(Bloomberg) — In a new attack against ESG investing, three New York City pension funds were sued for allegedly breaching their fiduciary duty by selling billions of dollars of fossil-fuel holdings.
The plaintiffs, who include a subway train operator, a teacher and an occupational therapist in the city’s school system, claim the retirement plans’ decision to divest roughly $4 billion of fossil-fuel assets is “a misguided and ineffectual gesture to address climate change,” according to the complaint filed in New York state court. They said the plans have “a duty to act prudently in making investment decisions.”
Oil and gas stocks rallied last year following Russia’s unprovoked invasion of Ukraine, with the MSCI World Energy Index rising more than 40%.
New York City Comptroller Brad Lander, who oversees the pension plans, has been actively pressing asset managers to do more to address climate change.
“While we don’t comment on pending litigation, we take our fiduciary duty very seriously,” said a spokesperson from Lander’s office. The move by trustees to exclude fossil fuels from the three funds was made “in accordance with their fiduciary duty” to protect beneficiaries from “the financial risks of investing in fossil-fuel reserves,” the spokesperson said.
The lawsuit, filed late Thursday, emerges as Republican politicians across the US criticize environmental, social and governance investing. They have launched probes and introduced anti-ESG bills, while states including Texas and Florida have restricted doing business with Wall Street firms that push ESG investing.
The New York City Employees’ Retirement System, the Teachers’ Retirement System and the Board of Education Retirement System violated their obligations when they opted in 2021 to divest fossil-fuel holdings to “advance environmental goals unrelated to the financial health of the plans,” according to the suit. The choice was made without “regard for whether those assets would produce a superior return for the plans.”
The city’s police and fire pensions decided against selling, saying that divesting wasn’t consistent with their fiduciary duties.
The plaintiffs — represented by Eugene Scalia, a former labor secretary under Donald Trump — are seeking unspecified financial damages, including a reimbursement of losses caused by the divestment actions, among a series of related requests.
“Defendants’ actions in selling off high-performing securities, and prioritizing lower-yield investments, is especially troubling given the plans’ chronic and severe underfunding,” according to the suit.
NYC pension funds were among the first in the country to set targets to reduce greenhouse gas emissions from investments. Last month, the New York City Employees’ Retirement System voted to increase investments in climate-related projects to $19 billion by 2035 and ask private money managers to exclude holdings tied to the production, exploration or extraction of fossil fuels. The Teachers’ Retirement System voted to adopt a similar plan.
The case is Wayne Wong v. NYCERS, TRS and BERS, New York State Supreme Court, New York county.
—With assistance from Chris Dolmetsch.
(Adds comment from New York City comptroller’s office in fifth paragraph.)