RI Interview: New York’s DiNapoli on how new $2bn low carbon index can enhance engagement

State Comptroller discusses ground-breaking index deal with Goldman Sachs

At last Friday’s COP21 special focus on private finance, New York State Comptroller Thomas DiNapoli announced that the $184.5bn Common Retirement Fund he oversees had teamed up with Goldman Sachs Asset Management on a new $2bn low carbon index as part of an expanded sustainable investment commitment. Responsible Investor speaks with DiNapoli about the move.

What was the thinking behind developing the new index?

We are very excited about it. It’s been many months of efforts to come up with a smart strategy which we feel is a responsibility to the members of our pension fund and moves us to be supportive of a low carbon economy which we know is around the corner. We want to be ahead of the curve.

Why did you choose to work with Goldman Sachs on this?

We have a strategic relationship with Goldman Sachs and part of that relationship involves working with them to assess our carbon footprint across our portfolio. That was a preliminary of much of the work we’ve been doing to assess what our risks are. We found out that our carbon footprint was better than our benchmark so we were pleased with that. But we knew that there was more work for us to do. So brainstorming with Goldman we came up with the notion of creating a customised index that would put the priority on shifting capital to low carbon companies and away from those who are heavy emitters of carbon and greenhouse gases. So working with Goldman and FTSE Russell, which is our index calculator, we came up with this new index.

Where has the $2bn come from?

We are taking $2bn out of our existing equities portfolio and shifting it over to this new index as part of our passive investment strategy and our expectation would be that we are going to get at least as good or better returns, probably better returns. And because it is an index strategy it is easily scalable so we are really looking at again working with Goldman and FTSE Russell over time building out the first $2bn we’ve put to this index. From an investor perspective it really is a way to reduce our risk. We are very excited about what it will do for us and hope it will point the new direction for other institutional investors like pension funds to take some more steps.

You have created a bespoke, in-house product. Are there enough products for big institutional investors like yourself to tackle climate change risk?

That’s been one of our challenges. We have wanted to do more but it has been hard to find opportunities. Especially because we are a pension fund, and we are large, and we’ve got a perpetual investment horizon.We always have to think about active management versus passive management. In terms of public equities we’ve relied on indexes. It is also more efficient for us. We are going to manage it internally, so it’s very efficient for us. It’s a product where we can easily deploy a significant amount of capital, get the benefit from doing so, and know there is a greater good attached to it, and it’s a smart way of investing.

What is also going to help us is the continued engagement in terms of corporate governance with the companies. So when we see companies in the portfolio lagging in terms of dealing with emissions issue we can really target then a little more closely and carefully. We are really keeping it very broad in terms of what we are including, for example pure play coal. We are going to mirror the index fund of Russell. It will no doubt change, and there has been a lot of response on corporate engagement. So no doubt we will be reporting those who are responsive to our engagement and get the message across that dollars will flow more to companies that deal with the issue of his we move to a low carbon economy, or low carbon investments. So we think it has many possibilities for some very positive outcomes.

How has the vibe been at COP21?

COP21 has been a very positive vibe. I think there is certainly a sense that those who are hammering out the details of the agreement are focused on getting an agreement. Obviously they are not there yet and certainly from the perspective that we have as investors having there be a global commitment to resolve this issue will send a very strong signal that the steps we are taking and others are taking is very much in line with what is a collective vision from the world community. And ultimately I think it goes back to market-based solutions in terms of where you put your investment dollars and having a market can move this agenda. I think the agreement needs to come up with a statement that has s collective level of support that will be a very important and very strong signal. And I am confident it is going to happen. A briefing this morning with Christiana Figueres and Al Gore was positive. We are not there yet, but it is going to happen you have 150 heads of state kicking it off. There is a combined desire to see a positive and strong statement come out of this.

The New York State Common Retirement Fund is the target of a piece of divestment legislation that would require it to divest all fossil fuels by 2020. Can you comment on this?

We are investors so we take the perspective that being investors in the market and moving the market in a positive direction is the smart strategy, and I think from the perspective of wanting to continue to meet our obligations to our retirees, or taxpayers who help support the retirement fund, having a smart index is the more effective way to create the sort of change, and get the returns that we want.