NYC tackles fossil fuels with ESG despite GOP opposition.
New York City Takes Bold Steps to Exclude Fossil Fuel Companies from Pension Funds
New York City is leading the charge to exclude fossil fuel companies from pension funds, despite pushback to ESG from Republicans at the state and national levels.
The Big Apple has, largely across the board, been working to cut greenhouse gas emissions in an effort to curtail climate change. But it stands apart in its ambitious embrace of environmental, social, and governance investment principles, collectively known as ESG.
Proponents and Critics Clash Over ESG Investing
Proponents of ESG investing, such as New York City Comptroller Brad Lander, who oversees the city’s pension plans, see ESG investment strategies, for example, moving away from investments in the fossil fuel industry, as compatible with fiduciary duty, as they contend divestments help safeguard plan beneficiaries from the longer-term financial risks associated with disruption from climate change.
But critics, like Republican attorneys general and state treasurers across the country, see ESG investing as a breach of fiduciary duty. They contend that the ESG push is a way for liberal climate goals to be injected into the private market without the use of the ballot box, and that fund managers that do so are violating their duty to get beneficiaries the best returns on investment.
Lawsuit Challenges Fossil Fuel Divestment Decision
Now the board of trustees of three different pension systems is facing a lawsuit over the 2021 decision for three funds to divest from fossil fuels. The lawsuit argues that the New York City Employees’ Retirement System, the Teachers’ Retirement System, and the Board of Education Retirement System are all in violation of their fiduciary duties by committing to having net-zero emissions in their portfolios by 2040.
Lander, a Democrat, is not buckling to the pressure in what could be a test case for further moves to forward ESG investing and divestment from the fossil fuel space in municipalities across the country. He contends that critics on the Right have made ESG a political hot potato and that the move toward ESG investing shouldn’t be an inherently political matter.
“I wish I could start from square one, when the field hadn’t already been polarized,” he told Bloomberg Law last month. “I wish you could start from a place of saying, ‘Let me talk to you about what the pension obligations are that run out for decades.’”
The lawsuit, which was filed in May by a group of public employees, seeks unspecified damages, including reimbursement of losses from the divestment.
The lawsuit claims that the defendants breached their fiduciary duties and abused control over their plan assets by divesting some $4 billion in holdings in companies involved in the extraction of fossil fuels, something that the complaint characterized as an “ineffectual gesture to address climate change.
“This unlawful decision to elevate unrelated policy goals over the financial health of the Plans is flatly inconsistent with the Defendants’ fiduciary responsibilities, and jeopardizes the retirement security of Plan participants and beneficiaries,” the complaint reads.
Lander has argued that some of the pushback is a misunderstanding about the machinations in play. Lander pointed out last month that he doesn’t make direct investments, but that each pension fund’s trustees and asset managers do. Lander said he just wants ESG to be a way of measuring risk.
“Everyone who manages a large pool of money recognizes that it’s important to take long-term risks into account,” he said. “We take environmental, social, and governance concerns very seriously in the context of all our investments across our portfolio, because that is not only consistent with fiduciary duty, it’s required by fiduciary duty.”
Will Hild, the executive director of the conservative group Consumers’ Research, which has been a major critic of ESG, said that the lawsuit will be watched closely given the broader implications of ESG and how municipalities handle these sorts of issues.
“I think that just the filing of this case is going to send shockwaves through public officials who have been politicizing and weaponizing their states and localities’ pension funds in violation of the law,” he told the Washington Examiner.
Hild also said that the discovery is going to have big implications “because it is going to force the comptroller to admit the myriad ways they have been colluding with other players, other pension funds, other major asset managers in ways that are completely outside of their legal authority.”
The fight over the divestment and integration of ESG in New York City is a microcosm of the fight being waged in states across the country and at the national level.
Several states, including West Virginia, have made moves to protect pension funds from ESG. For example, Florida announced earlier this year it is prohibiting state-run fund managers from considering ESG factors when making investments. Some states have also announced big divestments from money managers such as BlackRock.
For instance, Missouri announced last year that it would yank some $500 million in pension funds from BlackRock, joining other Republican-led states divesting from the firm, which has become a top target of the GOP, over its commitment to ESG goals in investing.
“Fiduciary duty must remain the top priority for investment managers, a duty some of them have abdicated in favor of forcing a left-wing social and political agenda that has failed to succeed legislatively on publicly traded companies,” said Missouri State Treasurer Scott Fitzpatrick at the time.
ESG, and pushback against it, is getting big attention at the national level too. Last week, Republicans held a series of congressional hearings to emphasize their opposition to the federal government’s embrace of ESG policy and spark conversation surrounding the topic.
A big part of the ESG blitz on Capitol Hill was because of how hard the Biden administration is pushing ESG through federal agencies and the rulemaking process, according to Rep. Bryan Steil (R-WI), a member of the House Financial Services Committee.
“I think it’s a pretty rational understanding to realize that not only are the American people pushing back, but members of Congress and me, in particular, have been bird-dogging this for some time,” Steil told the Washington Examiner during an interview.
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