January 3, 2018

UPDATE: Why Divestment is All Wrong for New York: 5 Things You Need to Know

UPDATE (1/3/18, 3:00 p.m. EST): Today’s State of the State Address made only one brief comment on divestment, when Gov. Cuomo stated:

“We call to an end to any investment in fossil fuel related activities in the pension fund. The future of the environment, the future of the economy and future of our children is all in clean technology and we should put our money where our mouth is. Let’s give the Comptroller a big round of applause and thank him for all of his hard work.”

As we’ve said many times, however, Comptroller DiNapoli has continued to reject divestment and has not committed to the Governor’s plan.  As for it being the right thing for the economy, the Suffolk County Association of Municipal Employees released a study finding divestment would cost the New York State Common Retirement Fund $2.8 billion over 20 years and “result in a significant increased pension contribution by local governments.”

For the environment, divestment merely transfers funds while having no real impact on the environment or targeted companies.  And as for investing in clean technology, divesting would only transition funds away from many of the energy companies investing billions in the technology providing clean-burning natural gas, not to mention new solutions to support affordable energy and environmental protection.

Hopefully today’s one line on divestment is the last we hear from the state for the benefit of New York pensioners and taxpayers.

— UPDATE —

Today at 1 p.m. EST, New York Governor Andrew Cuomo will deliver his annual State of the State Address.  Ahead of the speech, the Governor announced his intention to call for divestment of the New York State Common Retirement Fund.  Cuomo of course has no power to compel divestment – that decision lies with State Comptroller Tom DiNapoli who has repeatedly rejected the effort – yet has pushed it as a means of fulfilling his administration’s climate initiatives, leaving out any impact on the fund’s ability to deliver value and steady returns for pensioners.

So as Gov. Cuomo takes the stage to play politics with pensioner returns, here are five things to keep in mind about fossil fuel divestment in New York.

1. Divestment would cost the state…a lot.

Several studies have analyzed New York’s pensions and concluded that it would cost millions in the short term and trillions over the long term. Just last month, the Suffolk County Association of Municipal Employees released a study analyzing the direct impact expected on the New York State Common Retirement Fund if it were to divest.  That report found it would cost $2.8 billion over 20 years and “result in a significant increased pension contribution by local governments.”  Additionally, “divestment would mean that State and local governments would have to cut critical services or raise taxes to ensure that the pension system is funded.”

Another report by Prof. Daniel Fischel of the University of Chicago Law School found divestment would cost New York City’s five pensions up to $1.5 trillion over a 50-year timeframe and up to $120 million annually.  While NYCERS is separate from the state pensions, they are comparable in size.

And these loses are only those associated with the increased risk and reduced diversification that accompany divestment.  Eliminating an entire sector of the economy from investing could mean billions more in increased compliance costs and management and transaction fees, regardless of performance, according to a separate study by Prof. Hendrick Bessembinder of Arizona State University.

2. New York’s top Universities have continually said “no” to divestment

Last month, New York University (NYU) reaffirmed its divestment rejection despite student protests.  In 2016, the school refused to divest, declaring that the move “does not reduce the amount of capital or funding available to fossil fuel companies; rather, it simply transfers ownership of stock from one holder to another.” No surprise given the costs of divestment: A study by Prof. Bradford Cornell of Caltech found that by divesting, NYU would lose more than $4 million per year and six percent of the endowment’s value over 50 years.

At Columbia University, a Columbia Advisory Committee recommended against divesting in 2015, saying it was “too narrow a lens through which to consider Columbia University’s engagement with the climate change issue” and calling it “a matter of symbolic speech.”  In March 2017, the school announced it was “divesting” from thermal coal—though Columbia did not disclose the total value of these investments in the endowment, or even confirm that they existed.  Columbia’s student divest group responded by declaring they “cannot support this proposal because coal divestment is not an adequate institutional response to the threat of climate change.”

New York’s Cornell University is also one of many Ivies to reject divestment, doing so in 2016.  The administration decided that fossil fuel production was not on par with their “morally reprehensible” standard for divesting—which includes “apartheid, genocide, human trafficking, slavery or systemic cruelty to children, including violation of child labor laws.”

Vassar College also rejected divestment near the start of 2016.  In an op-ed announcing the decision, University President Catherine Hill reiterated the school’s previous reasons for rejecting in 2013, namely, that divestment is an ineffective way to address climate change and could reduce available resources by imposing costs on the endowment.

3. Elected officials in charge of the state pension don’t agree with divestment

Tom DiNapoli—the elected official in charge of managing the $200 billion pension fund—has repeatedly expressed his opposition to divestment.  After Gov. Cuomo’s announcement, he issued a statement of his own noting that the fund “has no immediate plans to divest our energy holdings” and instead that the fund has “shown that shareholders have the power to compel major corporations” through engagement—an option divestment would eliminate.

First Deputy Comptroller Pete Grannis also spoke out against divestment at an event at Baruch College last year, saying, “We’re not social investors” but instead “We are investors that use our voice based on the best available economic information we can get and where we think we can have the best impact.”

4. Divestment Legislation has yet to make it out of committee in the NY State Government

Several proposals have been introduced in the legislature which would force the state pension fund’s managers to divest fossil fuel assets by 2020 and coal holdings within one year.  None have advanced to either chamber’s floor for a vote.  Tom DiNapoli actually wrote a letter in response to these proposals outlining in detail how fossil fuels had actually outperformed other assets and highlighting how his fiduciary duty requires him to take a long term outlook.  The New York State Legislature could in theory mandate divestment if a bill passes through both chambers and is signed by the governor, but that event does not seem likely any time soon.

5. Blue state and cities continue to reject divestment

From Vermont to California, some of the nation’s bluest states have said no to divesting.  CalPERS, which is the nation’s largest pension fund, actually adopted a new policy that greatly curtails divestment and announced recently that divestment from other sectors has cost the fund $8.5 billion.

Vermont’s state pension also rejected its own governor’s calls to divest after a comprehensive analysis conducted by an outside consultancy found that it would cost the fund money, be ineffective in affecting climate change policy and would not be in the best interests of VPIC pension beneficiaries.

And this past summer, the Seattle City Employees’ Retirement System voted to reject divestment because they found it to “conflict with the Board’s fiduciary duties and the SCERS ESG Policy.”

Bottom line: If New York heeds Gov. Cuomo’s calls to divest, it will be standing alone in an empty gesture.  Hopefully for New York taxpayers and pensioners, DiNapoli will continue to rebuff divestment efforts and instead focus on what is best for the one million beneficiaries of the New York State Common Retirement Fund.