(Bloomberg) -- In a new attack against ESG investing, three New York City pension funds were sued for allegedly breaching their fiduciary duty by selling billions of dollars of fossil-fuel assets.
The plaintiffs, represented by Donald Trump’s former Labor Secretary Eugene Scalia, claim the retirement plans’ decision to divest roughly $4 billion in fossil fuel investments is “a misguided and ineffectual gesture to address climate change,” according to the complaint filed in New York state court. They said the plans have “a duty to act prudently in making investment decisions.”
The move to exclude fossil-fuel investments was made in 2021. Then last year, oil and gas stocks soared following Russia’s unprovoked invasion of Ukraine, with the MSCI World Energy Index rising more than 40%. New York City Comptroller Brad Lander, who oversees the pension plans, has been actively pressing asset managers to do more to address climate change.
“While we don’t comment on pending litigation, we take our fiduciary duty very seriously,” Lander’s office said in a statement. The vote by trustees to exclude fossil fuels from the three funds was made to protect beneficiaries from “the financial risks of investing in fossil-fuel reserves,” according to the statement.
The lawsuit, filed late Thursday, emerges as Republican politicians across the US criticize environmental, social and governance investing. They have launched probes into Wall Street’s ESG efforts and introduced anti-ESG bills, while states including Texas and Florida have restricted business with banks and investment firms that push to address climate change and workforce diversity.
The New York City Employees’ Retirement System, the Teachers’ Retirement System and the Board of Education Retirement System violated their obligations when they opted in 2021 to divest fossil-fuel holdings to “advance environmental goals unrelated to the financial health of the plans,” according to the suit. The choice was made without “regard for whether those assets would produce a superior return for the plans.”
The three pensions have about $180 billion assets. The city’s police and fire pensions decided against selling, saying that divesting wasn’t consistent with their fiduciary duties.
The plaintiffs, who include a subway train operator, a teacher and an occupational therapist in the city’s school system, are seeking unspecified financial damages, including a reimbursement of losses caused by the divestment actions, among a series of related requests.
“Defendants’ actions in selling off high-performing securities, and prioritizing lower-yield investments, is especially troubling given the plans’ chronic and severe underfunding,” according to the suit.
Americans for Fair Treatment, a conservative nonprofit that aids public-sector workers who want to opt out of unions, also is a plaintiff in the case. The group is a partner in the State Policy Network, a collection of conservative and libertarian think-tanks.
Plaintiffs claim will be hard to prove, said Lisa Sachs, the director of Columbia University’s Center on Sustainable Investment.
“There’s a legitimate, defensible view with plenty of evidence that climate change presents a risk,” said Sachs in a telephone interview. “Pension funds are uniquely obliged to protect the long-term value of their investments because they are making long-term investments to maximize the financial wellbeing of their retirees.”
While oil and gas company stocks surged last year, Lander could argue that in the longer run they will prove to be bad investments and a risk to beneficiaries because renewables are replacing fossil fuels, Sachs said.
NYC pension funds were among the first in the country to set targets to reduce greenhouse gas emissions from investments. Last month, the New York City Employees’ Retirement System voted to increase investments in climate-related projects to $19 billion by 2035 and ask private money managers to exclude investments tied to the production, exploration or extraction of fossil fuels. The Teachers’ Retirement System voted to adopt a similar plan.
The case is Wayne Wong v. NYCERS, TRS and BERS, New York State Supreme Court, New York county.
--With assistance from Chris Dolmetsch.
(Adds comment from Columbia University professor in 11th, 12th and 13th paragraphs)
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