A recent commentary in City & State argued that if New York state Comptroller Thomas DiNapoli divests public employee pension funds from fossil fuel companies, it would be a dangerous politicization of his role. No factor besides investment performance should be considered when investing those funds, the argument goes.
But if rate of return is New York’s main concern, the state should be running away from fossil fuels – rather than maintaining investments in ExxonMobil, Chevron and other fossil fuel companies that are causing global warming. And protecting New York from climate change is also a valid concern for any statewide elected official.
One rule to wise investing is to look forward to assess future rate of returns, not backwards to past performance. Sure, investing in fossil fuels was a safe investment strategy over recent decades. But they have been underperforming compared to other stocks in recent years.
The global climate treaty negotiated in Paris in 2016, flawed and non-binding as it is, demonstrated unanimity among the world’s nations that we need to curtail and then eventually eliminate greenhouse gas emissions, including those from fossil fuels, if we are to keep global warming below 1.5 to 2.0 degrees Celsius. Virtually all the world’s nations endorsed a goal of reaching zero carbon emissions by the middle of this century. If they reach that goal, the long-term investment prospects of fossil fuels will be bad. To invest in fossil fuel companies, therefore, is to bet that the Paris Agreement won’t be fulfilled, which is a very risky position to take.
The threat of regulation aside, increasing competition from growing renewable energy sources such as wind and solar is diminishing fossil fuels’ market share and capital investment. That already has harmed fossil fuels’ stock performance. When the New York state Senate held a forum on divestment a few years ago, 350.org, an advocacy group combating climate change, hired an investment firm to calculate how the state pension fund would have fared if DiNapoli had divested when first requested. The answer was it would be worth an additional $5 billion. That number will grow in the future.
In December 2017, Tom Sanzillo, who served as interim state comptroller after Alan Hevesi was forced to resign, wrote in the Daily News calling upon pension funds to divest from fossil fuels in order to protect the value of their holdings. He noted that Norway’s $1 trillion sovereign wealth fund – derived largely from its North Sea oil and gas reserves – decided the month before to drop oil and gas stocks from its core benchmark stock portfolio. It was an acknowledgement that such holdings have lost their status as mainstream, blue-chip investments and now face the possibility of sudden price drops.
ExxonMobil, under investigation by the New York and Massachusetts attorneys general for misleading investors and the public about climate change, has underperformed in recent years. In 2017, the company missed both its revenue and earning projections, even though oil prices rose; it also missed production targets. The state pension fund has $1 billion invested in ExxonMobil.
According to climate scientists, to avoid catastrophic climate change, the world must ensure that 80 percent of the known fossil fuel reserves are never converted into greenhouse gas emissions. The right to extract most of those fossil fuels has already been purchased, however, by oil, gas and coal companies. Therefore, many fossil fuels will become stranded assets. In addition, an increasing number of governments, including New York City, are filing lawsuits against fossil fuel companies to make them pay for the enormous damages they have caused from the burning of fossil fuels. That does not bode well for their stock value.
While it is often argued that the comptroller’s fiduciary duty to manage the pension funds should be limited to maximizing the rate of return, prudent pension management must also take into account the broader risk of economic and market disruption posed by climate change. (The Obama administration issued a Labor Department ruling allowing for environmental considerations in management of pension funds, though the Trump administration disagrees.)
What good would an extra 1 percent rate of return mean if your city was flooded from rising sea levels? If your neighborhood was devastated from wildfires, if droughts destroyed the local food system, if hurricanes demolished your home? As a state with huge population centers along the coasts that were flooded during Superstorm Sandy, this is not an abstraction.
The comptroller’s role in the oversight of the state pension fund is not determined by the state constitution but rather by the state Legislature, which is considering legislation requiring divestment from fossil fuels. New York should adopt that law, but, even if it doesn’t, the comptroller should drop fossil fuel stocks, to protect our investments and our future.