New York’s warning to asset managers highlights dangers of inexperienced retreat | USAEMALL.com

Welcome back. Yesterday’s Earth Day was an anxious one for many at US green non-profits, amid rumours that Donald Trump planned to celebrate with an executive order demolishing their tax-exempt status. The day came and went without that hammer blow.

Perhaps Trump thought better of the idea. Maybe he was preoccupied by the travails of his hapless defence secretary, or his dangerous stand-off with the Federal Reserve governor. Who knows — but climate groups would be rash to relax.

In New York, activists defaced Wall Street’s charging bull statue with green paint (then helpfully cleaned it up). And the city’s comptroller Brad Lander — who stressed his solidarity with climate non-profits — sent a message to asset managers that will have set alarm bells ringing, as I explain below.

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Sustainable investing

New York pension funds’ green warning shot for asset managers

BlackRock, the world’s largest asset manager, has taken its share of brickbats from across the political spectrum over the past couple of years. But the one lobbed yesterday by New York City comptroller Brad Lander looked more ominous than most.

Some asset managers used to take climate change seriously “but have taken big steps backward”, Lander said, citing BlackRock’s withdrawal from green investor alliances as an example. “We have certainly let them know . . . how displeased we were about that,” he added.

The criticism came as Lander, who oversees New York City’s huge public pension funds, issued a stark warning to the asset management companies that invest money on their behalf: comply with the funds’ climate goals or be prepared to lose their business.

Three of the five major funds, with investments of $235bn between them, have committed to reduce their financed carbon emissions to net zero by 2040. The funds have asked all their external asset managers investing in public markets to submit a detailed account of their own net zero plans by the end of June. For those that fail to submit such a plan — or submit one that doesn’t come up to scratch — Lander will advise the pension fund boards to put their contract out for a new competitive bid.

This looks like part of an emerging trend, as I highlighted last month. Some of the biggest US asset managers have been turning quiet on climate issues, after coming under heavy scrutiny for supposed “woke capitalism” from Republican lawmakers, while some conservative state officials have withdrawn business from them. But now they are threatened by the loss of contracts with pension funds who want their asset managers to take a proactive approach to climate issues.

Most notably, the UK’s People’s Pension fund in February pulled a £28bn ($37bn) investment mandate from State Street, after a review of its sustainable investment policy. In the same month, a group of mainly UK pension funds and other institutions controlling $1.5tn in assets warned that they could withdraw their business from asset managers that didn’t engage with companies on climate risk.

Lander’s warning yesterday underscores that this risk is not confined to Europe. For asset managers whose climate plans don’t pass muster, the loss of business from these New York pension funds will prove painful. BlackRock alone manages $16.8bn for just one of the funds. New York’s public pensions are the biggest in the US outside California (and while the Golden State’s giant Calpers and Calstrs funds have not yet given their asset managers an explicit warning like Lander’s, they continue to stress the importance they attach to climate concerns).

Lander said that the managers’ climate plans would need to meet the following standards:

1. Engage portfolio companies to drive real economy decarbonization, not just portfolio decarbonization.

2. Incorporate material climate change-related risks and opportunities in investment decision-making.

3. Ensure a robust and systematic stewardship strategy that addresses prioritization and escalation of engagement and voting to advance decarbonization.

Asset managers would need to set climate expectations for all their portfolio companies, which must be asked to draw up net zero goals and transition plans.

Lander’s broadly worded requests have left his team a lot of discretion to decide whether asset managers are compliant with the new rules. If he does push for sweeping changes, critics are likely to allege political grandstanding by Lander, who is running to become New York City mayor in this year’s election. And any recommendations would still need to be approved by the boards of the funds.

Lander is right, however, to argue that “climate risk is financial risk” — especially for the multi-trillion-dollar pension fund sector, with its duty to consider beneficiaries’ interests decades into the future.

Not all those beneficiaries will be as keen on climate action as the teachers of New York (notably, the pension funds for the city’s police and fire departments have not adopted net zero goals). But as pension funds continue to grapple with the long-term risks of climate change and the energy transition, their asset managers should brace themselves for many more tough conversations to come.

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