Divestment, engagement and fiduciary duty in the New York Senate

This week’s hearings before the state’s finance committee got to the heart of the divestment/engagement debate

As a perfect encapsulation of the divestment/engagement/fiduciary duty debate raging around the new ‘sin’ stocks, fossil fuels, the hearings before the New York Senate finance committee on the divestment bill that the state’s politicians have been trying to compel Comptroller Thomas DiNapoli to comply with could not be bettered.

Senator James Sanders noted that fiduciary duty would not have prevented, he hoped, the fund from divesting from Nazi Germany, and climate change was far more dangerous a prospect.

The situation was enhanced by the fact that New York City mayor Bill de Blasio has already made the decision to divest from fossil fuels and is only waiting to decide the most effective process, while DiNapoli is resisting pressure with all his influence.
But the moment that provided the most potent encapsulation came as the state fund’s interim CIO Anastasia Titarchuk was being grilled by NY senator John Liu. Has the fund divested from any other sector stocks?, she asked. Private prisons and gun and ammunition manufacturer stocks had been divested, she replied. The decision was based on a holistic investment approach in combination with “the double bottom line, the moral case”.
It was a moment before she realised what she had said, and she later admitted she should not have used the phrase, but it did not take Liu so long to capitalise on her mistake: and how is the moral case not part of fiduciary duty for fossil fuel divestment, she asked? Quick to her defense, she noted that these stocks represented a minute portion of the fund and their divestment did not and could not have affected its bottom line, while fossil fuels represented from $5bn to $8bn. But it was too late. And the mood in the room was already on the side of divestment.
In her introduction, Senator Liz Krueger noted that none of the politicians who opposed the bill had agreed to attend and ask questions, and the only industry representative scheduled to attend was from the American Petroleum Institute, though, as it turned out, no one turned up from there, either. Nor did the Governor, Andrew Cuomo, attend, despite being slated to be there. But the hearing did include grass-roots activists, journalists, researchers, pensioner representatives, mayors and other officials, as well as two members of the DiNapoli’s decarbonisation panel – who did not always appear to agree with each other – Bevis Longstreth and Joy Williams.Titarchuk provided most of the testimony, however, speaking of DiNapoli’s “multifaceted strategy” compared to the bill’s “blunt instrument” which she claimed was “narrowly focused and does not address the risk which exists across the entire portfolio”. The bill asks the Comptroller to divest from the Carbon Underground 200, an aggregated list of the top 100 coal and top 100 oil & gas companies; coal within one year and the rest within five years, by 2025. The fund owns shares in 85 out of the 200.
On the other hand, the City’s decarbonisation panel’s recommendations call for the fund to be 100% sustainable by 2030, and Krueger asked whether the argument over the bill wasn’t simply about timelines. Titarchuk insisted it was about policy and approach, not timelines. She noted that utilities might present the greatest opportunities in the future, though they showed the greatest present risk right, and that the bill would be simply transferring shares away from an engaged shareholder. She brought up the example of Equinor, a power company assessed in the panel’s report, which is 95% fossil fuels right now but is aggressively pursuing wind power. “If we divested now we would miss that opportunity,” said Titarchuk. But Krueger countered that if the funds divested from Equinor now and then it dropped off the Carbon Underground list because it was shifting to wind power they could reinvest at that point. Challenged about Exxon’s recent successful bid to keep a climate shareholder proposal off its proxy, and its undermining of the engagement process, Titarchuk said that engagement is a long game and “it’s better to be at the table”.
Then the argument shifted to fiduciary duty, with logic and semantics contesting with emotion. Titarchuk argued that fiduciary duty was very narrowly defined: the sole responsibility of the fund was to provide the highest benefits to its beneficiaries and that simple divestment was not consistent with that fiduciary duty. Senator James Sanders noted that fiduciary duty would not have prevented, he hoped, the fund from divesting from Nazi Germany and climate change was far more dangerous a prospect. Which Liu followed with: “What good is all of this wealth if it leads to all of us dying.” Williams, the Chair of the decarbonisation panel, explained that their advice would lead to divestment as an investment process not an investment strategy.
Other speakers came and went, each as compelling as the other regardless of which side of the argument they were supporting. But not everyone can be right. However, it did seem, despite claims to the contrary, that this was more an argument about process than about end results. No one wanted to continue to own fossil fuel stocks, but it was all about the how and the when.