New York State’s Andrew Siwo: ‘our proxy for success is investment performance’

The New York State Retirement Fund is one of the largest public sector funds in the US with $267.7 bn in assets, it is looking after the retirement savings of more than a million New Yorkers, increasingly with climate in mind.

This far from straightforward, as a court case against three New York City Systems earlier this year indicated. The New York City Employees’ Retirement System, the Teachers’ Retirement System and the Board of Education Retirement System were accused of acting in breach of their fiduciary duty. While the legal challenges have been dismissed by a New York State Court, they nevertheless indicate the challenging environment in which many US pension funds operate.

Apparently undeterred by the prospect of anti-ESG pushbacks, New York State announced at the beginning of this year that it is reducing its positions in fossil fuel shares. This summer it doubled down, revealing that its upping investments to its SICS Programme to $40bn.

Asset class breakdown

Some 40% of the fund’s overall portfolio invested is invested in listed equities, this is also mirrored in the SICS Program led by Andrew Siwo. SICS is invested in seven different asset classes with just under half of the portfolio is being deployed in listed equities, due to the fund’s liquidity requirements. “We’re keenly focused on the best off-the shelf climate index products given our views on climate related risks and opportunities born in the investment portfolio and our liquidity needs” Siwo explains.

Due to the emphasis on listed equities, deployment is coming along rapidly, with some $25bn already invested. The second biggest position in the SICS programme are real assets such as sustainable infrastructure and renewables. On the private market's side, SICS has committed among others $450m to the EQT Infrastructure VI fund invested in energy transition infrastructure across Europe, North America, and Asia Pacific and  further $375m to a Fundamental Partners fund specialising in affordable and workforce housing, renewable energy, and infrastructure-related assets.

The fund uses mainstream benchmarks when measuring the performance of its investments. “While we are pleased at the opportunities we are seeing, our proxy for success is investment performance, that is why we have an asset class driven investment approach and utilise mainstream performance benchmarks. That means each investment has to meet or exceed the asset class specific investment criteria. We expect performance of the sustainability portfolio to be indistinguishable if not better than the broader portfolio and we see a lot of evidence of that.”

Equities: tackling climate change through indices

Equities will continue to account for the majority of the fund’s holdings, Siwo emphasises: “If you look at the makeup of US-based public pension funds that are required to pay benefits to beneficiaries you can imagine that with illiquid investments there is a premium that investors expect.

Within its equity holdings, the fund uses a variety of different climate tilted indices combined with stewardship efforts at investee companies. Two key indices- strategies for the fund are tracking the MSCI Climate Index Ex US and the FTSE Russell Transition Pathway Index. As part of the SICS programme, the fund has recently committed a further $2bn to the MSCI Climate Index Fund.

“The [MSCI] index considers opportunities and risks associated with energy transition and integrates climate risk considerations that contain key transition assessment inputs into the global investment process” Siwo explains.

The Russell Index pursues a similar approach, he adds: “The strategy similarly incorporates a transition to a lower carbon economy through a two degree Celsius alignment that reflects the transition readiness of companies.”

A common criticism of the transition-focused approach is that that progress on transition readiness is a lot harder to verify than progress on emissions reductions which can be summed up in hard figures. In contrast, strategies with a transition approach risk looking very similar to conventional indices. Does Siwo share that concern?

He thinks carefully before answering, acknowledging that “Investing is an art and a science.” In practice, this means that the fund aims to balance the difficult line between engagement and divestment. Indeed, its 2019 Climate Action Plan released by Comptroller Di Napoli explicitly includes an option to divest.

Last time Net Zero Investor spoke with DiNapoli, the comptroller appeared to be somewhat dismissive of this approach, warning that: “we cannot divest our way to net zero.” The balance appears to have shifted somewhat since them. In February, the fund announced that it has significantly cut back its equity and corporate bond holdings in eight fossil fuel firms amounting to a divestment of $26.8m. In addition, the fund has also pledged that it will no longer invest in private market funds focused on the extraction or production of oil, gas or coal.

Siwo stresses that these divestments were a conscious decision to sell some of its holdings in actively managed portfolios, rather than a mere by-product from shifting assets into lower carbon indices.

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But he is also keen to emphasise that the fund has not fundamentally changed its strategy: “In some cases, exiting a holding is the most prudent decision, in other cases we can use a different tool, our preferred tool is engagement. If we find that our interactions are less productive than desired, we determine the most prudent fiduciary decision.

“We fortunately have multiple tools such as engagement and advocacy, we view engagement and advocacy a a complementary tool, we have had success in protecting retirement assets by using the various tools outlined in our Climate Action Plan" he stresses.

The fund is has now partially divested from Exxon Mobil but continues to hold companies which meet its minimum standards. “There is also a big difference between active and passive holdings because you can’t just strip a stock out of an index funds” Siwo says.

Private markets outlook

Despite the focus on equities, New York State continues to place significant investments in private markets, including in energy transition assets. Has the Inflation Reduction Act been an incentive to do so?

Siwo stresses that it is still early days: "The $370bn stimulus is designed to ensure that the US doesn’t fall behind and also provides incentives for innovation as well as encourages domestic energy independence. We do expect managers to benefit from the IRA incentives but investments in private markets take time to materialise and it is our expectation that these benefits will be clearer as investments mature.

“We make dozens of investments in the private markets, some of them are only 2-3 years old and are early in the J Curve, but many people are optimistic about it and we are as well.”

A key criterion for selecting the right opportunities is the ability to scale, he emphasises: “We have to be able to scale, these are pretty sizeable cheques that we are writing.”

The outlook for private market assets has become increasingly challenging with the impact of higher rates starting to feed through and managers building up record levels of dry powder. Siwo acknowledges these challenges but appears undeterred.

“We are cautiously optimistic and well diversified. We do pay close attention to fund size discipline and other factors such as the composition of our portfolios. We realise that not all investments are going to be successful and there are instances where we recognise asset gathering which gives us pause. How a manager achieves its returns and exists investments is important. Items like financially engineered returns that involve a lot of heavy leverage can be a concern as well as cross-fund exits. We are in a fundraising environment that has been challenging for many managers, and we are very selective and patient as avoiding mistakes can also drive returns.

But despite these immediate headwinds, the fund is not looking to make any fundamental changes to its long-term strategic asset allocation. “Being very well diversified, this environment is part of the investment cycle. Yes rates are higher but managers have responded to it. As long-term investors, some of the short-term activity doesn’t really affect us meaningfully. I’ve not yet seen a desire to meaningfully change asset allocation.”

New frontiers

A potentially new area the fund is engaging on is setting the standards for emerging global carbon markets. Siwo has been part of US Treasury Department meetings hosted by secretary Janet Yellen on the issue.

Siwo describes the current discussion about the merits of carbon credits as “an unsettled topic that we are learning more about in terms of investment merit. Raising integrity standards, supply integrity, demand integrity and even market integrity. That is very important for our decarbonisation pathway, especially if there is a price on carbon that captures pollutive externalities.” For the time being the fund remains in the stage of gaining more information and learning more.

With the interview coming to an end, the big question still outstanding is how the fund plans to deploy the remainder of its $40bn climate commitment and where it sees the biggest opportunities. “We will be adding to our climate index exposure, as the portfolio target has doubled to $40bn from $20bn. There is continued interest in infrastructure and renewables, while climate venture and more earlier stage funds that are unproven tend to see less appetite given our desire to minimise malperformance and adverse selection. We also have significant exposure to corporate and municipal green bonds, over $1.2bn, mostly in the US, given the current interest rate environment has been appealing for credit investments.”

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