The effects of climate change are apparent and all around us. Historic polar ice melts, coastal flooding, hurricanes and wildfires of increasing frequency and severity—and a general sense that 100-year storms seem to occur on an annual basis have now become a part of our common experience.
The extraction and burning of fossil fuels are the central cause of climate change and have already driven global temperatures up by 1°C beyond pre-industrial levels. Current global fossil fuel reserves, if extracted and burned, would exceed—many times over—the international carbon budget for an average increase in temperatures of 1.5-2°C (2.7-3.6°F).
One global response to this climate crisis is to push large institutions to stop investment in fossil fuel companies. Drawing upon the divestment movement that combated South African apartheid, the fossil fuel divestment movement rests upon both financial and moral objectives. In total, more than 1,000 institutional investors globally have committed to divest, in whole or in part, almost $8 trillion in holdings from fossil fuels. This success of this movement is thanks in significant part to the amazing organizing work of Bill McKibben and 350.org.
It is time for New York to join this global divestment campaign by enacting “The Fossil Fuel Divestment Act”—now pending before the Legislature in Albany. This bill, sponsored by Senator Liz Krueger and Assemblyman Felix W. Ortiz, would require the New York State Comptroller to divest the $209 billion New York State Common Retirement Fund (“Pension Fund”) from stocks, debt or other securities in the 200 largest publicly-traded fossil fuel companies, along with their subsidiaries, affiliates, or parent entities. The Comptroller may pause divestment, however, if divesting is likely to harm the Pension Fund. Specifically, the bill includes an important “safety valve” that allows the Comptroller to stop divesting, continue investing, or begin reinvesting in fossil fuel companies if “clear and convincing evidence” shows that the New York Pension Fund has lost or would lose at least half a percent of the fund’s total worth because of divestment.
(As we wrote in March, Governor Andrew Cuomo separately has called on his state agencies, including the MTA, New York Power Authority and the New York State Throughway Authority—in total, nearly $40 billion in value—to divest from fossil fuel companies.)
The New York State Finance Committee recently held a public hearing on this bill, where NRDC and many others testified in support of the legislation. However, New York State Comptroller Thomas DiNapoli, the sole Trustee of the Pension Fund, has come out in strong opposition to the bill in part because he argues it impinges on his “fiduciary duty” to make independent investment decisions and is in conflict with a New York State Constitutional provision that protects the pension of public employees. More broadly, the Comptroller also argues that divestment should only be used “as a last resort,” and that corporate shareholder engagement and other strategies are a better approach for addressing reducing carbon emissions from the fossil fuel sector.
With respect to the Comptroller’s legal arguments, NRDC believes there are no statutory, fiduciary, constitutional or other legal impediments to enacting this bill:
- First, New York State statutory law clearly establishes the Legislature’s authority to restrict the classes and kinds of investments the Comptroller can make with the New York pension fund. Under the New York State Retirement and Social Security Law, the Comptroller may invest in securities “in which he is authorized by law to invest the funds of the state,” and shall “be subject to all terms, conditions, limitations and restrictions by this article and by law upon the making of such investments.” Indeed, the history of this pension reveals that the Comptroller has never had unbridled freedom to invest the fund’s assets.
- Second, contrary to Comptroller DiNapoli’s position, we do not believe New York State’s fiduciary duty principles prevent the enactment of this bill. Under this standard, codified into state law in 1995, fiduciaries are judged by whether their investment decisions reflect reasonable care and caution in light of the entire investing portfolio—as well as in diversifying assets. Especially because of the bill’s safety valve, we believe the bill preserves the Comptroller’s ability to exercise care in investing. Further, this bill only removes one type of industry from the fund’s portfolio and does not prevent the Comptroller from otherwise diversifying.
- Third, we find that nothing in the New York State Constitution presents a legal impediment to advancing this bill. The provision of the Constitution that the Comptroller points to—the so-called “Nonimpairment Clause”—prohibits the State Legislature from diminishing or impairing the benefits of public pensioners. But nothing in this provision prevents the Legislature from making changes to fund management, so long as the Legislature provides appropriate protection for the fund’s assets.
- And finally, the New York State courts have repeatedly affirmed that the Legislature can restrict the classes and types of investments the Comptroller may invest pension funds in—so long as the Comptroller retains sufficient discretion in executing the specific investment decisions. In one of the leading cases, decided in 1975, the state’s highest court confirmed that the Comptroller’s investment choices are “limited by the continuing power of the Legislature to expand or restrict the classes and kinds of investment in which he may place the funds in his care.”
Turning to Comptroller DiNapoli’s arguments on the benefits of corporate and shareholder engagement, we agree there is merit in this approach as a general practice. But we have learned firsthand that certain industries—in particular the tobacco industry—are largely immune to change via engagement, however thoughtful the approach. And a recent report commissioned by Comptroller DiNapoli on how to best “decarbonize” the Pension Fund also provides support for skepticism over corporate engagement in the fossil fuel sphere. Specifically, as a distinguished panelist on the report, Bevis Longstreth, writes in an appendix: “[S]hareholder advocacy has a poor record where the policy changes sought materially affect management’s compensation or power, or the core of the corporation’s business.” He adds: “Engagement makes sense when the efforts undertaken are likely to serve the interests of beneficiaries to a greater extent than simply removing the investment from the portfolio. In the case of the oil majors, where exploration and sale of fossil fuel is central to their business model, engagement is hard to justify.”
Further, the Comptroller’s own experience in corporate engagement in this area has had its frustrations. In 2018, for example, his office sponsored a proposal to require ExxonMobil—one of the very top oil and gas companies in the world—to disclose climate risks in their drilling and sales strategies. The company claimed there were virtually no such risks. Similarly, in 2019, ExxonMobil asked the SEC to block an investor proposal aggressively supported by the Comptroller, that would mandate the company to set targets to lower greenhouse gas emissions. This time, ExxonMobil called it “micromanaging,” opposed the proposal and refused to cooperate.
So what would it would take for the Comptroller to conclude we have reached, in his words, the “last resort” of divestment? Earlier this month, the Comptroller (along with the endowment fund of the Church of England) is trying again to pressure ExxonMobil. This time, in a proxy filing that glaringly indicates options for corporate engagement are dwindling, the Comptroller has declared he would vote against all Exxon directors at the company’s annual meeting later this month due to its “inadequate response” to climate change. He also is calling for the election of a new independent board chairman and for a new board committee focused on climate change.
The Comptroller’s new decarbonization report also provides overall support for immediate action on fossil fuel pension investments. While the panel does not explicitly endorse the pending legislation, it recommends that the Pension Fund establish new criteria to measure return on investment, to assess the value of these assets over a longer time frame, and to consider an entirely new frame for investing decisions. The bottom line is that the Panel “recommends the Fund pursue alignment of its entire portfolio with a 2-degree or lower future by 2030 in accordance with climate science consensus.” We respectfully submit this is not far from the goal or timing of the Fossil Fuel Divestment Bill.
We also note that a long-term value reduction of the Fund is unlikely because of increasing global pressure on fossil fuel companies to shrink their extraction and production capacity to meet climate goals—and that would reduce their earnings. Divesting of assets whose core business earnings are expected to shrink makes common sense. Indeed, Jeremy Grantham, the acclaimed international investor, argues that divesting from fossil fuels would just as likely increase returns as diminish them. And in any event, as noted, the Divestment Bill includes a safety valve that allows the Comptroller to exercise independent judgment, pause divestment, and even reinvest in fossil fuel companies if clear and convincing evidence suggests divesting may hurt the Pension Fund.
In sum, passage of the Fossil Fuel Divestment Act—which is legally sound—would send a clear message to the industry that New York State will no longer countenance the oil, gas and coal industry practice of generating greenhouse gas emissions. Indeed, at a time when leading world experts warn the worst climate impacts will arrive much sooner than previously expected, swift, bold action is needed by all of us before it is too late. And divestment underscores the point that we can’t achieve our ambitious climate goals if we continue to gain profits from the companies and activities that are harming our planet the most.
*We greatly appreciate the assistance of Natalie Jacewicz, a third-year law student at NYU School of Law, in the drafting of this blog.