A New York City subway operator, a school teacher, and other public workers have filed a lawsuit against the city’s pension fund managers, charging that they have misused pension investments to pursue a political agenda and harmed public workers who depend on that money to fund their retirements.
Filed in New York state court on May 11, the
lawsuit states that city pension fund managers are “obligated to administer their respective Qualified Pension Plans (the ‘Plans’) solely in the interests of the Plans’ participants and beneficiaries, and for the exclusive purpose of providing retirement benefits. But instead of honoring that obligation, Defendants have breached their fiduciary duties and abused their control over plan assets by divesting the Plans of approximately four billion dollars of holdings in companies involved in the extraction of fossil fuels, in a misguided and ineffectual gesture to address climate change.”
“This is a landmark action and a huge warning shot to pension funds like New York’s that are breaching their fiduciary duty and using pension assets to push a political objective instead of focusing on returns for their pensioners,” Will Hild, an attorney and executive director of Consumers’ Research, told The Epoch Times.
Elisabeth Messenger, CEO of Americans for Fair Treatment, one of the plaintiffs in the case, said, “Pensions are a promise, and governments owe it to their employees to keep their commitment. The teachers, maintenance workers, municipal employees, and more who keep our government running effectively deserve properly managed retirement systems, free from politically motivated intervention.”
The legal action was filed against the New York City Employees’ Retirement System, the Teachers’ Retirement System of the City of New York, and the Board of Education Retirement System of the City of New York. Together, these funds manage more than $40 billion in retirement assets for about 700,000 city workers.
While
24 states have either banned or are considering banning their pension funds from investing according to nonfinancial criteria, New York City has explicitly directed city pension funds to consider climate and social justice criteria, claiming that these criteria are prudent risk management.
“Responsible fiduciary investing takes into account the environmental, social, and governance (or ‘ESG’) risks facing companies and integrates risk mitigation into how we build our portfolio and engage with the companies we invest in,”
city policy states.
New York City has established an Office of ESG and stated that “the Office of ESG within the Bureau of Asset Management is tasked with leading the integration of ESG considerations into manager selection, investment due diligence, corporate engagement, and economically targeted investments.”
New York state has taken a
similar approach, stating that “the New York State Common Retirement Fund’s Corporate Governance Program supports and facilitates the integration of environmental, social and governance (ESG) into the Fund’s investments process.” According to
Standard & Poors, which rates states in terms of ESG compliance, eight states currently include ESG as a criterion for pension investments, and nine other states have policies to divest from fossil fuels.
Does ESG Help or Hurt Pensioners’ Returns?
Questions that will likely prove pivotal in the case are to what extent pensioners have suffered monetarily from the fund managers’ actions and whether ESG is an effective tool for enhancing investment returns, as pro-ESG asset managers claim, or a political agenda.
“I am fully confident that [the employees] will be able to show that there were monetary damages to the pension fund because of this decision making,” Hild said.
A number of academic studies appear to back him up.
A
2020 study by the Boston College Center for Retirement Research stated that ESG investing reduced pensioners’ returns by 0.70 to 0.90 percent per year, with much of the difference attributable to higher management fees for ESG funds. A
Harvard University report, titled “An Inconvenient Truth About ESG Investing,” found that ESG investing actually hurts returns.
“ESG funds certainly perform poorly in financial terms,” the report reads.
“ESG funds appear to underperform financially, relative to other funds within the same asset manager and year, and charge higher fees,” a
2021 report by Columbia University and the London School of Economics reads.
Regarding the benefits of “stakeholder capitalism,” “the push for stakeholder-focused objectives provides managers with a convenient excuse that reduces accountability for poor firm performance,” according to a
2021 study by the University of South Carolina and the University of Northern Iowa. The report found a correlation between a CEO’s underperformance and how vocal they were in supporting unquantifiable ESG goals.
Some of the top asset management firms are publicly conceding that ESG, which is touted by its supporters as a means to reduce risk and enhance returns, has no pecuniary value for investors.
Vanguard CEO Tim Buckley said in February that “our research indicates that ESG investing does not have any advantage over broad-based investing.” In December 2022, Vanguard, the world’s second-largest asset manager,
pulled out of the Net Zero Asset Managers initiative (NZAM), a U.N.-affiliated climate club whose members are “committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner.”
Testifying before the Texas state senate in December 2022, Lori Heinel, chief investment officer of State Street, the world’s third-largest asset manager,
said: “I have no evidence that this [ESG] is good for returns in any time frame. In fact, we’ve seen the evidence to be quite contrary. Last year, if you didn’t own energy companies, you did miserably compared to broad benchmarks. The year before, that was quite the opposite ... but that was just a happenstance, that’s not because it’s a good investment.”
BlackRock, the world’s largest asset manager and one of the most outspoken advocates of ESG investing, is finding that its advocacy for these causes is causing difficulty with conservatives and progressives alike. In September 2022, New York City Comptroller Brad Lander, who manages the city’s pension funds, issued a scathing
letter to BlackRock CEO Larry Fink, stating his “growing concern that BlackRock is backtracking on its climate commitments.”
“BlackRock has repeatedly and rightly recognized climate change as an investment risk. In your 2020 letter to CEOs, you name climate change as a ‘defining factor in companies’ long-term prospects,’ and declared your ‘investment conviction that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors,’” Lander wrote. “Your 2021 letter to CEOs committed to ‘supporting the goal of net zero greenhouse gas emissions by 2050 or sooner.’”
However, Lander charged, as a result of pushback from conservative states, “BlackRock now abdicates responsibility for driving net zero alignment in its own portfolio by saying that it does not ask companies to set specific emissions targets, and that its participation in NZAM does not mean BlackRock is setting or meeting any net zero targets.”
Next Steps in NYC Workers’ Lawsuit
The next step in the case against New York City pension managers is that the managers will likely move to dismiss the case.“I don’t think that will be successful,” Hild said. “New York has fairly favorable rules around standing for pensioners to sue pension funds for breaching [fiduciary duty].”
If the courts allow the case to proceed, the next stage will be the “discovery” phase, during which plaintiffs will have the right to examine internal communications and deliberations among the pension fund managers, the city comptroller’s office, and others involved.
“That is when the fireworks really start, because not only will we be moving toward a calculation of damages for this egregious breach of fiduciary duty, but we will also get a peek into the inner workings of this ESG complex and the many ways in which different players within this have colluded with each other and coordinated their activities in ways that I think we’re going to find are likely illegal,” Hild said.
Legal experts say that if courts decide that New York City pension managers have violated their fiduciary duties, this case will likely set a major precedent for other states, most notably California, that are pursuing ESG goals with pensioners’ money. It may also raise the possibility of class action suits against Wall Street asset managers such as BlackRock that have touted ESG as an appropriate and effective investment tool.
