The New York State Teachers’ Retirement System (NYSTRS) plans to end its investments in 20 natural gas, oil and thermal coal reserve holdings with a market value of $1 billion as they “pose climate-related risks” to the investment portfolio.
The massive retirement fund in late December also said it wants to divest $66 million worth of other thermal coal holdings.
“NYSTRS fully understands its important responsibility as an institutional investor to actively pursue the path to a climate-conscious future,” said Chief Investment Officer Thomas K. Lee. “This initial climate action plan squarely puts the system on that path, while remaining consistent with NYSTRS’ fiduciary duties.”
The system was required by the end of 2021 to update the New York Legislature regarding plans to divest from fossil fuels.
In a letter to the legislature accompanying the analysis, Lee said NYSTRS “agrees with the sentiment of the divestment bill, which articulates global climate change as a risk that must be mitigated. As you know, climate change is a complex issue. Mitigation efforts to address climate change require comprehensive and broad-based public policy and regulatory directives; investment in green technology and infrastructure; and corporate and individual commitments to reduce the use of fossil fuels.”
The board noted that its analysis of “climate risks and opportunities” related to the investment portfolio “is consistent with its fiduciary duties to provide retirement security to the system’s nearly 435,000 members.”
NYSTRS is one of the 10 largest public pension funds in the nation, providing retirement, disability and death benefits to eligible New York State public school teachers and administrators. The system pays more than $7.7 billion annually in benefits, with 80%-plus distributed to New York residents.
‘Rational Nexus’ In Fossil Fuels Risks
According to the board, the system is nearly 100% funded based on the estimated actuarial value of assets as of last June. The estimated 30-year rate of return, net of fees, is 9.2%.
The action plan was adopted unanimously “as an important first step to mitigate climate change risks” in the portfolio, the board said. Members “determined there is a rational nexus between long-term investment risks facing the companies in the fossil fuel industry and the long-term risks they pose to the system’s investment in such companies.”
Specifically, the initial climate action plan calls for divesting from all directly held public equity thermal coal holdings that derive more than 10% of their revenue from activities related to thermal coal.
The plan also calls for creating a restricted list to prohibit “directly held internal and passive external public equity portfolios from further purchases of some carbon-intensive fossil fuel holdings.”
The restricted list includes the 10 largest company positions held by the system that have more than 0.3 gigaton of potential carbon dioxide (CO2) emissions from thermal coal reserves; derive more than 20% of their revenue from oil and gas, or have more than 0.1 gigaton of potential CO2 emissions from oil and gas reserves.
Also on the restricted list are companies “that derive more than 10% of their revenue from activities related to oilsands.”
The board said it was “prioritizing the companies on the restricted list for engagement efforts, to the extent that the system directly holds equity securities in such companies, seeking to engage with such companies on their climate transition plans.”
Calls For Global ESG Reporting
Also being revised is the stock proxy voting policy “to more clearly articulate” voting “to affect climate-friendly change among its portfolio holdings.” In addition, the board plans to support the global adoption of environmental, social and governance (ESG) reporting standards.
“The board has long diligently and thoughtfully considered complex ESG matters and how they relate to the system’s long-term investments, and is creating a pathway to effectively integrate ESG factors in a responsible manner,” it said.
The process is to continue through this year. Plans include:
- Completing due diligence of the oilsands industry by the end of this year;
- Developing a divestment policy to guide engagement activities and divestment decisions;
- Pursuing “climate-friendly” investment opportunities; and
- Analyzing fixed income and private equity investments for climate-related risks and opportunities.
“The board is committed to helping develop the path to a climate-friendly future,” Lee said. “In 2022, NYSTRS anticipates undertaking further deliberations in a number of different areas, and the system pledges to continue working with industry groups in support of ongoing regulatory efforts to develop climate disclosure frameworks and standards that promote clear, consistent, reliable and decision-useful climate disclosures.”
Many pension funds and entities are working to divest from fossil fuels. The action by NYSTRS follows a decision in early 2021 by New York City’s largest pension funds to pull their money from fossil fuel investments within five years, portfolios that hold an estimated $4 billion in securities.
Maine voted last June to purge fossil fuel investments from its pension funds. The University of California’s 10-campus system in 2020 divested more than $1 billion in fossil fuel investments within its $126 billion portfolio. And in 2019, the government of Norway proposed dropping a who’s who of U.S. independents from its estimated $1 trillion pension fund to reduce the “aggregate oil price risk” to the economy. However, integrated producers, many with substantial renewables businesses, would not be impacted.
Meanwhile, a coalition of state financial officers, many from resource-rich states and all Republicans, is pushing back against climate change-combating banks that have adopted corporate policies cutting off financing for the fossil fuels industries.
In an open letter addressed to the U.S. banking sector, the state treasurers, auditors, and comptrollers pledged to “take concrete steps within our respective authority to select financial institutions that support a free market and are not engaged in harmful fossil fuel industry boycotts for our states’ financial services contracts.”