There is a conflict in climate change policy between the two largest public pension funds managed by New York State. The $268.3 billion Common Retirement Fund (CRF) is engaged in a robust fossil fuel divest/invest strategy. The $148.1 billion Teachers’ Retirement System (TRS), is stuck in public policy discussions that are five years out of date, at best.
The Common Retirement Fund, under Comptroller Tom DiNapoli’s leadership, went through a robust and at times frustrating diligence process on climate change. For years, the fund participated with the governor in fact-finding, solicited the views of experts, and joined with other investors in various climate-related actions. When the time came to act, CRF adopted a policy that improved on and exceeded the climate goals of a bill proposed by the Legislature. The comptroller has considered climate change, engaged with fossil fuel companies, and decided it is time to orchestrate a systematic withdrawal from fossil fuel investments.
The state comptroller has decided it is time to orchestrate a systematic withdrawal of investments from fossil fuels
Meanwhile, the Teachers’ Retirement System released an initial climate action plan only in late December. The fund divests from some thermal coal companies (in which it has minimal holdings) and freezes further share purchases of the oil, gas, and coal companies where it holds its largest positions. It also prioritizes the fossil fuel companies for engagement on climate issues through proxy voting and other methods.
Freezing stock holdings is not divestment, and claiming that shares held in a company are less risky than shares bought in the future looks like a political compromise, not progress.
The TRS also places a big bet on its engagement strategy, even though it has not yet developed a policy to guide its activities or future divestment decisions. The fund must decide when engagement has failed and divestment is required. Many fossil fuel companies have proven impervious to persuasion by shareholders, and the fund risks destroying value for beneficiaries if it lingers on the threshold.
Consider last year’s shareholder revolution, when ExxonMobil owners voted in three new directors over management’s objections. After years of fruitless engagement with the company, climate-conscious shareholders appeared to have won a landmark victory. But now, the new ExxonMobil board is acting the same as the old board. Engagement doesn’t work – at least, not with fossil fuel companies that act in bad faith. DiNapoli tried talking to the fossil fuel companies and lost patience. He is divesting.
The case of the Teachers’ Retirement System of the City of New York bears special lessons for state TRS. The city fund publicly released several reports it used to justify divestment, including one from leading investment adviser BlackRock. The report found that no fund that divested had lost money and most fossil fuel companies were not prepared to address the transition risks associated with climate change. BlackRock also made it clear that oil and gas stocks have underperformed over the past five years.
For its part, the state Legislature has a fiduciary relationship with the fund, and the 2022 legislative agenda includes a bill requiring the fund to divest from fossil fuels. The bill currently has 77 co-sponsors.
In the face of a thoroughly documented divest/invest strategy by the state comptroller based on a history of active engagement with fossil fuel companies; legislative action compelling the fund to divest; sister funds in New York City choosing divestment; and advice from one of the largest investment advisers in the world, the TRS is plainly out of step.
This op-ed appeared originally in the Albany Times Union on January 31, 2022: Teachers’ Retirement System must divest from fossil fuels
Tom Sanzillo ([email protected]) is IEEFA’s director of financial analysis.
Dan Cohn ([email protected]) is an IEEFA global energy transition researcher.
About IEEFA: The Institute for Energy Economics and Financial Analysis (IEEFA) explores issues related to energy markets, trends and policies. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.