Brief:
In a bold move that reverberates through the financial landscape, New York City Comptroller Brad Lander has unveiled a transformative proposal aimed squarely at the city’s pension funds. This initiative seeks to curb future investments in midstream and downstream fossil fuel infrastructure—such as pipelines and liquefied natural gas terminals. Announced in a blog post on Tuesday, Lander’s recommendation would radically reshape the investment strategies of the city’s three major pension funds.
Should the pension boards endorse this sweeping policy, it will apply to the Employees’ Retirement System, the Teachers’ Retirement System, and the Board of Education Retirement System. By proactively excluding these energy sectors, New York City would pioneer a precedent as the first municipality in the United States to prohibit public pension funds from engaging in midstream and downstream fossil fuel investments, expanding upon existing divestment from fossil fuel reserves and upstream activities like extraction.
Insight:
The Bureau of Asset Management is tasked with the crucial job of crafting the actual policy language for these exclusions, slated for presentation to the pension fund trustees in the early months of 2025. In this anticipated meeting, a comprehensive assessment of the potential impacts of this decision will also be on the agenda.
The exclusions are a continuation of the pension funds’ Net Zero Implementation Plans. Lander articulated in his blog that diverting investments from fossil fuel infrastructure is vital to mitigate the colossal risks posed by climate change—both to the global economy and the financial health of New York City’s public pension portfolios. As he poignantly stated, "Climate risk is financial risk," underscoring the responsibility of finance professionals to heed this moral imperative.
“The ramifications of the climate crisis unfold before us," Lander observed, pointing to increasingly frequent hurricanes, flash floods, and deteriorating air quality that jeopardize both our planet and our financial futures.
In a historical context, the funds first began their divestment journey back in 2018, and this evolving strategy reached another milestone when they excluded upstream fossil fuel investments from their private market portfolios in 2023, aligning with the ambitious net-zero goals.
Underpinning the plan are stringent requirements for annual disclosure of emissions, increased allocations to renewables, and active engagement with portfolio entities to curtail emissions. The funds have proudly increased their stakes in energy and climate solutions to $11 billion since 2021. Lander has sought commitments from major banks to reveal their ratios of clean versus fossil fuel financing, demonstrating a proactive stance towards sustainable financial practices.
Lander’s announcement on October 22 has garnered accolades from numerous environmental groups and advocates, including 350, New York Communities for Change, and Climate Families NYC. Loren Blackford, Acting Deputy Director of Sierra Club, stressed that the new exclusions would help disrupt the dangerous trend of private market investments funding environmentally harmful projects.
"The urgency has never been more pronounced," Blackford asserted, "It’s imperative to sever financial ties with industries that exacerbate the climate crisis, which in turn threatens both our economy and the retirement security of countless individuals."
Tom Sanzillo, former Deputy Comptroller and now an analyst with the Institute for Energy Economics and Financial Analysis, remarked on the opaque nature of the private equity sector. He contended that the proposed exclusions represent a judicious and much-needed advance in climate policy.
"Lander’s initiative today could empower much-needed scrutiny over an industry long overdue for oversight. Fossil fuel entities, regardless of their equity status, continue to decline," Sanzillo noted.
The implications of this decision are likely to ripple across the investment community. Alissa Jean Schafer, Climate Director at the Private Equity Stakeholder Project, emphasized that private equity firms must respond to their capital sources and that investors should pivot towards more sustainable and less hazardous energy alternatives.
“Investing in fossil fuels invites a trifecta of financial, legal, and climate risks for institutional investors," Schafer cautioned. "It endangers communities and jeopardizes the retirement funds of our everyday heroes—firefighters, teachers, and others. It is essential that we disentangle our investments from the damaging fossil fuel sector.”