NYC’s Financial Boss Denounces Politicization of ESG Investing

Politicized rhetoric against ESG is making it harder for investment managers to consider the financial risks posed by climate change, says the overseer of the nation’s biggest municipal pension fund.

“I wish I could start from square one, when the field hadn’t already been polarized,” Brad Lander (D), comptroller of New York City, said in an interview. “I wish you could start from a place of saying, ‘Let me talk to you about what the pension obligations are that run out for decades.’”

Lander serves as a custodian of, and financial adviser to, five pension systems that are worth $248 billion and cover some 750,000 public sector workers. Three of those funds—representing teachers, transit workers, and a wide range of other city employees—have committed to achieving net zero emissions in their portfolios by 2040.

He has faced resistance from Republican elected officials over his investment strategy, as well as a lawsuit from public employees against the retirement fund.

Some of the hostility Lander has encountered in promoting ESG concepts arises from a misunderstanding of what the New York City’s comptroller’s office does and doesn’t do, he said.

For example, the comptroller doesn’t make direct investments, leaving those decisions to the trustees and asset managers of each pension fund, Lander said.

The comptroller also doesn’t advise the funds to steer their money toward investments that specifically prioritize fossil fuel divestment. Rather, Lander said he only wants them to use ESG as a tool for measuring risk.

“Everyone who manages a large pool of money recognizes that it’s important to take long-term risks into account,” he said. “We take environmental, social, and governance concerns very seriously in the context of all our investments across our portfolio, because that is not only consistent with fiduciary duty, it’s required by fiduciary duty.”

Lander also said his identity as a progressive Democrat doesn’t influence the “very specific set of duties and responsibilities” he now must fulfill. Lander was the founding co-chair of New York City Council’s Progressive Caucus when he served as a councilmember in former Mayor Bill de Blasio’s old district.

Witold Henisz, vice dean and faculty director of the ESG initiative at the University of Pennsylvania’s Wharton School, said Lander’s approach is aligned with both the Securities and Exchange Commission’s and the Supreme Court’s definition of material factors.

“There’s no logical tension between ESG investment and fiduciary duties,” Henisz said.

Pushback From the Right

Not everyone agrees with Lander’s position.

Four current and former city employees recently sued the three city pension funds that support ESG, alleging they breached their fiduciary duty by shedding $4 billion in fossil fuel investments.

“In America, you can always invest your own funds based on your personal or political preference so long as it’s done legally,” Utah Attorney General Sean Reyes said in an interview. “But when you invest other people’s assets as a fiduciary—particularly when those beneficiaries are public employees who are captive to your decisions—you are held to a much higher standard.”

Making investment decisions based on ESG factors, “as it appears Lander is doing, contradicts the duties of public pension trustees if those decisions are motivated by broad social, environmental, or governance concerns, rather than the exclusive financial interests of participants and beneficiaries,” Reyes said.

Similarly, Rep. James Comer (R-Ky.), chair of the House Oversight and Accountability Committee, during a May hearing called ESG investing “window dressing for liberal activism and radical far-left ideology.”

Lander said that kind of rhetoric hasn’t softened his stance on ESG, and he will continue to press the two city pension funds that haven’t adopted a net-zero implementation plan to do so. Those funds represent police officers and firefighters.

Broadly, the implementation plans lay out a strategy for emissions disclosures, interim targets, stronger partnerships with other investors, investments in climate change solutions such as renewable energy, and ultimately divestment.

But Lander also said he’s concerned about “a moderating or slowing impact” the pushback is having on some of the pension funds’ investment managers.

“Many of those folks don’t want to be in the eye of a political storm,” Lander said. “So even if they know they should have the freedom to invest, even if they know that it’s critical to decarbonize their portfolios, they’re slow-walking or stepping back from those obligations because of the political attacks.”

Of the arguments advanced by Republicans like Reyes and Comer, Lander said it’s “sheer nonsense. It’s motivated by fossil fuel political contributions, rather than by stewardship” of the public treasury.

Henisz said the current way many investors consider ESG “leaves a lot to be desired.” Many asset managers try to account for ESG by using third-party ratings data from financial institutions like Morgan Stanley and Moody’s, he said.

“If you just buy someone’s data, there’s no clear evidence that you’re going to outperform,” Henisz said. “But it’s expensive to do it right, and a lot of the financial investment community is looking for shortcuts.”

Plan Members ‘Delighted’

Most of the academic literature shows that ESG funds underperform non-ESG funds, according to Samuel Hartzmark, an economics professor at Boston College’s Carroll School of Management.

“If you’re making investments in ways not to optimize total returns, it would be very difficult that that could lead to higher returns,” Hartzmark said.

The data is often noisy, and ESG investing is still too new for definitive conclusions to be reached, according to Hartzmark. But the findings of underperformance make intuitive sense if only because non-ESG funds have a wider pool of investments from which to choose, he said.

Even so, Hartzmark and Abigail Sussman of the University of Chicago Booth School of Business also found in a 2019 paper that many investors prefer ESG funds.

Lander said most of the response he’s heard from pension participants has been positive, in part because many of them are concerned about the effect the climate crisis will have on their grandchildren.

Plan participants also have the option of withdrawing their money if they end their government service and no longer want to draw a pension, said a spokeswoman for the comptroller’s office.

“Retirees in this city are a very politically active set of folks,” Lander said. “But they’re delighted to hear that the funds are well funded, that the investments are doing well, that we’ve got a broadly diversified portfolio, and that they’re going to keep getting their checks every month.”