In January, two of New York City’s pension funds announced that they would divest $4 billion in fossil fuel investments from their portfolios to limit the financial and environmental impact of the heavy emitters. New York City was already the first major U.S. city in 2018 to commit the divestment of fossil fuels by 2023. And the latest announcement would make this one of the largest fossil fuel divestments in the world.
The two funds are New York City Employees’ Retirement System (NYCERS) and New York City Teachers’ Retirement System (TRS). A third one, the New York City Board of Education Retirement System (BERS) is expected to vote for divestment soon as well.
“Fossil fuels are not only bad for our planet and our frontline communities, they are a bad investment,” said Mayor Bill de Blasio. “Our first-in-the-nation divestment is literally putting money where our mouth is when it comes to climate change. Divestment is a bold investment in our children and grandchildren and our planet. I applaud the trustees, advocates, and experts for their hard work, and I look forward to seeing more cities around the world join this call for change.”
The trustees of the pension funds hired independent investment consultants in 2018 to assess the risks from fossil fuel investments to their portfolios and create an action plan. The plan also included the doubling of investments in renewable energy, climate infrastructure, and sustainable real estate to $4 billion within three years.
Kirsten Spalding, senior director of the Investor Network at Ceres, a nonprofit organization that brings together institutional investors and companies to tackle the world’s greatest sustainability challenges including aligning the economy with the goals of the the Paris Climate Agreement, said that all of those investors and funds start from a position of fiduciary duty.
“While we’re advocates and particularly focused on climate, our perspective is always ‘what does the fund need to do to manage risk and improve performance,’” Spalding said.
The Ceres Investor Network includes socially responsible asset managers, pension funds, endowments, public retirement plans, money managers, including BlackRock and State Street, as well as specialty managers and venture capitalists in clean energy. This represents more than $29 trillion in investment assets.
But divesting assets is only one – albeit the most stringent – of the ways to help companies transition to a net-zero economy. For example, after divesting stock in 14 thermal coal companies in 2017, the California Public Employees’ Retirement System (CalPERS) is also focusing on encouraging investors to use their power in proxy voting of oil and gas companies, such as it did with Exxon Mobil that year.
In addition, CalPERS and California State Teachers’ Retirement System (CalSTRS) have a comprehensive strategy on climate change. It includes engagement with high-carbon emitters to decarbonize their companies, advocacy with regulatory organizations such as the Securities and Exchange Commission, and integration of the carbon footprint analysis across all asset classes in their investment process.
Spalding said that there’s been a shift in the last couple of years where Ceres’ members went from analyzing each individual security on climate risk to viewing climate as systemic risk.
“So, we have to move the temperature trajectory of everything in the portfolio to begin to stop global warming, and address the physical and the transition risk of climate change to everything in the portfolio,” Spalding said.
Spalding noted there will be implications of climate change even on sectors and industries that are unrelated to fossil fuels. For example, in health care, there will be an impact on underserved communities and their access, even though health care is not traditionally considered a climate risk area, she explained.
In order to achieve climate goals, investors’ engagement with companies, board governance, and diversity will also play a large role – not just divestment of heavy polluters.
Spalding is optimistic about the future and predicts that there will be a lot of cooperation between investors, asset owners, and governments.
“Usually, you think of investors in competition with one another,” Spalding said. “But around this issue, I’m seeing a lot of collaboration, a lot of alignment as they try to work together.”