Engagement plays an important role for managers to ensure the companies they invest in are managing ESG factors to maximize long-term value. But what happens when this engagement just doesn’t cut it? When the carrot doesn’t work, sometimes you need the stick. On this episode of ESG Currents, BI Senior ESG Analyst Rob Du Boff chats with NYS Comptroller Thomas P. DiNapoli. They discuss the recent announcement that the New York State Common Retirement Fund, one of the largest public pensions in the US, will restrict investment in eight oil and gas companies it deemed not ready for the carbon transition, including Exxon Mobil. This episode was recorded on March 26.
ESG has become established as a key business theme as companies and investors seek to navigate the climate crisis, energy transition, social mega trends, mounting regulatory attention and pressure from other stakeholders. The rapidly evolving landscape has become inundated with acronyms, buzzwords and lingo, and we aim to break these down with industry experts. Welcome to ESG Currents, brought to you by Bloomberg Intelligence, your guide to navigating the evolving ESG space, one topic at a time. I'm Rob Dubaf, Senior ESG Analyst. We've talked in prior episodes about the role of engagement in ESG investing. An asset manager is a steward of capital has a fiduciary duty to ensure the companies they invest in are managing ESG factors to defend and grow the long term value of these investments. This can take the form of voting proxies, filing shareholder proposals, or even nominating a competing slate of directors. But what happens when this engagement just doesn't work. When the carrot doesn't work, sometimes you need the stick and the proverbial stick in this case is divestment. If the company's managers are not adequately addressing investor concerns, be they ESG or otherwise, at some point that company just might not be investable. Joining us today to discuss is Thomas Denapoli, the fifty fourth Controller of the State of New York. Tom has held this role since two thousand and seven, and one of his chief responsibilities is managing the New York State Common Retirement Fund, one of the largest public pension plans in the United States, providing retirement security for over one million New York State and Local Retirement system members, retirees, and beneficiaries. The fund recently made headlines when are announced it will divest holdings in eight oil and gas companies determined to be not transition ready, including Exon Mobil. Tom, thanks for joining us.
Great to be with you. Rob. Thank you.
As a pension investor, you really need to take the long term view. So how do you integrate ESG analysis into this?
Well, you know, it's it's such an important question, one that I'm asked quite often these days. It seemed a few years ago nobody was asking about the ESG. Now he was talking about it. So you know, I view ESG considerations and as as your audience knows that stands for environment, social and governance issues really as as risk factors. So when we evaluate an investment opportunity or current holding with an ESG perspective, it's really meant to minimize risk, right, So we we want to maximize returns, but you know those are risk adjusted returns, so we want to account for risk in our consideration. So we have evolved over many years to really integrate ESG evaluation, uh through you know, throughout our portfolio in all asset classes. And obviously climate has taken center stage in that regard for you know, for obvious reasons, particularly since the Paris Agreement. So you know, when I think about ESG, you know, sometimes I'm asked, you know, are you doing ESG investing? I don't really, we don't call it ESG investing. It's really a risk mitigation tool to consider environment, social, and governance. You don't want to you don't want to have money in a company that has a terrible environmental record as far as pollution getting cited by government regulators. You don't want to be invested in a company that doesn't treat their workers fairly has all kinds of sexual harassment settlements and lawsuits. You don't want to be invested in a company that has a poor governance structure, where the CEO has there's no accountability, or the board is not diverse. So you know, the challenge for us, So I'll wrap up my answer with this is that you know, because who are a large and social investor, A big part of our portfolio, the largest part is in public equity, so and much of that is passive investing, you know, through index funds. So we want to stay invested. So you know, while in some cases we might, especially with private markets, not choose to go into a certain investment because it falls short on a SG, on the public market side, where we do want to stay invested, our role as a shareholder is to try to compel the company that may be falling short to improve so that we could stay invested in them. Hence you know, engagement with company shareholder resolution, derivative lawsuits. You know, you use the D word, and that really the investment is something we take only in extremely rare circumstances, but that is that is another tool in the toolbox.
Right, So that was going to lead me to my next question. So you do engage fairly regularly with portfolio companies. How how does that typically work?
Well, we have we have within our pension team, we have a corporate governance and we've grown that team out because of all the need for engagement. Right. So, the challenge has been and we've met as successfully, is to integrate the information that the corporate governance team gets into the investment decision making process. So when we would come up with a company that may be falling short in terms of one of our evaluations, that's the team that will usually start with a letter writing or a meeting request. Then, depending on the issue and the company, it might elevate to a shareholder resolution. And what most folks don't realize is that in the majority of cases, when we file a shareholder resolution, we actually get an agreement with the company and we withdraw the resolution. Sometimes people say, well, why did you withdraw the resolution? You didn't get what you wanted. Well, if we got eighty five ninety percent of what we wanted, we don't need to go through, you know, with the annual meeting and with a shareholder resolution. And there have been very limited so circumstances where we've done divestment, but there have been a few, you know, and certainly I know, as you mentioned at the outset, there's been much discussion of what we're doing with our climate action plan. To be happy to go into more detail on that if you're interested.
Yeah, absolutely, walk us through the decision to divest or restrict investment in these eight round gas companies.
Right right. It's part of a long process. So we had we recognized climate as a material risk of the portfolio for for a long time, and certainly in the wake of the Paris Agreement, and I had the opportunity to be on one of the panels at the Paris negotiations. From a policy perspective and to save the planet, certainly support the goals to transition to a low carbon economy. There have been you know that tug in New York, some of our friends in the legislature wanted us to fully divest all of our fossil fuel holdings. You know, as a fair argument as to whether divest you know, across the board, you know, really has the impact that those that advocate for or believe it might feel good to say you've done it, but what does that really do you know, to move companies in the right direction. So we convened a Decarbonization Advisory Panel, oh, I guess about four or five years ago now that really looked at all the different options about investing, divesting, you know, corporate engagement, policy, engagement, and they came up with a set of recommendations that we then turned into our Climate Action Plan. And what the Climate Action Plan says is it's important to look not at what the company may be doing today, but what kind of commitment do they have through their business plan to be part of the transition to a low carbon economy. So we evaluate different sectors of the economy and we started with energy because obviously that is a big connection to the climate issue. With that question measuring transition readiness, so we started with coal, We did shale oil and gas, oil sands, and the biggest undertaking, it took many months, was into grade oil and gas companies, and that's the announcement you referred to earlier. So we did identify eight companies, including Exon, where we felt they failed as far as transition readiness. What's important to point out though, is that the divestment that we made, and again it is a rare circumstance, but one that we felt was merited here in terms of the of the number was about twenty seven billion twice seven million, excuse me a million with an M, and so the context of a multi billion dollar fund, you know you're going to say, well, that wasn't really a big restriction under our divestment. Part of what explains that is that Exon was on the list and Exon is one of our our obviously bigger holdings as far as the energy sector, but most of our holdings in Exon are through our passive investment with the index fund, and we did an economic evaluation and it was felt that the five hundred million that's in the index fund, if we had divested all of that, although we do feel Exon has come up short, that it would really throw our index out of whack in terms of a tracking error. So we made the judgment to make a statement and to restrict Exon from our active management portfolio. So, you know, for those that argue you should be out of x On one hundred percent, there was some disappointment for those that argue you shouldn't. You know, those stocks have been doing very well lately. They pay big dividends. You shouldn't touch them. They were disappointed that we divested anything, but I felt, particularly with Exon, we've had a long history of engagement. They often fall short. They continue to fall short in our perspective in terms of being transitioned ready. The other large integrated oil and gas companies where we did not do a restriction or a divestment, it's not because we've given them the good housekeeping seal of approval. It's that they meant are minimum standards. And I use the word minimum very clearly because we we we just took a basic threshold as to how we define transition ready. We're going to continue to keep an eye on those companies as well, be it you know, Chevron or you know or BP, but you know, in the case of EXCELLN, we just felt they really fell short. So so I'm glad you threw in the word restriction because in many ways this was as much a restriction as it was a divestment. With the other part sectors of the energy portfolio I mentioned earlier, we did have some divestments, but again the dollars were not such that we felt it compromised the value because most of our holdings are through index funds. Right, So the next category that we're looking at are utilities, So that's going to be the next sector that will evaluate and we'll determine whether there needs to be any further restriction or divestment there. You know, at some point we'll look at other sectors of the economy transportation, agriculture, you know, or other areas to look at. But it's it is a very staff intense process, you know. So but we think it's important. We think climate is a big issue. But again our metric our view is that it's not so much what the business is doing today, it's are they transitioning to that emerging low carbon economy and how are they contributing to that change that we use as a minimum threshold if we're going to continue our investment.
So it's interesting so that the other integrated names are I guess on notice that you know, the plans they have in place today are adequate. But you know, I know there's been a lot of backsliding recently with some of these names.
So yeah, I didn't even know that I'd use adequate. They met our minimum threshold, so maybe they're less than adequate, but they weren't. They weren't, so they didn't fall so far short because I I personally believe that if we're going to make that successful transition, you're going to need the big players to be part of it. You know, they've got resources, they've got you know, scientific and engineering know how, and at least you know, you're right, there's been some backsliding, but you know, at least upfront, many of them, particularly the European based ones, have been saying the right thing. We just got to keep the pressure on them continue to do the right thing. But you know, look, unfortunately, this whole discussion of ESG has become so politicized in this you know environment that we have now in this country that you know, I think it's unfortunately, as you know, there have been efforts to to you know, eliminate ESG from consideration. You know, at the state level, some states have severed relationships with with certain financial partners because they believe they're relying too much on ESG. You know, as others have said, maybe we should stop calling an ESG because it's become like a code word, which I think is unfortunate. So we're not dropping the code word because I just I think it is what I said before. It's it's evaluating your investments from the perspective of risk, and broadly categorizing risk and environmental, social, and governance buckets really covers the whole range of risks that any smart investors should be concerned about.
So, just to be clear, you're not pushing an environmental or social agenda at the expense of your strong risk adjusted return.
Correct, No, but that's it's the phrase you just used. That's so, but risk adjusted return, it's it's it's you know. I think one of the challenges is that if you especially because you know as you as you well know as a pension fund, we don't have a short term horizon, just the opposite. We have a perpetual horizon. So so we want to be invested for the low hall and we want companies to have a very long term view. So the fact that a company may be making a lot of money today, if we feel they don't, they're not a good bet for the future. It doesn't matter. You know, we're not We're not day traders, right, We're very long term and that's why we take this position that that evaluating risk over the long haul is an appropriate responsibility or a fiduciary. And I would say the main thing I would ask at this point, because I know there are a lot of politics a play across the country. Give us the freedom to invest as we feel. You know, I'm entrusted to be the fiduciary. We have, you know, one of three states with the soul fiduciary model for the state fund. But you know, I would like that that freedom to invest as I see fit with my fiduciary responsibilities. Ultimately, if I'm screwing up, the voters are gonna cancel my contract, right But you know, our fund is continues to be among the best funded in the country. Part of that is our smart investments. Part of it is we pay our pench bills. We don't we don't let the system become poorly funded, and that that's been our strength.
Yeah, I mean, I think that risk adjusted part is key, and it gets lost in the discussion a lot that you know, a lot of the other the rhetoric from some of the other side, as we might call it, would say, you know, focus only on returns, focus only on returns. And you know, as a cfart proud CFA charter holder, that's something that you know, that's not how you're supposed to look at.
The world with as a fiduciary. It's good to hear that.
But you know, unfortunately the world we live in, there is that pushback. I know the New York City pension Plans are currently facing a challenge in the court over their decision to divest from fossil fuels.
To that give you positive, well, it does in the sense that, you know, we want to be sure that we are careful in our decision as to you know, how we're approaching this. I hope that lawsuit fails because I do think, you know, the city, well, we should point out three of the five city funds, right, two of the city funds did not do that. Three of the five did. They have separate boards that made that judgment. But I think I think that's there. They should have the freedom to do that, you know, consistent with their view of their fiduciary responsibility. So I do hope that that lawsuit succeeds. Although we took a different tact than those three. Than those three funds, I personally think our our approach makes more sense, you know, for the long term. But I think it just you know, it indicates that pension funds are going to be subject to the political environment, including lawsuits, and I'm totally confident our approach is one that's eminently defensible. So I'm not I'm not worried even if for some reason the city funds lose their suit, the suit against them, you know, because we've taken a different approach. But but no, I think the city boards were in their respective rights and prerogatives to do what they did, although I although I took a different approach than they have. Thanks.
I know you mentioned earlier about we need all players, including some of the big boys in the oil and gas space, with their financial and their engineering, know how to get it done the transition. So in your divestment announcement or restriction announcement got fewer headlines, but you also announced you were going to invest forty billion dollars in a sustainable investments in climate solutions program, which was double your initial commitment. Can you tell us a little bit about that.
Oh, I'm so glad Robbie asked about that, because you know, we spent so much time talking about divest not divest I think what we need to talk about not just the risk of the opportunities, and that's where the sustainable investing in the Climate Solutions Fund comes in. The global economy is changing and climate is a big part of what's driving it. We want to be on the ground floor of some of these great investment opportunities, with some of the alternative energy initiatives that are coming down the pike, some of the other more climate friendly options that are there. Be it, you know, a climate focused index funds, you know, which we've done some investing there. We're looking to do more, so, you know, to really focus on seizing opportunities. I think that will help us get a return for the pension fund, but also be part of the change that we'd like to see. So I please that you know. Actually, when we started this a number of years ago, we called it Our Dream, our Green Strategic Investment Fund, kind of a long wordy label, with five hundred million dollars, and we grew that over the years to twenty billion. And because we've been successful, you know, with so many of those investments. As part of that announcement, as you point out on the oil and gas companies, we did announce we were doubling our commitment to the Climate Solutions bucket. So now it's going to be forty billion. Our goal is to have the fund be net zero greenhouse gas emissions by twenty forty, a little more aggressive. Some other funds are twenty fifty and part of what we also announced two other pieces, one that we were going to ramp up in the short term our Climate Index investing. We're in the process of evaluing some opportunities there right now. And also on the private market side, we would not be doing any more investments in upstream oil and gas generation. So we've taken a number of steps and I think they are responsible from an investor point of view, but also are very consistent with our concern about minimizing risk to the portfolio because of climate change and the challenge that that presents.
So I know climate gets a lot of the headlines, but can you tell us some of the other ESG issues you may look at.
Well, we've been doing a lot of late on I guess you'd put it in the social category of how employees are being treated in the workplace. Certainly, coming out of COVID, you saw many new industries and companies facing union organizing efforts, and you've also seen instances of there being penalties against workers that have been trying to organize. So we've filed a number of shareholder resolutions at companies calling for freedom of association for workers. We think that's an important area also, I guess in the aftermath of the George Floyd killing, where we all had to look at a lot of issues with a new lens. We've also been concerned about how employees are treated in the workplace, especially employees of color. So for Insta an Amazon, we put in a resolution going back a couple of years now calling for an independent racial equity audit because there are many serious allegations about how certain employees are being treated, particularly black and Hispanic in the warehouses. We lost that resolution when it came up for a vote. We've got a significant vote. We reintroduced it, and the company came to an agreement with us that they would they would undertake that racial equity on it. It should be concluding very soon. Actually, Loretta Lynch, the former US Attorney General, is heading that up for Amazon, looking at how employees are being treated. On the government side, we continue to be focused on diversity on corporate boards because again we think the board should reflect the population of the country. The boards should reflect the consumer base that many of them are reaching out to. So we've had some success over the years in coalition with others to press for more women to be on boards of directors, and you've seen an increase there. We are now continuing to press for more diversity as far as racial and ethnic representation, also pressing for consideration in terms of LGBTQ representation on boards. And another employee initiative we've been involved with for a couple of years now is disability inclusion. You know, we see the numbers and many people with a disability or certainly severely underemployed. We think that's a great talent pool. It's available, and we want to encourage companies to have workplace policies and practices that are favorable to hiring up people with disabilities and creating a corporate culture to retain those employees as well. So we've been working with some of the advocacy organizations, the American Association with People Disabilities, Ted Kennedy Junior's Group as an example, to really take advantage of what we think is an undertapped talent pool that's out there. So we have. We have a lot of other initiatives. We keep the corporate Governments team very busy, you know, with that work. But that's that's just a few of the ones that we're working on now.
And I know you mentioned divestments kind of the rarely used endgame, but is that something that's on the table for some of these initiatives as well?
You know, certainly with some of the actions at boards, for instance, on board diverse, we we we vote against board members right if if if there's no gender or racial diversity, or if there's what we view as token representation, we'll vote against dominating committee members. You know, I think our view would be on those kinds of initiatives, we're more likely to just step up, uh, with more aggressive engagement with the company rather than divestment. You know, as I said, investment's been used in very limited circumstances. A few years ago, we divested from gun manufacturers, especially after the you know, the shooting in Parkland, connectic Connecticut was a stand you know even before you know, a lot of our employees are school employees, right, so what was happening in the schools was very distressing. And again, we never had a lot of money invested in guns. It was in it was in some fund. So we we pulled out of that. But it would take pretty extreme circumstance for us to divest because again we're because we are so large, we want to be not only a perpetual investor, we want to be a universal investor because that has served us well, you know, to spread the money around and to ride the markets. You know, there's always that debate, is it better to be you know, take your bets active management of your investment or passive investing as far as your public equities. I think as much of the research, if not more, shows passive investing across all sectors is the best way to make money most of certainly most efficient. Right. It's less in terms of fees because we could do that in house, right, So that makes it hard for us to to go to divestment when we have it's it's been in a way that hasn't thrown our index in our passive strategy out of whack, got it?
So I did want to circle back on something you touched on a little bit earlier. Some other states have made headlines for restricting investments for the exact opposite reason of what you've done, claiming certain asset managers are discriminating against the oil and gas industry or more broadly, focusing too much on ESG and not enough on performance. Any thoughts on these anti ESG laws.
Well, I mean, I actually think I think they may be hurting themselves. Uh. You know, you know, whatever you want to say about black Rock, they've been very successful, right, So if you're going to eliminate them from your pool of possible partners, you know, you you you may be feeling good about making a statement, but you may in the long run be missing out on some opportunities to work with a you know, with a proven uh successful investment partner. So you know, I think that's where, you know, politicizing it to that extent is a mistake. Now, of course, the critics on the other side say what we do is politicizing it. I would argue that we're not. Uh but uh, I think that gets back to the weaponizing of VSG. I think it's unfortunate. Uh. Look, I do think ultimately they may be wrong, but Texas should be allowed to do what it wants to do, and New York should be allowed to do what we want to do. So you know, I would argue that that I don't think it makes sense. You want to have as much of an opportunity work with as many investment partners as possible. But I think that's why. You know, you've even heard Larry you know, Fink say that he's he's not calling it ESG anymore. So the point is delayer to evaluate companies on these factors. And if it just de escalates the politics by not calling it ESG anymore, you know, fine, you know we still call it ESG. But if you know, if others want to just change the label or eliminate the label, that's that, you know, maybe that'll help. I don't know. I think I think we got to get past this November. Yeah, why things settle out and then we'll we'll know exactly where we're headed, for better or for worse on all these issues. It is unfortunately, it should really be an investment debate. It has become increasingly political debate. I think that's unfortunate.
Yeah, I mean I would say that kind of if there's any kind of silver line to all this pushback, it's that, you know, it's you know, people went from just saying esg's great esg's awesome to actually having to focus about, you know, what are the issues. You know, it really is a risk management exercise and really trying to defend the practice as opposed to just you know, throwing up a picture of a windmill on a fun perspectus and you know, trying to get investors that way. But I think ultimately, you know, modern portfolio theory says restricting your investable universe will constrain risk adjusted returns. Is that a risk at all? I know you mentioned that you know most of your investments are passive, but.
Right, no, it is, and that's why we really take it as very much a last resort. It's a tool in the toolbox, but it's one that we rarely use. And even you know, as I mentioned in terms of the announcement on oil and gas, at the end of the day, it was you know, twenty seven million, which in the context of our broader portfolio, it certainly was a small percentage of the oil and gas investments in an even smaller percentage of the total portfolio. So I think, I think we did something that made sense. We certainly sent a message which which I think was important as well, but we didn't harm the fund in doing it.
Thank you very much for your time.
Tom.
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