Interim net-zero targets ‘may not be met by any of us’, says NYS Comptroller

Thomas DiNapoli, sole trustee of the $233bn New York State Common Retirement Fund, talks to RI about divestment, net zero and anti-ESG backlash.

“It is very possible that none of us will meet the kind of interim [net-zero] goals and targets we’d like,” New York State Comptroller Thomas DiNapoli told Responsible Investor candidly. But, he added swiftly: “That doesn’t mean we can’t make the 2040 one.” 

DiNapoli, the sole trustee of New York State’s $233 billion pension fund, was speaking to RI last month during the RI USA conference. As he noted, the preceding 12 months had had a major impact on investor plans for decarbonisation.  

“Everything has just gotten so complicated on the energy side because of the war in Ukraine and what that’s done to energy prices and supply,” he said. “It’s a much more problematic geopolitical environment.”

His remarks echo a report put out last year by the Net Zero Asset Owner Alliance (AOA), in which the UN-backed body warned that it may need to “tolerate a ‘buffer’ or slight lag behind the scientific pathways” among its members when it comes to their decarbonisation efforts, given the widening gap between climate science and real economy pathways. 

New York State set its 2040 net zero target at the end of 2020.  

Liz Gordon, executive director, corporate governance at New York State, told RI that investor initiatives such as AOA and the Paris Aligned Investment Initiative – to which the pension fund belongs – recognise that if the real economy doesn’t shift, net-zero commitments will not be achieved.  

Unlike New York City, where three out of five funds have divested fossil fuels, New York State is in the process of assessing its fossil fuel holdings, sector by sector, on their transition readiness. This exercise was one of the recommendations of an expert decarbonisation panel, whose work informed the fund’s 2019 Climate Action Plan.   

DiNapoli told RI that assessments of the fund’s thermal coal, tar sands and shale oil and gas holdings have resulted in more than 50 firms being dropped from its portfolio. 

The fund strongly advocates for engagement when it comes to fossil fuel holdings. Gordon stressed that “divesting from particularly risky investments is one small piece” of the fund’s net-zero efforts. “You really can’t divest your way to net zero,” she added.  

She also highlighted the importance of policy advocacy too – “because in the end, the answer is going to come there”.    

Oil and gas assessment

New York State is currently assessing its oil and gas holdings, a process that is “more complicated” than other sectors, DiNapoli said, in part because of the size of the fund’s holdings in this area. 

“Let’s say it got to the point where, based on our [transition readiness] metrics, we would consider divestment. That might have an impact on the fund that would limit some of our options there.”

DiNapoli explained that, when the fund divested guns, its holdings represented “a rounding error” compared to its overall size. “That is not the case when you look at the climate issue and the energy sector, so that makes it more problematic and more difficult.” 

As he noted, following the crash in share price during the pandemic, oil and gas majors are making record profits. “Being honest about it, in the short run, because we haven’t divested, we’re benefiting from that at a time when the markets have been down.” 

The fund’s analysis of the oil and gas sector, which includes big names, is likely to run longer than those already completed on other fossil fuel sectors. It is expected to finish towards the end of the year. 

“It’s definitely going to be more intense, more complicated than earlier sectors that we looked at and perhaps more problematic in terms of outcome,” said DiNapoli.  

Part of the complexity when it comes to assessing integrated oil and gas firms is the number of potential pathways open to them. 

“A large integrated oil and gas company does a lot of things and a lot of things well, with a lot of resources on the R&D side and a lot of capital to put towards whatever it is that they choose,” said Gordon. 

Rather than dictate a path, she said what the fund really wants to hear is that majors have “some plan and that the plan is a viable one and that they are supporting it with capital”. 

Index investment focus

Many of those who were critical of New York State’s fossil fuel holdings early on almost had the “notion that the fund was betting on big oil”, DiNapoli said. He stressed, however, that most of its holdings are through index funds, a method of investing favoured by the state.  

In December 2021, the fund invested $2 billion into the FTSE Russell’s Russell 1000 TPI Climate Transition Index. Five years earlier, it collaborated with Goldman Sachs Asset Management on a pioneering low carbon index.      

DiNapoli hopes that financial markets “will understand what folks like us are trying to achieve, and that they will come up with more products with a low tracking error, so we can do more passive investing in index funds that are complementary to our net-zero goal”. 

He added that where it will get “more complicated” for the fund is with private markets, an area it is starting to look at. 

“When we make certain judgements today, we may be invested in those funds 10 years from now – and suddenly we’re getting a lot closer to 2040,” he said. “We’re going to have to be more thoughtful about where we put our money in terms of infrastructure, private equity and real estate.”  

Here too, he is hoping that financial firms will come up with products that have a similar timeframe to the fund’s goals.  

ESG backlash  

On the anti-ESG movement currently sweeping red states in the US, DiNapoli told RI that he is concerned – but not overly. 

“When anything becomes that politicised in the kind of divided world that we’re living in, especially here in the US, I am concerned. But most responsible money managers out there understand that the whole menu of issues under ESG are real world concerns and factors.

“I believe there are more investors that take our position that these need to be considered as part of risk mitigation, and you’re not being a responsible fiduciary if you’re not doing that.” 

On the US Republican states boycotting the likes of BlackRock over ESG, such as Texas and Kentucky, DiNapoli said they do so at their own risk.  

“BlackRock has a pretty good track record, so in effect, they’re politicising it because they have some qualms about certain things that BlackRock may or may not being doing. They’re going to cut off the opportunity to maximise returns. That to me is not a smart investment strategy and counter to fiduciary responsibility.” 

He has “a little” sympathy for BlackRock’s CEO Larry Fink over the ire his firm has drawn from both “the anti-ESG crowd and the divestment crowd”. But, he added: “When you’re that big, you have a bigger target on your back.”   

His remarks contrast with those of New York City Comptroller Brad Lander, who wrote to Fink in September over his “growing concern that BlackRock is backtracking on its climate commitments, to the detriment of its portfolio, New York City’s pension funds, and our planet”. 

2023 proxy season 

New York State is a regular filer of shareholder proposals on ESG issues.

Last year, it filed a proposal at Amazon for the second year in a row calling on the online retail giant to undertake an independent racial equity audit. The resolution was withdrawn after the company committed to undertake one led by former US attorney-general Loretta Lynch. 

This year, DiNapoli said the fund will put together a new proposal on worker freedom of association, an area of increasing focus for shareholders. Last month, a proposal on the issue was filed at Amazon by Canadian responsible investment body SHARE and US-based SOC Investment Group.  

New York State is still researching which firms will be filed at. Gordon told RI: “We’re seeing a lot of organising efforts around the country and we’re seeing a variety of different responses from companies to those efforts.” 

DiNapoli agreed that there has been a growing focus on social issues generally among investors in the past few years. Driving this, he believes, is a response to the “combination of the George Floyd killing and the impact of covid”. 

“I feel today more than ever that it’s E, S and G,” he said. “It’s all three. I think there were previous times where it was very much the G, other times, very much E and now we’re at a point where it really is ESG.”