(Bloomberg) -- When it comes to climate change, the people who oversee the New York City and State pension investments agree that the threat to people and property is real.
But that’s where the comity ends. New York State Comptroller Thomas DiNapoli prefers to use his leverage as a large shareholder to press fossil-fuel companies for change. New York City’s comptroller, Scott Stringer, is a divestment hawk who is calling for the city’s pensions to be out of fossil fuels within five years.
At stake in this version of the "engage" versus "divest" debate is billions of dollars. The New York State Common Retirement Fund, overseen by DiNapoli, topped $209 billion at the end of the year, and the city’s five pension funds together reached $193 billion, making them the third and fourth largest systems in the country.
"While our strategy might be more nuanced, or more complex to explain, I actually think it’s one that’s more targeted,” DiNapoli said in an interview. “So the challenge is, we’re trying to make sure we have the money we need, and do the right thing on the climate issue."
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Governments have increasingly turned divestment from their state pension funds into a weapon in the fight against climate change, even though its costs and benefits remain unclear. In 2015, California lawmakers required the state’s pension funds to divest coal investments by mid-2017, leading to a wave of sales from the largest two U.S. Pension funds, Calpers and Calstrs. Divesting a wider set of fossil fuels however, could be a heavy lift for pension funds because they comprise a large part of the market, and pensions have historically been long-term holders of stocks -- not the vote-with-your-feet kind of investors.
New York Governor Andrew Cuomo in December called for the state’s pension fund to stop buying new fossil-fuel stocks and to unwind existing holdings. New York City’s Stringer immediately issued a release supportive of the governor. He had already divested from power-plant coal, some gun retailers and private prisons. As he told a climate-and-investing conference at the United Nations last month, divestment is "an extraordinary opportunity to send a clear message."
The city’s fund trustees started looking at fossil-fuel investments last year, measuring the carbon footprint and hiring a consultant to make recommendations. Just two of the five city funds, with holdings totaling $134 billion, have endorsed Stringer’s policy. Each of the five funds has its own board of trustees and Mayor Bill de Blasio -- who supports divestment -- and Stringer each have a seat on four of them and can try to steer the boards.
De Blasio in January kicked off a five-year transition out of $5 billion in fossil energy investments and sued the five largest U.S. oil companies in federal court.
By contrast, state Comptroller DiNapoli wrote the same day that he supported the governor’s intentions and promised to work with him, but specified that “there are no immediate plans to divest our energy holdings.”
DiNapoli is not opposed to evaluating divestment, or even selling shares if circumstances warrant. The city’s approach -- a star-studded announcement followed by investigation into the matter -- is backwards, he said. “To start with the premise that we’re going to say we’re divesting and then we’re going to study it, that to me doesn’t make sense,” he said.
It makes sense to divestment-movement leaders, who believe getting out of a stock is more rational than asking fossil-fuel companies to abandon fossil fuels.
Two days after Cuomo’s Dec. 19 announcement, author and activist Bill McKibben wrote for the New Yorker magazine that climate advocates, including 350.org, which he co-founded, had just seen “perhaps the biggest single day" of their campaign. McKibben sat between Stringer and fellow activist Naomi Klein at the city government’s Jan. 10 event.
The event was meant to energize debate and action fighting climate change.
"If that’s dramatic -- that’s the whole point," said Tyrone Stevens, Stringer’s press secretary. The comptroller thinks that "divestment and economic success can be aligned," Stevens said.
When it’s successful, divestment works because of its impact on lawmakers and leaders, not because it drives a stock price low, according to the new book, Activism and the Fossil Fuel Industry, by two Johns Hopkins University researchers. "The eventual goal of divestment is to sway the greatest institutions of power, namely governments themselves... Unless governments act, however, divestment alone can achieve little," write professors Andrew Cheon and Johannes Urpelainen.
Virtually no one is 100 percent divestment or engagement. Stringer introduced in 2016 a resolution pushing Exxon Mobil Corp.’s board to include a climate scientist, which the company did early last year. And even DiNapoli has sold off stock related to Iran and Sudan.
DiNapoli has taken the engagement route for some time, most notably in May, when New York State’s Common Retirement Fund and the Church of England jointly filed a successful resolution pressing Exxon Mobil to release annual reports detailing how climate change may affect its business. The first one came earlier this month.
“We think it was a positive step forward. Obviously it falls short of what we would have liked to have seen, so we’re going to continue to press companies,” DiNapoli said.
The state’s $1 billion investment in Exxon Mobil, which pays reliable dividends into the pension fund, is mostly in passive index funds, he said. As a part of the state’s push, DiNapoli also doubled to $4 billion its investments in companies that reduce emissions.
A city press release Jan. 10 about divestment raises an important question for state and local officials. It says that before any stock is sold, the city pension-fund trustees will seek legal counsel to make sure divestment is compatible with their fiduciary responsibilities, and will move ahead “assuming a positive legal opinion.”
The Department of Labor in 2015 issued guidance approving environmental criteria when appropriate, an influential cue for public funds. But “what we still don’t have is a court precedent system of how far you can go” with divestment, said Matt Cristensen, global head of responsible investment at Axa Investment Managers Inc.
For DiNapoli, the whole debate came as something of a surprise, and he’s "perplexed" that public employee pension funds are seen as tools for climate activists.
When he became comptroller, he said, “I kind of expected everybody would be telling us where to put our money. We get more calls about where not to put our money.”
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