New York pension fund puts ESG pressure on Amazon, Facebook, ExxonMobil and others

New York State's pension fund, the third-largest of its kind in the country, is pressuring corporate America to change its ways.

Every spring, the $242.3 billion Common Retirement Fund seeks to compel Amazon, ExxonMobil, Facebook, Macy's and other public companies that it has invested in to adopt more progressive policies on climate change, executives' pay, diversity and workers' rights. Many Republicans and conservatives oppose the fund's championing of policies that they have denounced as "woke."  

The pension fund — at the direction of state Comptroller Thomas P. DiNapoli — gets the attention of CEOs and corporate boards by filing shareholder proposals. If the proposals garner enough votes from fellow investors, management can be forced to address the issues. Recent proposals have required public companies to make plans to reduce greenhouse gas emissions, report on their diversity-hiring efforts and disclose their political spending.  

Companies often negotiate an agreement with the fund and it withdraws a proposal before investors cast their ballots and potentially hand an embarrassing defeat to management.

At stake in the process are the retirement benefits of 1.2 million state and local government workers and retirees. Last year, the pension fund provided checks totaling about $15 billion to more than 507,900 retirees and their beneficiaries across New York. On Long Island, more than 64,000 people received a total of $2.4 billion, according to the most recent available data.

DiNapoli, the Nassau County Democrat who is the pension fund's sole trustee, said he's safeguarding those retirement benefits by pushing changes in how public companies operate. If the changes are implemented, the companies will reduce risk and increase profit — and by doing so boost the fund's assets, said DiNapoli, who has had the final word on the fund's activities since being elected comptroller in 2007.

"We need to protect the value of the Common Retirement Fund's investments by keeping an eye on the companies where we have our money," he said in an interview at his Albany office. "We're constantly evaluating corporate practices because good corporate practices make an investment more profitable in the long term, and that benefits the fund's beneficiaries who must always be my priority."

Critics deride activism

But critics said DiNapoli, a former assemblyman who lives in Great Neck Plaza, should focus on investment returns, not shareholder activism.

Most of the nearly 470 shareholder proposals that he's filed in the past decade are about environmental, social and corporate governance issues, or ESG, according to a database compiled by Newsday.

ESG principles are anathema to conservatives.  

“Environmental, social, and governance policies are the left’s latest political tool to use businesses and financial institutions to force their progressive ideology on the American people," said Jessica Anderson, executive director of Heritage Action for America, the lobbying arm of the conservative think tank Heritage Foundation in Washington. Heritage has helped conservatives file more than 150 anti-ESG bills in state legislatures across the country, including in Albany.

Pension managers should "fulfill their fiduciary duty and stop investments in political agendas," Anderson said.

[Pension managers should] fulfill their fiduciary duty and stop investments in political agendas.  

—Jessica Anderson of the conservative Heritage Action for America

Credit: Heritage Action for America

At least eight states in the South and West have enacted anti-ESG measures. Last month, Florida Gov. Ron DeSantis, a Republican presidential candidate, signed a bill into law that bars state officials from investing public money to promote ESG goals. 

Asked about ESG, DiNapoli said ESG principles aren't used to determine where New York's pension fund invests its money.

Risky business

He said the fund's assets are invested in hundreds of companies based solely on their potential to generate strong returns in the long term. If a company's policies or practices are lacking based on ESG principles then the fund seeks change through shareholder proposals, he said.

We're asking questions of the companies where we see there's a potential risk. 

—NYS Comptroller Thomas P. DiNapoli 

Credit: Hans Pennink

"We see ESG as a risk mitigation strategy — and we've been doing it for well over a decade" by filing shareholder proposals, DiNapoli said. "We're asking questions of the companies where we see there's a potential risk. We want to get those companies to mitigate those risks."

For example, a company that mistreats employees could face disruptions in its operations, lawsuits and union organizing drives — all of which could reduce sales and the stock price, which in turn would impact the pension fund's performance. Similarly, oil, natural gas and coal producers face threats to their existence from government's drive to replace the use of fossil fuels with solar and wind power, he said.

DiNapoli pointed to news reports about allegations of employee discrimination at Amazon warehouses that could hinder the online retailer's ability to fulfill orders, cause workplace protests and lawsuits. "Amazon needs to ensure that it is effectively addressing inequality and protecting the company's long-term success," he said.

Last spring, in one of the pension fund's biggest victories, Amazon agreed to conduct a "racial equity audit" — an independent review of the working conditions at its facilities. The fund first raised the issue in a 2021 proposal that was backed by more than 44% of shareholders who, like DiNapoli, were concerned the discrimination allegations would lead to disrupted operations, lawsuits and bad publicity — all of which could hammer the stock price. 

Many happy returns

The pension fund's total investment return averaged 9.55% per year between 2013 and 2022. Its holdings in U.S. public companies produced a return of 14.04% per year, on average, in the same period, according to the most recent available data. That compares with an annual rise of 14.28% of the Russell 3000 Index of the largest public companies nationwide.

The fund's performance was lauded by the Public Employees Federation, one of the unions representing state workers. DiNapoli "is an incredible steward of the state's pension fund and he has earned PEF's trust," said Wayne Spence, president of PEF, which has about 50,000 members.

The companies targeted by the fund were largely mum. Newsday contacted two dozen of them and most declined to comment or didn’t respond.

Many of the companies’ CEOs are members of the Business Roundtable lobbying organization. The group’s senior vice president and counsel, Maria Ghazal, said the U.S. Securities and Exchange Commission under President Joe Biden has made it more difficult for companies to exclude proposals from being considered by shareholders on the grounds that they are too broadly written or not relevant.

“The shift in the SEC’s shareholder proposal policy [between President Donald Trump and Biden] has lowered the bar to allow, and even encourage, many more non-germane proposals to be included,” she said. “The result is a broken system forcing companies to divert resources and attention to addressing an influx of proposals that are often unrelated to their governance and long-term success.”

More than half of the proposals filed by the pension fund since 2014 have produced results — either a majority of investors voted for the proposal, or the company agreed to address the issue in return for a proposal being withdrawn, according to the Newsday database.

Pushing diversity, equity

Proposals about diversity, racial equity and human rights have had the most success. Nearly 90% of those have yielded agreements for action at Amazon, Chipotle Mexican Grill, Dollar Tree and Monster Beverage, among others.

Every year, the fate of the proposals is decided during proxy season: the weeks in late April through mid-June when most public companies hold their annual meetings, where shareholders vote to elect boards of directors and weigh in on shareholder proposals.

Among government pension plans, the New York State Common Retirement Fund, together with New York City’s five pension funds, the California Public Employees’ Retirement System and California State Teachers’ Retirement System, are the most active in pushing U.S. corporations to change, said Keith Brainard, research director for the trade group National Association of State Retirement Administrators.

Pension funds began engaging in shareholder activism in the 1970s by divesting from cigarette manufacturers and companies with ties to apartheid in South Africa. “They really didn’t succeed in terms of gaining broad acceptance and the pension funds that divested from tobacco ended up losing money,” Brainard said.

Conservatives questioned what DiNapoli’s activism has achieved, saying his filing of shareholder proposals with public companies doesn’t guarantee there will be less risk, that their stock price won’t drop, and that New York's pension fund won't have a lower return on its investment.

 James R. Copland, a senior fellow and legal policy director at the conservative think tank Manhattan Institute, said, “DiNapoli is doing an end run around the regular process of regulating businesses [via legislation]. I don’t think his shareholder activism has moved the needle much in terms of changing corporate policies.”

 If he were to not address the risks to the portfolio from climate change, to put blinders on, then he would not be fulfilling his fiduciary duty to protect those members.

—The Rev. Kirsten Snow Spalding, vice president of the investor network at Ceres, a nonprofit focused on sustainability issues.

Credit: Ceres

The Rev. Kirsten Snow Spalding, who works with pension funds and other institutional investors on climate change proposals, disagreed. She said DiNapoli's proposals have led companies to publicly address the risks to them from rising sea levels, warmer temperatures and devastating storms. 

Confronting climate change 

“This is not a political platform that Tom [DiNapoli] is pursuing,” said Spalding, vice president of the investor network at Ceres, a Boston-based nonprofit that works on sustainability issues and where DiNapoli sits on the board.

“He wants to protect the retirements of [pension fund] members. If he were to not address the risks to the portfolio from climate change, to put blinders on, then he would not be fulfilling his fiduciary duty to protect those members,” she said.

Spalding and others said shareholder proposals filed by the pension fund have persuaded corporations to publicly disclose how their operations would be impacted by climate change, to set targets for reducing greenhouse gas emissions and to take steps for transitioning from the use of fossil fuels to renewable energy. 

Climate change has been the topic of 134 proposals in the past decade, or 29% of the total, making it the largest category. The next-largest group, 127 proposals or 27%, relate to disclosure of political spending and lobbying activities, according to the Newsday database. 

Businesses that don’t honor agreements with the state pension fund to address an issue or ignore the proposals backed by many shareholders can face a challenge to management's candidates for board seats.

In 2021, ExxonMobil shareholders elected three dissidents to the then 12-member board, defeating three company-backed candidates.

The dissidents were nominated by the hedge fund Engine No. 1 in San Francisco after 62.3% of shareholders adopted a DiNapoli/Church of England proposal in 2017. It called on ExxonMobil to disclose the impact on its business of global measures to combat climate change. 

“After that shareholder vote and ExxonMobil’s response, investors around the world recognized that this company wasn’t well-governed,” Spalding said. “They said, ‘If you won’t do what we are really clearly asking for, then the directors need to be changed.’ And that’s what happened, and it was the Common Retirement Fund’s proposal that paved the way,” she said.

Of the nearly 270 companies targeted by the fund in the past decade, Dollar General Corp. has been the most receptive, agreeing to address four issues in the first year that each proposal was filed. The issues were the working conditions at Dollar General suppliers, energy efficiency, environmental sustainability reporting and racial equity, the Newsday database shows.

Facebook and its parent, Meta Platforms, have defeated eight proposals on sustainability reporting, disclosure of steps to combat hate speech and fake news, and one-share/one-vote elections.

Most proposals never come to a vote because companies prefer to settle with the pension fund rather than be defeated in a shareholder vote. 

“The proposals are nonbinding, but they have to listen to the shareholders or the next thing that’s going to happen is shareholders will come after the directors,” said Liz Gordon, executive director of corporate governance for the state pension fund. “We’ve really seen a lot of movement from companies either as a result of merely filing a proposal and negotiating an agreement or going to a vote that makes them sit up.”

 She leads a team of nine people that each year puts forward proposal topics at specific companies for DiNapoli's consideration. Once he’s provided guidance, they research the topics and companies to file proposals. Team members then negotiate with the companies' management.  If no agreement is reached, the proposal comes to a shareholder vote, she said.

DiNapoli said he doesn't attend annual shareholders' meetings or routinely telephone CEOs to pressure them on the proposals.

There’s nothing wrong with being an active shareholder, but it’s tedious and takes a lot of effort — and you may not get the outcome that you want.

—Jean-Pierre Aubry, associate director of state and local research at Boston College’s Center for Retirement Research

Credit: Center for Retirement Research at Boston College

Shareholder activism requires a long-term commitment from pension trustees like DiNapoli, according to experts.

“There’s nothing wrong with being an active shareholder,” said Jean-Pierre Aubry, associate director of state and local research at Boston College’s Center for Retirement Research. “But it’s tedious and takes a lot of effort — and you may not get the outcome that you want.”

By James T. Madore

james.madore@newsday.comJamesTMadore

James T. Madore writes about Long Island business news including the economy, development, and the relationship between government and business. He previously served as Albany bureau chief.