Last month, New York State’s pension fund revealed it had begun reviewing its thermal coal holdings – one of the pledges made in its 2019 Climate Action Plan.
The announcement came just a week after three public pension funds in New York City appointed consultants to scope out the potential for fossil fuel divestment.
The announcements highlight the starkly diverging approaches to climate change being taken by the two men elected to oversee the public pension funds of New York State and New York City.
“Does it take more effort than divestment? Absolutely. Will the purists think it is too incremental? Probably. But we are a pension fund, people need to remember we are trying to make money for 1.1 million New York workers”
State Comptroller Thomas DiNapoli – the sole trustee of the State’s $210bn Common Retirement Fund – tells RI that he knows that divestment “purists” won’t be happy with the approach the fund is taking. But, he argues, it’s very important there is a “thoughtful” and “deliberative” process behind any investment decisions it takes.
“As fiduciaries, we want to make sure we are keeping the interests of our members and beneficiaries in mind, first and foremost…and not doing anything that would be harmful to the fund, even if that might be something many folks think would be desirable in terms of a larger societal goal.”
DiNapoli has come under increased pressure to divest fossil fuels since New York City Comptroller, Scott Stringer, announced his intention for the City’s five pension funds to do just that by 2023 (although, in reality, only three funds are participating in the divestment study).
The State’s approach is, on the surface, less dramatic: it will assess “high-impact sectors” against newly-developed “asset-class-specific metrics and minimum standards” to sort the companies preparing for the low-carbon transition from those that are not.
Thermal coal will be the first sector to be reviewed due to its “inherent risks” on climate change, DiNapoli says. Oil sands are the likely to be next.
The creation of minimum standards was one of the recommendations of New York State’s decarbonisation panel, which delivered its findings to the fund in April.
The panel, chaired by former climate change expert for Ontario Teachers’ Pension Plan Joy Williams, did not recommend a blanket divestment of fossil fuels, but said the fund should establish a “glide-path”, including active engagement with target companies, so that, over time, it “will no longer own” companies not making progress.
DiNapoli describes the thermal coal review, which isn’t anticipated to take long, as “trying to assess transition readiness”. It’s “quite likely”, he adds, that the disclosures it gets back from the less diversified thermal coal companies targeted “won’t be very satisfactory”, and that there “will be some kind of restriction – up to and including divestment – in some cases”.
He tells RI that he believes this sector-based approach will “effectively de-risk our portfolio” while “looking out for the financial interests of our returns”.
“Does it take more effort than divestment? Absolutely. Will the purists think it is too incremental? Probably. But we are a pension fund, people need to remember we are trying to make money for 1.1 million New York workers.”
DiNapoli adds that, while pension funds have a role to play in tackling climate change, the problem “won’t be solved by pension funds just selling off certain holdings”. The reality, he continues, “is that government policy, regulatory policy will have a lot more to do with change in this area than whether a pension fund holds stocks in Exxon Mobil”.
He concedes that it’s a stance that is proving “very hard” to sell to the public, who are showing increasing support for fossil fuel divestment, thanks to its simplistic approach (one which DiNapoli criticises as “too simplistic”) and a number of high-profile campaigns.
DiNapoli insists New York State’s focus on picking ‘winners’ within each sector is more appropriate, pointing to the billions of dollars it has invested in the energy sector. “We can’t just say that we are going to pull that out,” he argues, especially as much of it is held through passive funds that have “worked well for us for decades” and are complex in terms of divestment.
“Exxon is a big holding of ours, so it creates a real challenge when we get to setting minimum standards for that sector. I suspect that there will not only be some tough questions from our side, but some difficult analysis that we are going to have to make”
The fund is “looking at new strategies” though, he adds, explaining that sustainable investing is a good fit for the kind of “patient capital” run by pension funds. “We want to be invested in companies that know that there is a transition going on”.
One company that is frequently accused of ignoring the climate transition is US oil major Exxon Mobil, for which New York State is a ‘lead engager’ on behalf of investor engagement initiative Climate Action 100+.
“Exxon is a big holding of ours, so it creates a real challenge when we get to setting minimum standards for that sector. I suspect that there will not only be some tough questions from our side, but some difficult analysis that we are going to have to make”.
Last year, New York State voted against Exxon’s directors in response to the company blocking its shareholder proposal on emissions targets. Just two of the ten directors received less than 93% support last year and Exxon’s CEO and Chairman, Darren Woods was re-elected with 93.5% backing – 40% of shareholders supported a resolution calling for his two roles to be split.
DiNapoli believes the high level of support for directors at companies like Exxon shouldn’t necessarily be seen as an “enthusiastic endorsement”, but “more a lack of attention to the issue” of climate change.
“As long as a company is in business and paying dividends, most folk’s natural inclination is to say: ‘Even if we quibble on some part of what they are doing, generally speaking the leadership seems to be handling things the right way’”, he says.
He adds that, “for now”, the fund remains invested in Exxon, but remains “dissatisfied”. “Voting against all their directors [last year] is just one way of expressing that, and I expect we will continue to have those concerns in the future.”
It’s important that other investors join the fund in “ramping up the discussion” on climate engagement – especially in a US context, where the SEC is moving in an increasingly “inhospitable direction of what investors role should be”.
Although recent moves by the SEC may be emboldening companies like Exxon (the firm is attempting to block several climate-based proposals again this year), DiNapoli warns that the global push on sustainability means that “US companies make a big mistake, and the wrong bet, if they think they can stick with business-as-usual”.
The Comptroller tells RI that if Exxon shows a “continued lack of progress”, it’s “very likely” that New York State would vote against its directors again, and he would “absolutely encourage other investors” to follow in the same direction.
“We have to do something more to get their focus and attention.”