New York City’s LPs face ban on private fossil fuel-related infrastructure

New York City comptroller Brad Lander last week announced a proposal that would see three of the city’s pension funds step up their decarbonization efforts by excluding midstream and downstream fossil fuel infrastructure from their funds’ private equity and infrastructure portfolios.

The proposal will be considered by the trustees of the New York City Employees’ Retirement System, the Teachers’ Retirement System of the City of New York and the New York City Board of Education Retirement System. Collectively, the systems serve as the LPs for $208.3 billion in AUM.

These funds have all committed to several vintages of funds managed by the likes of Stonepeak, Brookfield, KKR and BlackRock, which have invested in assets such as gas and oil pipelines, LNG infrastructure and gas-fired power production and would be prohibited if the proposal is adopted. The firms all declined to comment on the announcement.

Previously, these funds divested from public equity in fossil fuel reserve owners and voted to exclude upstream fossil fuel investments from their private portfolios. The divestment was voted on in 2018 and completed in 2022. The upstream exclusion proposal was adopted in 2023.

“Climate risk is financial risk, and we have a fiduciary duty to our beneficiaries to take that risk seriously as we make long-term investment decisions,” Lander said while making the case for the move. “The impacts of the climate crisis are playing out in real time, with more frequent hurricanes, flash floods, intense heat waves, and deteriorating air quality jeopardising our planet and our portfolios. Excluding pipelines and LNG terminals from future investments will help mitigate the systemic risks that climate change poses to the global economy and to New York City’s public pension funds.”

This past February, the head of infrastructure at the Office of the New York City Comptroller’s Bureau of Asset Management, Petya Nikolova, discussed with Infrastructure Investor some of the challenges of finding renewables funds that can deliver performance and reliability on par with more traditional infrastructure funds. She noted that there were challenges associated with hard mandates on decarbonisation efforts.

“Stranded asset risk is very real, but we don’t have hard mandates not to invest and therefore it’s an economic decision based on merit,” Nikolova said at the time. “But you see the issues playing out, so it becomes a higher threshold from an investment point of view.”

‘Substantial climate risk’

According to John Adler, the chief ESG officer for the Bureau of Asset Management for the New York City Comptroller’s Office, the time for raising that threshold has already passed and the city’s pensions should distance themselves from the entire fossil fuel asset stream as fast as practical.

“We’re taking this step now because midstream and downstream fossil fuel infrastructure carry substantial climate risk that could harm the resilience of our pension funds,” Adler told Infrastructure Investor. It is our responsibility to ensure that every investment decision we make today aligns with the future we owe our retirees.”

Adler emphasised he believes the proposal’s goals can be accomplished through arrangements similar to ones the firms have already made to exclude the pension fund’s money from investments in upstream fossil fuel companies that are part of their AUM.

“Our fiduciary duty is based on being able to provide benefits to members and their beneficiaries of the pension fund for decades to come,” he said. Adler cited an example used by Lander, of a teacher who has just begun her career with New York City schools.

“Hopefully, she teaches in the schools for 25 or 30 years, then retires. And then she lives for another 25, 30, 40 years. Just for that teacher you’re looking at pension obligations that effectively extend out to the end of this century,” Adler said, noting that for a universal investor like the city’s funds, the single biggest determiner of outcomes is the global economy, which is already seeing the impact of climate change, including recent record-setting hurricanes, wildfires and floods.

“Anything we can do to reduce climate change, we believe, will have a positive economic impact on the global economy and therefore on our portfolio.”