Editor’s note: ImpactAlpha contributing editor Imogen Rose-Smith, a longtime senior writer for Institutional Investor, contributes a bi-weekly column on the policies, practices and strategies of the largest asset allocators, including pensions, foundations, and endowments. As Imogen says, she’ll be “tracking what investors do, not just what they say.”
ImpactAlpha, June 15, 2021 – It may seem like last November’s election only just happened (or, perhaps, never stopped happening). But in New York City it’s already election season again.
Early voting is underway for next Tuesday’s Democratic primary for mayor, comptroller and other local races. Given the popularity of the GOP in the city, whoever wins the nomination will likely emerge victorious in November. Even if that gives Andrew Yang the key to the city.
The mayor’s race garners the bulk of attention, but spare a thought for the comptroller as well. One surefire way to tell there is an election going on: the announcement in late March from public officials, including Mayor Bill De Blasio and Scott Stringer, the current comptroller, that the $253 billion New York City pension system would increase its climate-change solutions investments from the $4 billion goal set in 2018 to $6 billion by the end of this year.
Earlier in the year, three of the city’s five pension plans had also committed to selling approximately $4 billion in equities to showcase the plans’ divestment from fossil fuels.
State and local elections offer the rare opportunity for voters to hold public officials accountable for how pensions, which use taxpayer dollars, are managed. But by turning climate and ESG into election issues, officials have missed the chance to actually align pension portfolios with the real risks, and opportunities, of the climate crisis.
Rather than settle for pledges, voters should look at what they do in office, and push for broader changes in the investment strategies of public pension plans. De Blasio and Stringer have had almost a decade to redirect the pension plans’ investments. For most of that time they did, basically, nothing.
Consider the rhetoric: “We need to meet the climate crisis with everything we’ve got, and that’s why New York City is leading the way forward with investments in sustainable solutions for our planet, our children, and our retirees,” Stringer said in his official statement announcing the new $6 billion commitment.
Stringer sounded almost like an impact visionary. “New York City is standing up for our people, our pension beneficiaries, and the only Earth we have because the future is on the side of big ideas in clean energy — not big polluters,” he went on. “Investing in climate change solutions is in the fiduciary interest of our beneficiaries and together we’re leading the charge to build a cleaner and greener future for all.”
Now ponder the reality: The portfolios still have perhaps $2 billion, or under 1% of their total , invested in clean energy solutions. The increased allocations, according to the March 23 statement, will be in “climate change solutions public equity investments,” identified by the Comptroller’s Office Bureau of Asset Management. In other words, the plan is going to $6 billion through a ramp up in unnamed public-equity funds.
Eight years ago, when De Blasio and Stringer were both seeking election to their current jobs, they expressed interest in climate commitments. It is only now, when it suits their political ambitions, that any real investing activity appears to be happening. Stringer is running, albeit poorly, for Mayor of New York. De Blasio is itching to take on his hated rival, New York Gov. Andrew Cuomo, in next year’s gubernatorial election. That’s depressing.
Putting aside the fuzzy math of fossil fuel divestment, even $6 billion of assets invested in renewable energy and climate solutions over an eight-year period for a $253 billion pension system… is nothing. A rounding error that does not suggest “meeting the climate crisis with everything we’ve got.”
Given the two-term limit for the offices of mayor and comptroller, the next elected official could similarly drag their heels. Big promises followed by years of inaction. That is wasted time in a climate race we are rapidly losing, and a lot of capital sitting on the sidelines.
Changing the investment behavior of public funds is not impossible. See, for example, hedge funds. But when it comes to climate investing, our public pensions are stuck in neutral, or rather, stuck in socially responsible investment.
The problem is that sustainable investing still is not the responsibility of the investment office. Yes, most public pension plan investment offices, at least in liberal cities and states, have a policy for ESG alignment. Many will have signed the Principles for Responsible Investment.
But relatively few are actively and aggressively seeking out ESG investment solutions, even around climate change. The amount of money committed by pension plans to these opportunities remains shockingly small.
Last month, the new alternative investment firm Engine No. 1 won its activist campaign against ExxonMobil, successfully placing three insurgent candidates on the oil giant’s board (see, “Victory for insurgents stuns Exxon as shareholders vote for a low-carbon future”). The opinion page of The Wall Street Journal rejoiced. Just kidding. They were outraged.
In “The Proxy Coup at Exxon,” on May 26 the Journal presented the historic election of the insurgent slate as some kind of woke signaling on the part of institutional asset owners. “The vote is a reflection of the enormous political pressure and financial leverage of government pension funds, proxy advisers and asset managers like BlackRock that want to be seen as virtuous to the progressives who are now in power,” the editorial board opined.
True, the California State Teachers’ Retirement System, or CalSTRS, and the New York State Common Retirement Fund came out in favor of the dissident nominees. That hardly counts as a “progressive political coup.”
Pension plans are political, and that swings both ways. What, after all, was the last-minute push by Eugene Scalia, President Trump’s secretary of labor, to upend Labor Department guidance concerning ESG pension investments, if not a politically motivated stunt? Or the Trump administration’s even more bizarre Fair Access to Finance rule, which sought to prohibit the consideration of ESG factors in bank lending. The swift efforts to roll back these initiatives on the part of the Biden administration are as much political as they are economic, although bad policy is bad policy.
The Texas state legislature recently passed a bill to prevent state pension plans from investing in ESG funds that boycott Texas energy companies. “Extremists are coming after your retirement account vis-à-vis ESG investing,” Texas Railroad Commissioner Wayne Christian said, in a railroad commission piece published in World Oil. “As proponents of SB 13 have said, this sends a strong message to big business, that if you boycott Texas energy, Texas will boycott you.”
The common practice has been for politicians to say one thing – ‘We’re going to invest in clean energy solutions,’ or, conversely, ‘Don’t mess with Texas’ – while largely leaving the investment office to do its own thing, protected by the language of fiduciary duty.
This approach has left little room for educating pension board members and investment staff, not to mention state lawmakers, that investing in renewable and clean energy solutions is actually a good idea. (The hangover from the failed clean tech boom and bust of the early 2000s does not help.)
As a result, pension funds in red states are unlikely to make any clean and renewable investments. In blue states, politicians make political hay when it suits them.
There are exceptions, of course. A state university endowment in a red state making an investment in a renewable energy fund. A New Orleans public pension plan investment in a clean energy venture fund. But if you believe that clean and renewable investing represents a significant opportunity for returns across the risk spectrum, then public pension plans are vastly underinvested.
Follow the money
Rarely are climate change solutions or ESG mandates baked into asset allocations as a dedicated investment commitment. Instead we have pledges. Pledges can be a powerful political tool, but have limited impact on investment decision-making.
In the early 2000’s, public pension plan investments in hedge funds and other alternative investments, in most cases, required legislative action. In that case, the investment plans wanted to be allowed to invest in hedge funds, sometimes over the objections of organized labor distrustful of Wall Street and high fees.
Union objections to hedge funds have grown louder and more weaponized as hedge funds have underperformed, and as they have continued to make labor-unfriendly investments and, almost more damming, their principals have given political donations to anti-labor causes and politicians.Even against that political firestorm, public pension plans often still have hedge fund investments, even if they call them special situations, absolute returns or something else.
More or less the opposite is true of clean energy and ESG. When we take a look under the hood of the five pension plans that make up the New York City Pension System, we see very little in the way of actual green or ESG investment. I asked the Comptroller’s press office to point me to the $2 billion in climate investments that the pension plans made prior to March of this year. They did not get back to me.
A review of the publicly disclosed investment portfolios for each of the five city plans brings up pretty much nothing. If investment staff actually thought climate-related investments were a good idea, they would act without a politician in the middle of an election breathing down their neck.
Being a state, or city, comptroller, or Treasurer, isn’t exactly a sexy job. You don’t get to prosecute bad guys, or oversee state government. You’re basically the accountant. But that function often comes with some oversight of one or more pension plans.
In New York City, the Comptroller’s office is responsible for the NYC Bureau of Asset Management, which invests all the assets of the fifth-largest pension system in the country. More often than not, the elected official in charge has no asset-management experience.
This year’s race for the next New York City Comptroller is playing out along predictable lines, even in these unpredictable times. According to a recent poll, City Council Speaker Corey Johnson is the frontrunner with support from 18% of the primary electorate. Tied for second with 9% each are former CNBC anchor Michelle Caruso-Cabrera and Brooklyn City Councilman Brad Lander. As many as 44% of voters were undecided.
Johnson’s pitch is mostly about Wall Street, saying he will ensure the pension plan pays less in asset management fees. The union base hates Wall Street’s fat cats even as their pension plans continue to search for returns and that elusive alpha.
Progressive candidate Lander, has targeted climate change, saying he will “utilize tools of the office to further efforts to divest from fossil fuels, reduce emissions, invest in renewable energy and climate resilience, and decarbonize New York City’s economy while creating new, green union jobs.” Sound familiar?
Wild card Caruso-Cabrera (proving that being a financial journalist is a qualification to run, if not serve) also supports fossil fuel divestment as well as divestment from other businesses with questionable practices, such as human trafficking and modern-day slavery.
None of these proposals represents a real plan to transform the investment portfolios of the city pension systems.
With their votes now and in November, New Yorkers have the opportunity to exert democratic control over the way their pension systems are managed. They should demand more from their politicians than platitudes and grandstanding.
They should ask candidates to make the case for climate investing on economic, not political, grounds. And they should make them work with their investment office to shift capital soon, not eight years from now. There is no more time to squander on the altar of political prudence.
Imogen Rose-Smith is a contributing editor at ImpactAlpha. A longtime senior writer for Institutional Investor, she was most recently a fellow in the Office of the Chief Investment Officer of the University of California.