New York State Comptroller Thomas P. DiNapoli, who heads one of the largest public pension funds in the U.S., concluded 2020 with a bold investment decision on fossil fuels. He will hold the entire industry to higher standards regarding climate change and establish broader scrutiny of a pension portfolio with holdings that span the entire economy in a bid to reduce demand for fossil fuels. His follow-up is critical.
Q3 2020 hedge fund letters, conferences and more
DiNapoli's Bold Divestment Plan
For the energy sector, the comptroller’s decision serves as a last call: If companies do not meet reasonable climate impact standards, then the fund may terminate its investments. The divestment option has always been available, but DiNapoli has never used it.
DiNapoli has been active on environmental issues. He tried talking with coal companies but decided to divest when these conversations proved fruitless. In 2017, he led a shareholder vote at ExxonMobil to require the company to report on the climate issue. Almost two-thirds of shareholders supported the effort. ExxonMobil prepared the report, but it was a disappointment.
Meanwhile, ExxonMobil led the fight against climate change initiatives, even as company and industry financial positions crumbled. ExxonMobil hit a market capitalization of $527 billion in 2007 but fell to a low of less than $140 billion in 2020. In 1980, the energy sector held 29% of the S&P 500 index, but this year ended with only 2.3%.
By adding the divestment option to his policy toolbox, DiNapoli has made a difficult choice, but his decision was made in light of three compelling factors about the energy sector:
- A weak financial case and faltering business model,
- A history of recalcitrance when presented with legitimate concerns, and
- The existence of available resources to pivot and construct a new business model.
DiNapoli’s strategy also encourages companies by offering to reinvest in them should they meet basic climate standards.
A Real Chance That Funds Will Follow
What will make or break DiNapoli’s promise is his follow-up. Leadership from a large pension fund is sorely needed. There is a real chance that other funds will follow. Harvard, Yale and Stanford all have retreated from renunciations by students who have loudly proposed divestment. Each university is now rethinking their positions. Also, the money managers who cashed their handsome fee payments for offering “wise counsel” that urged funds to stick with fossil fuels and admonished protesting students for wasting money on idealistic ventures now have proven to be the imprudent and careless ones. With BlackRock currently supporting a broad range of sustainable investment tools including divestment, money managers are likely to be competing for a niche market of inexpensive ways to reduce fossil fuel holdings in institutional portfolios.
A culture of deference to professional money managers is easy to develop at a fund governed by a board. Board members can easily forget that they—and not the managers they hire—are the bosses. And the money managers, wishing to keep their fees, do not like to make waves. The same is true of professional staff at investment trusts.
It Would Be A Rare Money Manager At A Rare Organization
who would find the balance and understand the weight of the divestment option. A money manager or senior professional at a fund might say to a board: “I have given you all the information you need to make a decision. This decision is a burden on us, as climate policy is more correctly a matter for our federal leaders, but they are derelict. This is above my individual pay grade, but it is not above the standards of care and prudence we embody as responsible members of the institutional investment community.”
DiNapoli does not have a board. He alone is ultimately responsible for the decision. He is elected to come to an all-things-considered judgment on his own. Still, he has other elected leaders and members of the public to consult. In this case, these stakeholders have worked hard to create the political space for DiNapoli to pursue this strategy and there has been no credible pushback.
The comptroller’s decision is solid. He exercised care and prudence. His decision is worthy of emulation by his colleagues, providing well-reasoned guidance to the affected companies and an anchor for leaders in the upcoming days and weeks.
*Tom Sanzillo ([email protected]) is IEEFA’s director of financial analysis.
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Article by Tom Sanzillo, IEEFA
