companies which engage in practices that result in chronic injuries to our environment over the long term?
Here in New York State, we’re dealing with several long-term, chronic injuries to our environment: acid rain, unhealthy air, and a build-up of mercury levels in fish. These problems are not the result of disasters or dramatic accidents, but rather the ongoing practices of utilities and other industries – some of which our Fund holds shares in. Day-by-day and year after year, these companies’ practices have damaged the environment and created a variety of negative economic consequences for our state, such as loss of fisheries, loss of tourism dollars and increased costs for health care. When the New York State Common Retirement Fund looks at our investments in these utilities and corporations, we’re not only concerned about the damage being done to our environment and economy – but also the possible damage being done to shareholder value in the future if and when these companies face increased environmental regulations and lawsuits for damages.For example, this past year the US EPA finalized or proposed several significant regulations to control dangerous pollutants from power plants, including a program regulating greenhouse gas emission, a program to control transport of oxides of nitrogen and sulfur dioxide, and a regulation limiting emissions of mercury and other air toxins. When fully implemented, these regulations promise to prevent tens of thousands of premature deaths, tens of thousands of emergency room visits, tens of thousands of hospitalizations and millions of missed school or work days.
Our Fund owns significant holdings in these industries and their future profitability depends on the ability to adapt to an environment where emissions, particularly from coal, will be more stringently regulated. During the corporate annual meeting cycle in 2011, I pushed coal companies and utilities with significant coal-fired electric generating capacity to develop and disclose their plans to comply with these new regulations and address changes in the coal market that will result. As a result of that initiative, Arch Coal, Peabody Coal, First Energy and Southern Company have agreed to develop and disclose their plans for doing business in the new regulatory environment. Another example of the intricate balance we have to achieve between sustainable economic growth and environmental and health considerations is the potential development of natural gas in the Marcellus and other shale formations through hydraulic fracturing (or fracking). This issue is provoking fierce debate here in New York, mainly over the safety of horizontal, high volume drilling, and the possible negative environmental impacts that could result. Our fund is invested in oil and gas companies as well as in companies that may be impacted by discharges of “fracking” fluid into waste water treatment plants, or accidently into streams or
other surface waters. Accidents and nuisance impacts have negatively affected corporate reputations, created liability risk for damages caused by accidents and impact license to operate as municipalities ban operations and state regulations restrict operations.
Also, accidental and routine releases of contaminants have the potential to negatively impact sectors of the economy that rely on streams and aquifers for water, or rely on regional aesthetics to attract visitors. These threats require a response from investors to protect the value of investments in the industry and in industries that may be negatively impacted. And again, we have been active investors. Last year, I worked with other institutional investors and the Investor Environmental Health Network to sponsor and support a shareholder initiative to pressure oil and gas companies to identify and address environmental hazards that result from hydraulic fracturing and related activities. Our shareholder proposals received significant shareholder support during the last proxy season. And maybe more importantly, through engagement, I was able to pressure some of these companies to adopt significant improvements in their disclosures concerning: well-by-well disclosure of fracking chemicals; recycling fracking wastewater to eliminate hazards related to disposal and to limit impacts related to water withdrawals; use of less toxic additives in the fracturing process; control of air emissions; and sound practices to lower the danger of accidental releases of fracking chemicals. After last proxy season, the SEC showed enhanced interest in hydraulic fracturing – as SEC staff requested some of thesame information from oil and gas companies that we had sought in our initiative during its review of gas company filings. This year we will be pressing companies with poor environmental records to disclose community impact of hydraulic fracturing, including: community opposition, government enforcement actions, total annual aggregate government fines, facility shutdown orders, license suspensions or moratoriums on licensing, exploration or operations. Obviously, climate change is the mother of all long-term, chronic injuries to our environment. There is no doubt that catastrophic drought, storms and sea level rise that will result from climate change will have a profound economic impact – here in New York, and across the globe. Lord Nicholas Stern, recognized as a leading economist working on climate change, has estimated that global economic impacts of climate change could cost the world economy as much as 20% of GDP. We’re working on a number of fronts as shareholders to push for more sustainable practices by businesses and governments. Working with the Investor Network on Climate Risk, I joined with hundreds of investors around the world to strongly urge national political leaders to develop a global agreement to address the impacts of climate change.
We’re also working with Ceres, the Council of Institutional Investors and others to push the SEC to adopt clear guidance on disclosure of risks related to climate change. In addition, I’ve joined with many of these parties to urge leaders in Congress to adopt incentives, regulations and other measures to make our systems to generate and consume energy more sustainable.

Not only do we have to actively engage management of companies who engage in irresponsible behavior or operate in an environmentally negligent manner, we also have to be attuned to the regulatory framework in which these companies operate. We must be ready to push government to strengthen those regulations when necessary to protect workers and safeguard the environment. While argument continues about the share of responsibility for the blowout and spill at BP’s Deepwater Horizon well, there were also failures on the part of regulators responsible for overseeing oil drilling in the Gulf. The committee empowered by the Governor of West Virginia to investigate the Massey Big Branch mine disaster found that while the company was clearly responsible for creating the conditions that led to the deaths of those 29 workers, state and federal regulators also bear responsibility. And again, we can’t just be focused on the large, dramatic accidents. We need to pay attention to the day-to-day practices that lead to long-term damage. And not just damage to the environment. Obviously, the economic meltdown on Wall Street in 2008-09 shows us the enormous damage that can be done to shareholders when company executives, officers and directors take out-of-control risks with other people’s money. Congress has made some key reforms to the financial system in response to the market collapse – but as shareholders, we have to be constantly vigilant. We need better risk management and attention to sustainable practices from executives, officers, and directors of companies we invest in. We need to create an environment where boards of directors are more accountable – engaging with us and consistently providing the key information we need.To that end, our fund has been and continues to be represented on the board of the Council of Institutional Investors and continues to press in
the Courts, the Congress and SEC for a regulatory environment that is more attuned to the rights and needs of shareholders. With regard to the “S” in ESG, in the last year, my office has reached agreement with 21 companies to promote non-discrimination based on sexual orientation.
In 2009 we adopted a program to divest or freeze investment in companies doing business with the governments of Sudan and Iran based on risks of genocide. We also have a prohibition against purchases of stock in tobacco companies. These are just a few examples of what I’ve tried to do as a large institutional investor and shareholder, both to influence companies to improve problematic management practices – and to hold bad actors accountable when their negligence or irresponsibility leads to environmental and economic damage. I’ll continue to focus on these issues and fight these battles not only because it’s the right thing to do for our environment and our economy, but because it’s the smart thing to do for the one million members of the New York State and Local Retirement System – our shareholders – whose pensions I am responsible for safeguarding. New York is a large institutional shareholder, and ESG is integrated into our investment process. I can’t afford not to take environmental, social and governance criteria into consideration. Again, thanks to Responsible Investor for holding this Conference, and for continuing to grow an army of investors who believe, as I do, that through responsible investing, we can create a stronger, more sustainable economy for everyone.