States Take Contrasting Approaches to Fossil Fuel Investing

Events in two states on contrasting ends of the political spectrum illustrate the ongoing evolution of ESG-related requirements facing financial institutions. In New York, fossil fuel companies that have not met state energy transition targets are facing divestment from the state’s flagship retirement fund. Meanwhile, a battle has broken out concerning fund compliance with a 2022 Oklahoma law requiring its largest pension fund to divest from companies that the State Treasurer pinpoints as discriminating against energy companies.

In February, New York State Comptroller Thomas P. DiNapoli, the trustee of the New York State Common Retirement Fund, announced that the fund will divest $26.8 million of actively managed holdings in eight oil and gas companies that it has determined are not ready to transition to a low-carbon economy. The Common Retirement Fund invests the assets of the New York State and Local Retirement System, and it is valued at around $250 billion. DiNapoli also announced that the fund has met its target of committing $20 billion to the Sustainable Investments and Climate Solutions program, which prioritizes climate and ESG-friendly investments. Moreover, it has set a new goal of investing $40 billion in the program by 2035. Ultimately, it aims for its investments to reach net zero greenhouse gas emissions by 2040. In his statement, DiNapoli also declared that the fund will not make new investments focused on the extraction or production of oil, gas, and coal. Additionally, it will modify its proxy voting guidelines to urge publicly traded companies to disclose their climate transition plans, risks, and opportunities.

This is not the Fund’s first announcement of its type. In 2022 it restricted investment in 21 of 42 energy companies examined after they were determined to lack viable transition strategies for a net zero economy. 

Meanwhile in Oklahoma, both chambers have advanced bills aimed at resolving a controversy created by the state’s 2022 law requiring divestment from companies that are found to be hostile to fossil fuel companies. The issue stems from the refusal last year by the Board of Trustees of the $11.1 billion Oklahoma Public Employees Retirement System (OPERS) to withhold its business from companies identified by State Treasurer Todd Russ. The OPERS Board voted to invoke an exception allowing it to maintain investments with the identified firms based on its fiduciary responsibilities. This drew the ire of Treasurer Russ, who sent a 17-page letter rebuking the Board and led to this year’s legislation.

The Senate’s version of the bill (OK SB 1536) would require the State Treasurer to seek an opinion from the Oklahoma Attorney General regarding legal compliance in the event the Treasurer disagrees with a state governmental entity’s determination that the entity is exempt from one or more of the provisions of the Energy Discrimination Elimination Act of 2022. Currently, the Senate has passed the bill and a House Committee has recommended passage with minor amendments.

The House has its own, more expansive answer to the showdown between the OPERS Board and the Treasurer. The House version (OK HB 3541) adds timber, mining, and agriculture as additional protected industries. It also weakens the fiduciary responsibility exemption by requiring materially negative financial impact and agreement from the Treasurer for a state governmental entity to invoke it. The bill directs that investment costs of less than .05% per year do not constitute a “materially negative financial impact” sufficient to trigger the exemption, and it clarifies timelines for divestment and alternative investment choices. The House has already passed this version of the bill but it has not gained significant traction in the Senate.

The contrasting situations in New York and Oklahoma illustrate the dramatically different ways that red and blue states are acting on ESG-related financial matters.

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This article appeared in our Morning MultiState newsletter on April 16, 2024. For more timely insights like this, be sure to sign up for our Morning MultiState weekly morning tipsheet. We created Morning MultiState with state government affairs professionals in mind — sign up to receive the latest from our experts in your inbox every Tuesday morning. Click here to sign up.