April 12, 2018

CIO for NYC’s Retirement System Calls Mayor’s Divestment Plan Uncertain, Could Create “Major Tracking Errors”

While New York City Mayor Bill de Blasio continues to recklessly push for divestment of New York City’s public pension funds, the Chief Investment Officer of the New York City Retirement System (NYCRS) is throwing cold water on the idea.  Yesterday, during a Pension Bridge Conference panel discussion, Scott Evans, New York City deputy comptroller for asset management and chief investment officer for NYCRS (who also happens to be the former Finance Committee chair for the Rockefeller Family Fund), confirmed emphatically the growing uncertainty of Mayor de Blasio and Comptroller Scott Stringer’s joint plan to divest $5 billion in fossil fuel assets from NYCRS $193 billion portfolio. As reported by Chief Investment Officer, “the city’s top asset management official made it clear Wednesday that divestment is not certain,” and that “the verdict is still out as to whether such a move would be fiscally responsible.”

Evans made clear that divesting from fossil fuels could cause some “major tracking errors” for NYCRS’ fund:

 “Now that’s a big deal (oil and gas divestment) from a fiduciary standpoint, that’s a big deal from a tracking error standpoint, its going to create 58 basis points of tracking error, depending on how you measure fossil fuel if you take it out of the portfolio.”

This cuts with stark contrast to what Mayor de Blasio recently said of the plan to divest:

“We will find other good investments. We want to protect our retirees for sure, but not at the cost of investing in something that’s poisoning the Earth. And let’s use our economic power. I think this is one of the most important points. At the grassroots, there’s a lot of economic power.”

But as Evans has made clear – the economics don’t jive with divestment and the reason being is that Mayor de Blasio and Comptroller Stringers both ignored a key factor for consideration in creating such an extreme fossil fuel divestment plan – fiduciary duty.

As Divestment Facts previously noted, an economic consultant to the San Francisco Employee Retirement System (SFERS) recently said that New York City has a lot to consider when it comes to costly divestment:

“There are five funds in NYC and each has a fiduciary duty and an investment advisor. Those boards have to do exactly what you are doing. They may decide to divest but they haven’t taken that action…The fact is that symbolically using the assets that are trusted to you to make a politically statement is not a good fiduciary duty. Your duty is to provide the highest level or return for your beneficiaries. We do not recommend a broad-based divestment.”

The economics are crystal clear.  Energy makes up a large chunk of the S&P500 and Mayor de Blasio and Comptroller Stringers political play to divest from fossil fuels could leave NYRCS portfolio vulnerable and underweight by nearly 5.7 percent –  in turn creating the “major tracking errors” mentioned by Evans.

State Comptroller Tom DiNapoli has also warned against divestment and the importance of the energy sector to diversification: “My fiduciary duty requires me to focus on the long-term value of the Fund.  To achieve that objective the Fund works to maximize returns and minimize risks.  Key to accomplishing this objective is diversifying the Fund’s investments across sectors and asset classes – including the energy sector, where fossil fuels continue to play an integral role in powering the world’s electricity generators, industry, transportation and infrastructure.”

In addition, a study by Professor Daniel Fischel at the University of Chicago Law School found that New York City would lose up to $120 million per year and up to a staggering $1.5 trillion over 50 years if it divested due to lost diversification benefits.

There’s a lot at risk here for NYRCS and the public employees and retirees who depend on the pension fund.  Mayor de Blasio and Comptroller Stringer should focus less on their politically motivated divesment plan and instead listen to their own financial experts who recognize divestment as a costly and risky decision that goes against their fidicudiary duty.