New York State Climate Investing Goals: Who's On the Hook?

I hope it's not me.... but I know it is.

Precis of all the following: the sole fiduciary of the New York state pension funds says that in twenty years the funds would be net-zero carbon emissions.

Huzzahs all around, but no mainstream press recognition that the pensions of hundreds of thousands of people would be affected… because a halo of virtue surrounds such a decision.

Also, if this decision leads to fund underperformance, the taxpayers will make it good…. right? Nobody will get sued, right?

Comptroller proud of his decision

Press release from the New York state comptroller: New York State Pension Fund Sets 2040 Net Zero Carbon Emissions Target

New York State Comptroller Thomas P. DiNapoli announced today that the New York State Common Retirement Fund (Fund), valued at an estimated $226 billion, has adopted a goal to transition its portfolio to net zero greenhouse gas emissions by 2040. This process will include completion within four years of a review of investments in energy sector companies, using minimum standards to assess transition readiness and climate-related investment risk, with, where consistent with fiduciary duty, divestment of companies that fail to meet minimum standards.

On the eve of the 5th anniversary of the Paris Agreement, as the world increasingly moves toward net zero emissions targets by or before 2050, this goal will continue to ensure the Fund’s portfolio is adapting to the anticipated transition. This ambitious and multifaceted effort continues State Comptroller DiNapoli’s leadership on management of climate risk to investments, for which the Fund is already top-ranked in the United States by the Asset Owners Disclosure Project.
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Building on DiNapoli’s 2019 Climate Action Plan, the Fund will continue its use of minimum standards for determining whether a company is well-prepared for the transition to a low-carbon global economy. The Fund has already set minimum standards for the thermal coal mining industry and divested from 22 coal companies.
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As part of its net zero commitment, the Fund will continue to increase its engagement efforts with companies across industries to encourage them to reach net zero carbon emissions more quickly, and will continue to vote against board directors at portfolio companies that fail to take steps to mitigate climate risks. The Fund is primarily a passive index investor in the public equity markets and its size gives it a prominent voice at companies across the globe. Major companies have already adopted net zero (or negative carbon) goals, including Microsoft (negative carbon by 2030), Apple (net zero by 2030), and Amazon (net zero by 2040), and more companies adopting these goals will further mitigate the risks of climate change on the Fund’s portfolio.

The Fund will also establish interim trajectory goals to measure progress toward its 2040 net zero target and institute transparency measures regarding the Fund’s progress, including annual progress reports, and updates at the outset and conclusion of each sector review.

The Fund’s strategies — to address climate risk to investments by achieving net zero carbon emissions by 2040 and comprehensively reviewing companies, with divestment from those that fail to meet minimum standards where it’s consistent with fiduciary duty — go further, faster, than the goals outlined in the Fossil Fuel Divestment Act, sponsored by Sen. Krueger and Assemblyman Ortiz. Therefore, the legislators have indicated that the Fossil Fuel Divestment Act will not be reintroduced in January 2021.

I skipped over all the politicians being quoted in this press release. You can go to the source if you really want to see their official statements. Other than State Comptroller Thomas DiNapoli, the following New York politicians are quoted in the press release:

• State Senator Liz Krueger

• Assembly Assistant Speaker Félix W. Ortiz

• Senate Majority Leader Andrea Stewart-Cousins

• State Sen. Todd Kaminsky

• State Sen. Rachel May

• State Sen. Jen Metzger

I will come back to those politicians in a moment.

Interlude: Venus is Too Darn Hot

News alert from the World Economic Forum:

World Economic Forum @wef

Venus was once Earth-like, but climate change made it uninhabitable wef.ch/38gHhcM #Space #ClimateChange

Look, I can get into the nuances of this, but let’s get real: if you’re trying to get people to agree that specific actions need to occur to prevent catastrophic climate change, then you shouldn’t point to planets where no humans ever lived and there weren’t any fossil-fuel-burning ANYTHING.

If you want my opinion:

1. a bigger catastrophic climate change on Earth for humans would be another ice age, which the Earth has had several times and will likely have again;

2. I have yet to see good support that humans have enough energy output [currently] to affect Earth’s climate for longer than a few decades

But I am not a climate scientist…. not that being a climate scientist protects them from being wrong.

I am not a marketing person, either, but I can tell you right now that tweet was idiotic from a persuasion point-of-view.

The Cheese Stands Alone

Back to my response to the press release: I could say I have questions, but I don’t really.

I will make statements.

The State Comptroller of New York is the SOLE FIDUCIARY of the New York state pension funds. The big cheese stands alone.

ESG, the current fad term among institutional investors, has three letters in it, where G = governance. Having a sole fiduciary for a pension plan is bad governance.

Thomas DiNapoli is currently 66 years old, and in 20 years, in 2040, he would be 86 years old. He may actually be around to answer for any screw-ups, even if he’s not in office then.

My point is this: only DiNapoli is on the hook for this decision. To be sure, his decision affects millions of people at a blow, and nobody but him is really responsible for this decision.

That is the meaning of sole fiduciary. He has the sole power to make this decision, and the sole responsibility.

As for lawsuits, well. I am not a lawyer. I do know it is difficult to sue a government official, whether elected or not elected. I will let a law-blogger address any legal issues, especially class action suits, in the event that a public pension plan is stressed due to the investment strategies of a sole fiduciary. That’s not my bag.

What I do know is that when pensions get to the litigation stage, that generally means disaster has already happened.

In the event that DiNapoli’s unilateral choice has a large negative effect on the public pension funds, the assumption is that the NY taxpayer can make the pensioners whole. That may not actually be a bad bet at this point in time, as the NY state plans have a good history in making payments in full to the funds.

Unlike some other states. [looking at Illinois and New Jersey]

Trying to Provide Cover for the Sole Fiduciary

All of the politicians quoted in the press release are Democrats (shocker), and all are sponsors/supporters of the “Fossil Fuel Divestment Act”, which is definitely no surprise.

Press release from last year on the Fossil Fuel Divestment Act:Krueger And Ortiz Introduce Updated Fossil Fuel Divestment Act

Albany – Today, as world leaders are meeting for the UN Climate Change Conference in Madrid, State Senator Liz Krueger, Chair of the Senate Finance Committee, and Assembly Assistant Speaker Félix W. Ortiz announced the introduction of a revised version of their Fossil Fuel Divestment Act (S.2126-A/A.1536-A). The changes to the bill, based on feedback from the State Comptroller’s office, advocates, and investment experts at an April 30th hearing, are designed to make it a more effective tool to address stranded asset risk, and place the bill on a firmer footing regarding its constitutionality and the pension fund’s fiduciary obligations.
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The new bill also contains a significant change to protect the Comtproller’s investment discretion and address concerns about constitutionality. Before divestment can commence, the Comptroller must issue a Determination of Prudence, stating whether he believes that divestment from any or all of the companies on the exclusion list complies with his fiduciary responsibility and the “prudent investor rule” defined in state law. If the Comptroller determines it would not be prudent to divest from any particular company, that company would be removed from the exclusion list. All companies removed from the list would be reconsidered for exclusion within five years.
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This bill will require the State Comptroller, after due consideration of his or her fiduciary responsibility and the prudent investor standard, to divest the state Common Retirement Fund (the Fund) from major coal, oil, and gas producers. This will protect the fund, as well as its members and retirees, from the growing risk of rapid devaluation these companies present, while also sending a powerful message that it is no longer acceptable to invest in a business model that is driving the climate crisis.
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The Legislature is bound by a fiduciary responsibility over the pension fund.

Ha, no, they’re not.

I decided to stop right there. No legislative body has fiduciary responsibility for anything, which they would realize if they thought about it for a moment.

I am not a lawyer (as mentioned earlier), much less a constitutional one, but I will tell you right now the legislature only has responsibility for passing laws, without regard to the practical effect (I mean, they should consider practical effects, but if they don’t, you can’t really sue them over it. You can merely toss them out of office at election time).

They can do whatever they want, and just from federalism, yadda yadda, the legislature can do what they damn well please within constitutional limits. It would be hard as hell to sue the New York Assembly/State Senate for screwing around with the pension funds. They can impose insane requirements on the pensions, such as no investments in equities at all.

But the comptroller can be sued, I bet. Especially when the comptroller does have the sole fiduciary duty.

Anyway, nice of them to offer him cover.

Democrats Can’t Progress a Progressive Bill in New York?

I checked on the status of the bill, and it seems it’s never gotten out of committee in the state senate. That’s odd. Versions were also introduced in the prior two legislative sessions.

And yet.

A Democrat-dominated legislature can’t manage to get this stuff passed. Interesting.

I will be watching this over the next year, because the next NY legislature will be even more lop-sidedly Democratic.

Incoming Democratic state senators representing upstate New York areas say their victories will bring a new set of issues to the table when state lawmakers reconvene in January.

Five Democrats won elections last month to represent parts of Buffalo, Rochester, Syracuse and the Hudson Valley in seats that were previously occupied by Republicans. The GOP incumbents in each district declined to seek re-election.

The results helped swell the Democratic conference to 43 members, which is enough votes to override a gubernatorial veto.

It’s not clear to me that the reason this bill can’t get out of committee is the threat of a veto.

But then, it’s not like the Democrats, much less Gov. Cuomo, is emailing me to let me know what they’re up to.

More coverage of the story: hallway of mirrors

Obviously, the Comptroller didn’t have to wait on the NY legislature to act. He is the sole fiduciary after all, with a lot of power to screw around with the state pensions. The bill would mainly tie the hands of any later comptrollers and to try to give the person in that role cover from litigation.

We will see how this plays out.

Coverage of this story:

• Fast Company: New York state is divesting its pension fund from fossil fuels

• MarketWatch: Influential New York pension fund will drop fossil-fuel stocks, put pressure on utilities and auto makers to cut emissions

• Financial Times: New York state’s $226bn pension fund plans rolling fossil fuel divestments

• Pensions&Investments: New York State Common pledges to reduce emissions to net zero by 2040

• NYT: New York’s $226 Billion Pension Fund Is Dropping Fossil Fuel Stocks

• ai-CIO: New York State Pension Fund Aims to Be Carbon Net Zero by 2040

Most of the above stories are slightly-edited versions of the press release, as is usual in the industry press. This is not a complaint — simply an observation.

Alternative views from the party line

I would like to share with you Elizabeth Bauer’s take at Forbes, but I am not paying Forbes for access to…. well, I don’t want to get into their business model right now. I pay less for other publications I value more… sorry, Forbes, fix your pricing if you want me to pay.

I will share Bob McManus’s take: State Comptroller Tom DiNapoli just put the NY pension fund on the road to ruin

DiNapoli Wednesday [December 9] waved his stylus and politicized the state’s $226 billion public-employee pension system, probably irretrievably, with far-reaching, unhappy implications for New York’s already critically overburdened tax base.

DiNapoli said he will direct the massive investment power of New York’s Common Retirement Fund away from fossil fuels. Disinvestment is a move he has wisely resisted for 13 years, but there is an election on the horizon, and New York is moving sharply to the left — so what better time to go woke than now, right?
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It may in fact be true that a “low-carbon future” is in the offing. But countries like China, India and Russia aren’t acting that way. And in any event, DiNapoli’s job is in the here and now, representing the best interests of one of the most cossetted and fiscally burdensome public workforces in America.
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Really, why wouldn’t the gender-driven alphabet-soup folks demand disinvestment from firms that don’t meet their ever-shifting standards? Of course they will.

Next up? How about race-based “reparations investments” from the fund? A special fund for women? Ethnic enclave development grants?

Hey, when you have $226 billion, a dangerously pliant pension fund administrator and a keenly honed instinct for spending other people’s money, just about anything is possible.
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The state consumes enormous amounts of natural gas, for one example, but it won’t permit any to be extracted from its own vast reserves in the Southern Tier, simply because it considers ­itself to be above all that.

I will address that last paragraph first: I don’t consume natural gas myself (we go for fuel oil and propane at our house, as natural gas is not on tap, as it were), but I am not surprised to hear that natural gas is a big fuel in NY.

I could get into the idiocy of using electricity for heat when you have fuels like natural gas around, but I do want to point out it is frickin cold in NY in the winter. Today, when I started all my errands, the temp outside was 10 degrees F. We have a stand-alone kerosene heater in the kitchen to keep it warm (yes, we have radiators and fuel oil to power them, but the kerosene heaters are backups for power outages — as I said COLD KILLS QUICK and while we have 5 humans in this house we can pile up, it helps to light a fire). One of the big reasons the northeast in the U.S. is so expensive to live in is because IT’S FRICKIN COLD.

The northern states in the U.S. are going to use more power — because it is more costly (from a fuel point of view) to heat than to cool.

But here’s the point: if you lock down the view that “NO WE WILL NOT INVEST IN THE EVIL FOSSIL FUELS” because that’s the current fad, you may find out… oh, those “evil” fossil fuels were saving us from an ice age (hypothetically).

Or, more pertinently from a pension fund point-of-view: oh, those fossil fuel investments could have added to our investment performance.

That may not be the case, of course. Perhaps fossil fuel investments are on the downslope of growth.

I don’t know.

And I am skeptical that the sole fiduciary of the NY pension funds knows, either.

It’s an act of hubris to declare that once-and-for-all a specific asset subsector is going to underperform for the reasonable investment horizon for the fund. If you are a fiduciary for the fund, that is the only legitimate basis for such decision-making, after all.

At least NY state funds are doing well (ignore NYC funds), and they’ve been outperforming peers, investment-wise, on an absolute return basis. There’s a lot of ruin in a public pension fund, if they’re sitting relatively pretty.

But opening up the pension fund investing to political fads means the assets can be carved away, which is Bob McManus’s point. Thing is, this is no the first time public pension funds have run into this issue. Many pension funds already opened investment decisions to political pressure: South Africa in the 1980s, guns and tobacco in the 1990s…. these pressures are all about.

So perhaps public pension funds shouldn’t exist in the first place, if they can’t look out for the pension-participant interests in the face of political pressure.

Public employee unions should think about that.