STATE OF NEW YORK ________________________________________________________________________ 2126--A 2019-2020 Regular Sessions IN SENATE January 22, 2019 ___________ Introduced by Sens. KRUEGER, ADDABBO, BAILEY, BIAGGI, BRESLIN, BROOKS, CARLUCCI, COMRIE, GIANARIS, HARCKHAM, HOYLMAN, JACKSON, LIU, MAY, METZGER, MONTGOMERY, MYRIE, PARKER, PERSAUD, RAMOS, RIVERA, SALAZAR, SANDERS, SEPULVEDA, SERRANO, SKOUFIS, STAVISKY, THOMAS -- read twice and ordered printed, and when printed to be committed to the Committee on Civil Service and Pensions -- committee discharged, bill amended, ordered reprinted as amended and recommitted to said committee AN ACT to amend the retirement and social security law, in relation to limitations on investments of public pension funds; and providing for the repeal of such provisions upon expiration thereof The People of the State of New York, represented in Senate and Assem- bly, do enact as follows: 1 Section 1. This act shall be known and may be cited as the "fossil 2 fuel divestment act". 3 § 2. Legislative findings. 1. a. Climate change is a real and serious 4 threat to the health, welfare, and prosperity of all New Yorkers, now 5 and in the future. Maintaining the status quo of fossil fuel energy 6 production will lead to catastrophic results. 7 b. The United Nations Intergovernmental Panel on Climate Change has 8 determined that in order to keep the increase in global average temper- 9 ature below 1.5 degrees Celsius, global greenhouse gas emissions must 10 decline by 45% by 2030, and reach net zero by 2050. 11 c. As such, New York State has codified into law a goal of reaching a 12 40% economy-wide greenhouse gas emissions reduction relative to 1990 13 levels by 2030, and net zero emissions by 2050. 14 d. The threat of climate change and the transformation of the global 15 energy system that will be necessary to mitigate it will have a serious 16 negative impact on investors whose assets are not aligned with a 1.5 17 degree trajectory. 18 2. a. Continued investment in fossil fuel producers poses unacceptable 19 risk to the long-term sustainability of the Common Retirement Fund. EXPLANATION--Matter in italics (underscored) is new; matter in brackets [] is old law to be omitted. LBD05278-04-9S. 2126--A 2 1 b. Experts estimate that demand for fossil fuels is likely to peak 2 within the next decade. In spite of this, the majority of fossil fuel 3 producers are not adjusting their business models to take into account 4 the changing energy market, investing billions of dollars in exploring 5 and extracting new reserves, creating stranded asset risk and the poten- 6 tial for rapid, unexpected, and significant loss of value. 7 c. Attempting to beat the market by holding these investments until 8 the last possible moment is a high-risk strategy that could result in 9 the loss of investment principal. In the words of the Decarbonization 10 Advisory Panel for the New York State Common Retirement Fund, "being too 11 early in the avoidance of the risk of permanent loss is much less of a 12 danger than being too late." 13 3. a. The Legislature is bound by a fiduciary responsibility over the 14 pension fund. 15 b. This responsibility includes a duty to future as well as current 16 beneficiaries. It is therefore incumbent upon the Legislature as fiduci- 17 ary to concern itself with how the Fund rebalances its investments to 18 meet its financial performance targets, favoring the long-term sustaina- 19 bility of the Fund over seeking short-term gains. Fossil fuel producers 20 are currently underperforming compared to the broader market. However, 21 even if they were to produce acceptable returns in the near term, they 22 present undue long-term risk that compels trustee action on behalf of 23 future beneficiaries. 24 c. Duties to future beneficiaries may reasonably include consideration 25 of their human interests, quality of life, and public safety and securi- 26 ty, and therefore may mandate that trustees try to accelerate the shift 27 away from fossil fuels to help mitigate the future adverse effects of 28 climate change. 29 d. Given the systemic threat of climate change to the economy as a 30 whole, and therefore to the value of the Fund's entire portfolio, 31 consideration of the climate impact of certain investments is entirely 32 appropriate. According to the US Department of Labor's interpretive 33 bulletin 2015-1, environmental issues "may have a direct relationship to 34 the economic value of the plan's investment. In these instances, such 35 issues are not merely collateral considerations or tie-breakers, but 36 rather are proper components of the fiduciary's primary analysis of the 37 economic merits of competing investment choices." 38 e. The Common Retirement Fund has set a precedent by choosing to 39 divest from certain industries in the past due to the moral implications 40 of their business models, including private prisons, firearms manufac- 41 turers, and companies doing business with Sudan, all while complying 42 with the Comptroller's fiduciary obligations. 43 f. Over 1,100 institutional investors representing more than $11 tril- 44 lion in holdings have chosen to pursue full or partial divestment from 45 fossil fuel producers, including the Teachers Retirement System of the 46 City of New York, the New York City Employees Retirement System, the 47 endowment and pension funds of the University of California system, and 48 the sovereign wealth funds of Norway and Ireland. This bill adopts the 49 prevailing approaches of these similarly situated fiduciaries with 50 regard to fossil fuel divestment, and therefore complies with the 51 prudent investor standard defined by section 11-2.3 of the estates, 52 powers and trusts law. 53 4. a. The Legislature is within its constitutional authority to 54 instruct the Comptroller to divest from fossil fuel producers along the 55 lines outlined in this bill.S. 2126--A 3 1 b. The Court of Appeals ruled in Scaglione v. Levitt that the Comp- 2 troller's freedom to invest is "limited by the continuing power of the 3 Legislature to expand or restrict the classes and kinds of investments 4 in which he may place the funds in his care," provided that his or her 5 discretion is not impaired. The Comptroller's discretion is maintained 6 in this bill through the mechanism of the Determination of Prudence. 7 c. The Court of Appeals further ruled in McDermott v. Regan and Guzdek 8 v. McCall that a proposed change to the management of the Retirement 9 System would be deemed "radical" and would compel "close examination" 10 if, in addition to interfering with the Comptroller's discretion, it 11 destabilized the system or created an inappropriate level of risk in the 12 management of the Fund. The Legislature finds that there is extensive 13 evidence that this bill, if enacted, would not meet any of these thresh- 14 olds. 15 d. Existing state law, in effect for decades, provides an example of a 16 limitation on the Comptroller's freedom to invest, placing requirements 17 on the Comptroller to consider certain social and political factors 18 before investing in companies doing business in Northern Ireland. 19 5. a. Given the severely adverse impact that climate change will have 20 on the lives of all New Yorkers and all people on the planet, the State 21 has a responsibility to take all available steps to avert and mitigate 22 it. 23 b. Attempting to profit from investments in companies whose business 24 models, public relations campaigns, and lobbying efforts not only fail 25 to comply with New York's statutory climate goals, but put the stability 26 of our society and the safety of our citizens at risk, is neither moral- 27 ly acceptable nor in compliance with the Legislature's fiduciary respon- 28 sibility to current and future pension beneficiaries. 29 § 3. The retirement and social security law is amended by adding a new 30 section 423-d to read as follows: 31 § 423-d. Fossil fuel divestment. 1. Definitions. As used in this 32 section: 33 a. "coal producer" means any corporation or company, or any subsidiary 34 or parent of any corporation or company, that derives at least twenty 35 percent of annual revenue from thermal coal production, or accounts for 36 more than one percent of global production of thermal coal, or whose 37 reported coal reserves contain more than 0.3 gigatons of potential 38 carbon dioxide emissions; 39 b. "direct investment" means ownership of an individual stock, securi- 40 ty, equity, asset, or other obligation of a corporation or company; 41 c. "exclusion list" means the list created pursuant to paragraph a of 42 subdivision two of this section; 43 d. "indirect investment" means a holding in an investment vehicle that 44 directly or indirectly owns an individual stock, security, equity, 45 asset, or other obligation of a corporation or company; 46 e. "oil and gas producer" means any corporation or company, or any 47 subsidiary or parent of any corporation or company, that derives at 48 least twenty percent of annual revenue from oil or gas production, or 49 accounts for more than one percent of global oil or gas production, or 50 whose reported combined oil and gas reserves contain more than 0.1 giga- 51 tons of potential carbon dioxide emissions; 52 f. "oil or gas production" means exploration, extraction, drilling, 53 production, refining, processing, or distribution activities related to 54 oil or gas; and 55 g. "thermal coal production" means mining, transport, processing, or 56 exploration activities related to thermal coal.S. 2126--A 4 1 2. Fossil fuel producer exclusion list. a. Within six months of the 2 effective date of this section, the comptroller shall create an exclu- 3 sion list of all coal producers and oil and gas producers in whose 4 stocks, securities, equities, assets, or other obligations the common 5 retirement fund has any moneys or assets directly invested. 6 b. Upon completion of the exclusion list, it shall be made publicly 7 available, and a copy shall be sent to the temporary president of the 8 senate and the speaker of the assembly. 9 c. The comptroller shall submit notification to any corporation or 10 company that has been included in the exclusion list informing them of 11 their inclusion, as well as the requirements of subdivisions three and 12 five of this section. 13 d. At the comptroller's discretion, but no later than two years after 14 the completion of the exclusion list, and no less frequently than bien- 15 nially thereafter, the comptroller shall update the exclusion list to 16 remove any corporation or company that is no longer a coal producer or 17 an oil and gas producer, and add any corporation or company necessary to 18 comply with paragraph a of this subdivision, with the exception of such 19 companies removed from the exclusion list pursuant to paragraph b of 20 subdivision four of this section. 21 3. Removal from the exclusion list. a. At any time following the 22 publication of the exclusion list, any corporation or company included 23 in the list may submit to the comptroller a request for removal on the 24 basis of clear and convincing evidence that they are not currently a 25 coal producer or an oil and gas producer as defined in subdivision one 26 of this section or that they will no longer meet such definition by 27 January first, two thousand thirty. 28 b. Upon satisfaction that a corporation or company has met the 29 requirements of paragraph a of this subdivision, the comptroller shall 30 remove that corporation or company from the exclusion list, and provide 31 a written explanation for such removal to the temporary president of the 32 senate and the speaker of the assembly. 33 4. Determination of prudence. a. Within six months from the completion 34 of the exclusion list the comptroller shall issue a determination as to 35 whether divestment from any or all corporations or companies on the 36 exclusion list, in whole or in part, pursuant to subdivision five of 37 this section complies with his or her fiduciary obligations and the 38 prudent investor rule as defined by section 11-2.3 of the estates, 39 powers and trusts law. The comptroller shall make such determination 40 publicly available and a copy shall be sent to the temporary president 41 of the senate and the speaker of the assembly. 42 b. If the comptroller determines that divestment from any corporation 43 or company on the exclusion list does not comply with his or her fiduci- 44 ary obligations and the prudent investor rule as defined by section 45 11-2.3 of the estates, powers and trusts law, that corporation or compa- 46 ny shall be removed from the exclusion list. 47 c. At any time, subject to the comptroller's discretion, but no later 48 than five years and six months from the effective date of this section, 49 and every five years thereafter, any corporations or companies removed 50 from the exclusion list pursuant to paragraph b of this subdivision 51 shall be returned to the exclusion list, subject to a new determination 52 of prudence issued at that time pursuant to paragraph a of this subdivi- 53 sion. 54 5. Divestment. a. Commencing one year after the effective date of this 55 section, subject to an affirmative determination of prudence pursuant to 56 subdivision four of this section, and in accordance with sound invest-S. 2126--A 5 1 ment criteria and consistent with his or her fiduciary obligations, the 2 comptroller shall: (i) divest the common retirement fund of any stocks, 3 securities, equities, assets, or other obligations of corporations or 4 companies on the exclusion list in which any moneys or assets of the 5 common retirement fund are directly invested; and (ii) cease new direct 6 investments of any moneys or assets of the common retirement fund in any 7 stocks, securities, or other obligations of any corporation or company 8 that is a coal producer or oil and gas producer. 9 b. Divestment from oil and gas producers pursuant to this subdivision 10 shall be completed no later than five years from the effective date of 11 this section. Divestment from oil and gas producers returned to the 12 exclusion list pursuant to paragraph c of subdivision four of this 13 section shall be completed no later than five years from the date of 14 return to the exclusion list. 15 c. Divestment from coal producers pursuant to this subdivision shall 16 be completed no later than two years from the effective date of this 17 section. Divestment from coal producers returned to the exclusion list 18 pursuant to paragraph c of subdivision four of this section shall be 19 completed no later than two years from the date of return to the exclu- 20 sion list. 21 6. Limitations on indirect investment. Commencing one year after the 22 effective date of this section, and no later than five years from the 23 effective date of this section, subject to an affirmative determination 24 of prudence pursuant to subdivision four of this section, and in accord- 25 ance with sound investment criteria and consistent with his or her fidu- 26 ciary obligations, the comptroller shall endeavor to ensure that no 27 moneys or assets of the common retirement fund are invested in an indi- 28 rect investment vehicle unless he or she is satisfied on reasonable 29 grounds that such indirect investment vehicle is unlikely to have in 30 excess of two percent of its assets, averaged annually, directly or 31 indirectly invested in coal producers and oil and gas producers. 32 7. Reporting. Commencing two years after the effective date of this 33 section and annually thereafter the comptroller shall issue a report to 34 the temporary president of the senate and the speaker of the assembly, 35 and shall make such report publicly available, outlining all actions 36 taken to comply with this section. 37 § 4. This act shall take effect immediately and shall expire and be 38 deemed repealed January 1, 2050.