NYC Comptroller’s John Adler: “Everything we do is in the name of fiduciary duty”

The New York City (NYC) Comptroller oversees five public pension plans, which are collectively referred to as the NYC Retirement Systems.

Each pension fund is financially independent of the others and has its own board of trustees.

As one of the largest pension systems in the United States, the New York City Retirement Systems aim to lead by example in addressing climate change.

Its ambitious 2040 target positions New York at the forefront of global efforts to transition to a low-carbon economy.

Such ambition has drawn the ire of US conservatives, who recently sued three NYC pension funds for their decision to divest $4 billion from fossil fuels.

Net Zero Investor sat down with John Adler, the NYC Comptroller’s head of ESG, to find out more about how its climate ambition works in practice.

Most pension funds have set a 2050 net zero target. Why the earlier target?

We are focused on the systemic risks of climate change. The science shows that if the world achieves net zero by 2040, there's a two thirds chance of keeping temperature increase to 1.5 degrees or below.

If net zero doesn't happen until 2050, there's only a 50% chance. That’s an unacceptable risk, and we, in line with our fiducaury duty must do everything in our power to mitigate it.

The health of the global economy is the single biggest factor in how our pension funds perform.

What kind of challenges come with the earlier target?

As universal investors, we invest in the whole global economy. And if the global economy is on a 2050 trajectory, but we’re on a 2040 one, then obviously our goal to achieve real world decarbonsiation – not just portfolio decarbonisation – becomes more complicated.

We could actually achieve portfolio decarbonisation quickly and easily – by for example divesting from carbon intensive companies – but doing so might jeopardise our fiduciary duty to maximise risk adjusted returns for our members.

In any case, we’re all about system transformation. The decarbonisation of a single portfolio won’t reduce the systemic risk of climate change if the global economy doesn’t also decarbonise.

So how do you manage that difference between a 2040 end point and a 2050 end point?

Right now, we're focused on getting our portfolio companies and investment managers to create a science-based net zero transition plan.

That in itself is a challenge. Once that’s done, we will push them towards a 2040 target. But we're not there yet. It’s a staged process.

Like many asset owners, you delegate all of your investments to external managers. What are you doing to make sure your investment managers’ net zero plans align with your own?

Firstly, we do all our own proxy voting. That reduces the risk of misalignment between our goals and our investment manager’s goals.

Secondly, we’re asking all of our investment managers to develop their own net zero plans. We’ve given them hard deadlines. 2025 for public equity managers, and 2025 or 2026 for private markets managers. If they fail to produce a formal net zero plan by those dates, then the boards will consider moving their money elsewhere.

Our boards take these relationships very seriously.

We also do an annual survey of our managers.

I see you’ve been putting pressure on BlackRock...

BlackRock is our largest manager in terms of AUM. They're also the largest manager in the world. They own a large percentage of most publicly traded companies. They manage much of our indexed funds and most of our public equity and some of our fixed income.

Our recent letter was a result of disappointment over BlackRock's backsliding – I think it’s fair to use that word on their climate commitments.

A few years ago, BlackRock CEO Laurence Fink boldly declared that climate risk is financial risk. These days, however, BlackRock downplays its work on climate risk publicly. It has also weakened its proxy voting and stewardship practices.

Like many asset managers, they appear to be scared of putting their head above the parapet and losing anti-ESG red state clients.

Given BlackRock’s size, how it votes and engages with companies is extremely important. We have repeatedly, both publicly and privately, expressed our concern with how BlackRock is conducting its climate stewardship activities.

For pension funds with ambitious climate goals, BlackRock isn’t doing enough, but for the State of Texas, it’s doing too much. Texas has even banned its public pension funds from investing in Blackrock for its perceived anti fossil-fuel bias.

Texas and various other red states have made BlackRock the poster child for the anti-ESG campaign.

BlackRock said back to them, look, we own more oil and gas stock than any other company in the world, which is true.

The notion that BlackRock is boycotting oil and gas is just ludicrous.

Three of the NYC Retirement Systems completed a major divestment last year: just under $4bn in publicly traded fossil fuel securities, both equities and fixed income. A lawsuit followed. The plaintiffs argued that the divestment harmed the plans’ ability to meet their defined benefit obligations. The state court judge called the allegations “speculative” and dismissed the case. Could you tell me more about the lawsuit?

The plaintiffs could appeal that decision, but we believe we're on strong legal grounds.

A strong fiduciary process informed the divestment decision.

The boards originally voted to study divestment in 2018. They hired expert consultants who provided recommendations. Each board then implemented those recommendations in their own way.

The boards have also directed the Comptroller's office to implement an exclusion of upstream oil and gas in private markets. That came into effect last year. Now all of our prospective investments have provisions whereby the managers agree not to invest in oil and gas exploration.

Are you considering divesting from other assets?

Our net zero plan prioritises engagement and real world decarbonisation.

We want to pressure companies to reduce their emissions, adopt mitigation plans and so on. We will only consider divestment where we determine that engagement is futile.

Major fossil fuel exploration companies don’t have a net zero plan and so the stranded asset risk is very high. That’s why we divested from them.

Asking them to stop is like asking Starbucks to stop selling coffee. Oil is Exxon’s busineess. They don’t want to stop.