Financial and Political Intersection: NYC Pension Fund Fuel Divestments
The NYC Public Pension Fund
In 2018, New York City’s public pension fund set out on an initiative to divest from fossil fuels in the plan’s portfolio. The move targeted fossil fuel divestment in two modalities. First, by eliminating investments in Midstream Fossil Fuel companies; companies that transport, store, and process oils and gases (think Cheniere Energy, or Enbridge Inc.) Second, by eliminating investments in Downstream Fossil Fuel companies; companies that are responsible for converting materials provided by Midstream companies into oil and gas products that can be used/distributed to the consumer (think Chevron, BP, ExxonMobil).
The recent divestments were chalked up to a timely revelation by fund leadership that climate change poses a threat to the global market and, thus, to further “galvanize global action” , they are choosing to eradicate fossil fuel investments and increase investment in sustainable energy.
Excerpt from the NYC Comptroller’s Office:
“In October 2021, Comptroller Stringer and trustees announced the funds adopted a commitment to achieve net zero greenhouse gas emissions in their investment portfolios by 2040. This includes a goal to double investments in climate change solutions, such as renewable energy, energy efficiency, and green real estate, to over $8 billion by 2025 and achieve a total of over $37 billion in climate solutions investments by 2035 across the three funds”.
As of 2023, the State of New York’s Fund managers declared in addition to Midstream and Downstream divestiture it would even be divesting from Upstream Fossil Fuel companies.
Excerpt from the Institutional Investor:
“Previously Lander and the trustees of the New York City Employees’ Retirement System (NYCERS), Teachers’ Retirement System (TRS), and Board of Education Retirement System (BERS) divested from fossil fuel reserve owners in their public equities portfolio and voted last year to exclude upstream investments — exploration and extraction — in their private markets portfolios”.
At the center of the argument, Lander, NYC Comptroller, equates climate risk with financial risk. A comprehensive list of the entirety of the NYC Public Pension Fund Divestments can be found here.
Potential Pros of Divestment
Divestment is Touted in service of a ‘Cleaner America’ by allocating investments to further research and implementation of renewable energy resources. There can be no further development or refinement of renewable energy initiatives without monetary support. And, while confounding information is present, it has been purported that the growth of renewable energy use in consumers’ everyday lives is growing. With longstanding social impact organizations like the Royal Society for Arts, denoting that a shift towards consumer goods like electric power vehicles has spurred on a type of technology revolution where renewables don’t necessarily have to depend on solar or wind support to operate. Just one example of this market shift can be found here. Additionally, In lockstep with IRS requirements, Pension fund managers have a fiduciary responsibility to diversify the plan’s assets. Turning a blind eye to emerging markets like renewable energy and not opting to diversify a plan’s assets could read as a lapse in prudent fiduciary judgment.
Prevent Stranded Assets. Stranded Assets are represented when a policy is proposed and passed that negatively affects fossil fuel production(i.e., NY Senator Webb’s S.8357/A8866), the NYC Public pension fund would not incur losses associated because they divested from upstream, midstream, and downstream fossil fuel companies. With ramped-up political efforts in recent years to target fossil fuel production at the federal and state levels, Pension fund managers could be anticipating inevitable trickle-down effects, such as consumer boycotting, and increases of government regulations that lead to increased expenditures(i.e., see Clean Air Act of 1977, led by President Carter) that, when coupled with aforementioned environmental incentives, make it a lucrative divestiture.
Cons of Divestment
Takes for Granted that divesting from upstream, midstream, or downstream fossil fuel companies does not mean the fossil fuel companies will not continue to grow or sustain their fuel production. The Institutional Investor reported that as public pension funds and banks have divested from fossil fuel companies, it has only opened the market to private equity. Where private investors are now buying up shares of fossil fuel companies, often with fewer ethical standards and considerations than the former public investors. This not only keeps fossil fuel companies running at every “stream level”, but it also means that the NYC Public Pension is unable to collect substantial returns for their workers and beneficiaries, while also not furthering its “Clean America” initiative.
Fails to Consider that what is the best move politically may not translate to the best business outcome. It is no secret the State of New York wants to make a political statement; “By successfully divesting billions of dollars from fossil fuel-related securities that directly contribute to a warming planet, New York City is once again claiming its place at the forefront of the global green revolution” (New York City Comptroller). However, the NYC political initiative works against national data, as reported by the 2023 U.S. Energy Information Administration(EIA). Where the EIA found that fossil fuels(petroleum, natural gas, and coal), comprise 83% of the U.S. primary energy consumption totals. This is directly compared to the 9% of U.S. primary energy consumption totals of renewable energy(biomass, hydropower, geothermal, wind, and solar) present in the 2023 report. When you compare the 2023 EIA primary reports to reports on primary energy consumption levels of previous decades, fossil fuels do not show an apparent statistical probability of decreasing any time soon. Those comparative reports can be found here. Further, this could implicate the Public Pension fund as not satisfying their ‘fiduciary duty’ as outlined by the Internal Revenue Service(IRS) here. This position is held on the basis that pension managers, if they opted to divest would not be acting “solely in the interest of participants”.
Further Considerations
While I don’t pretend to be a financial quant, I would be interested to know how NYC Pension fund managers rationalized divestiture after considering the stable usage rates, and the gross market monopoly that fossil fuels have on global energy supply. Further, in the spirit of diversifying, as is prudent according to IRS regulations, why not, instead of outright divesting, decide to reallocate other portfolio investments that have resulted in a negative carry or, a capital loss? Even broader, is there any point at which political considerations could affect the long-term success of the fund?
Resources & Additional Supplemental Material
https://www.institutionalinvestor.com/article/2dxca7q0o5qm45ilcj4zk/portfolio/nyc-pension-funds-may-ramp-up-fossil-fuel-divestment
https://climate.cityofnewyork.us/subtopics/divest-invest/#:~:text=They%20not%20only%20emit%20planet,from%20fossil%20fuels%20by%202022
https://comptroller.nyc.gov/newsroom/comptroller-stringer-and-trustees-announce-successful-3-billion-divestment-from-fossil-fuels/
https://www.eia.gov/energyexplained/us-energy-facts/
https://www.eia.gov/energyexplained/renewable-sources/
https://www.nrdc.org/bio/rich-schrader/new-york-announces-historic-fossil-fuel-divestment-plan
https://www.thersa.org/blog/2016/11/invest-in-the-future-not-the-past.-four-reasons-to-divest-from-fossil-fuels?gad_source=1&gclid=CjwKCAjwg-24BhB_EiwA1ZOx8iH-wMuHnz4P_8xsj83FQGGgBT-szsd-IR3wilwfedrHYVbgljmoRRoCicMQAvD_BwE