New York City’s chief financial officer announced plans Wednesday to divest the future private equity holdings of two major retirement funds from fossil fuels, making them among the first major public pensions in the nation to take the step.
The commitment is part of a new climate plan unveiled yesterday by Comptroller Brad Lander to chart the course of the retirement systems for municipal workers and teachers – together worth $172 billion – to net zero emissions across their portfolios by 2040. Lander called it “the most ambitious plan undertaken by a U.S. public pension fund.”
The move cast a shadow on Lander’s counterpart in Albany, state Comptroller Thomas DiNapoli. In November, New York Focus reported that the state funnels public pension dollars to one of the dirtiest power plants in the country through private investments managed by private equity giant Blackstone. The state pension fund has divested from at least 55 publicly owned companies and is seen as a leader on climate risk — but it hasn’t announced any plans to clean up its private portfolio.
The nationwide movement to divest from fossil fuels has gained significant traction in recent years, but it has largely limited its attention to publicly traded companies — even as they increasingly offload their fossil fuels assets to the private market. In New York, for example, researchers estimate over 20 percent of fossil fuel power plant capacity is now owned by private equity.
The municipal workers’ and teachers’ retirement funds first pledged to divest from fossil fuel reserve owners in 2018, but that commitment focused on public rather than private investments.
Under the new policy, the city will ask managers to exclude the pensions from any fossil fuel investments when boards consider new private equity funds. If the managers refuse, the pension board will then consider whether or not to go ahead with the investment. The policy leaves current private equity investments intact, but the city will ask existing managers to set their own net zero plans for the city’s assets by 2026.
None of this means the city is planning to get out of private equity. In fact, Lander last year successfully lobbied Albany to raise the cap on the teachers’ pension fund investments in private markets.
The stakes of the announcement are underscored by the financial might of the city’s retirement funds, some of the largest in the country. The two funds that voted for the plan have more than $15 billion invested in private equity. (For comparison, Maine, which is also looking to divest from private fossil fuel holdings, invests less than $4 billion in private equity.)
“Brad and the city folks have understood that their size makes a big difference,” said Tom Sanzillo, director of financial analysis at the Institute for Energy Economics and Financial Analysis and former deputy state comptroller. “This will have a very important impact on the private equity industry and the message being sent.”
Other funds, Sanzillo said, would be wise to consider similar commitments.
“It is safe to say that the city’s pension funds are ahead of the state,” said Pete Sikora, who directs climate campaigns at New York Communities for Change.
The move is the latest salvo in a war between blue and red states over sustainable investing. Republicans in at least seven states have enacted policies discouraging public investors from considering environmental factors, calling such practices “woke capitalism.” They moved to pull public money from BlackRock, the world’s biggest asset manager, after it embraced socially-conscious investing. Lander has chastised the company and similar firms over signs that it may be bowing to the pressure.
“What they’re waging is a culture war, an effort at political distraction designed to protect the pockets of their fossil fuel donors,” Lander said. “It is unfortunately having a very real impact. We have seen asset managers like Vanguard walk back climate commitments they already made in the face of the cynical attack.”
He cast divestment as a fiduciary responsibility, not just an environmental one. “Climate change poses systemic and material risks not just to the planet and everyone on it, but also to the global economy, the budget and finances of the city of New York, and the investment portfolios of New York City retirement systems,” he said.
Lander thinks he can pressure private asset managers to set their own climate goals and implementation plans by 2026. That’s one reason, he said, why he is committed to keeping the pensions invested in private equity, despite calls from advocates that he abandon the asset class.
“If we’re successful at getting our private market managers to do what the plan calls on them to do, and if we align with other institutional investors to do it, we will have a much greater impact on climate transition than if we were to wash our hands of all those investments and not have anyone calling on them to set science-based targets and decarbonize,” he told New York Focus.
“Left to their own devices, they would probably not care as much,” he said.
Another plank of the climate plan, Lander added, is investing pension dollars in solutions like renewable energy – $8 billion between the two funds by 2025. Many of those investments flow through private equity. “If we want to invest in growing renewables and in climate technologies, most of the places those companies are are in private markets,” he said.
But fossil fuels aren’t the only reason some activists and researchers have critiqued private equity investments. Critics have argued that private equity investments have had significantly lower returns than appear on paper, especially once fees are taken into account, and engage in risky business practices in industries like healthcare, retail and prisons.
Lander was receptive to those arguments as a candidate. “The pension funds need to be invested in a way that maximizes long term value and minimizes fees,” he told New York Focus in 2020. “We need to take a good hard look at whether private equity firms do that.”
Since taking office, though, his confidence in the investments has grown. “I have the numbers my people give me. Their job is to achieve good risk-adjusted returns net of fees,” he said on Wednesday. “That’s their core mission.”
Lander declined to comment on the lack of public progress from the state on cleaning up its private investments. State comptroller DiNapoli’s office did not return a request for comment.