The agency that manages New Jersey’s $100 billion state pension fund has codified a strategy to reduce carbon emissions at companies backed by the fund, with measures that will include an in-house assessment of emission reduction efforts across its entire portfolio and participation in shareholder pressure tactics.

Addressing Wednesday’s meeting of the State Investment Council in Trenton, Suzanne Hannigan, the sustainable investing portfolio manager for the New Jersey Division of Investment, presented a summary of the state’s new climate action investment plan. The plan would take a “holistic approach to addressing climate change risks and opportunities” while adhering to the agency’s fiduciary duty to make investments that are profitable, and boost the wealth in the fund, Hannigan said.

The council is primarily an advisory body and does not vote on specific proposals. However, the division posted a 5-page outline of the policy called “Principles and Practices Regarding Climate Change” on its website Wednesday afternoon, and said the policy is now in effect.

Divest NJ, an activist group that has pressured the division to divest from fossil fuel companies, said the agency’s announcement was the first time it had set down a concrete set of climate-change initiatives.

“It is a significant day,” said Tina Weishaus, co-chair of Divest NJ. “It is the beginning of a climate action plan. I think they’re definitely going in the right direction, and we appreciate that. And we’re glad they put it on paper.”

Hannigan told the meeting Wednesday that the goal of the plan is to “identify, understand and manage the investment risks and opportunities that arise from climate change, and from the transition to a low-carbon economy.

“We recognize that we cannot have a social agenda or act as agents of change for any reason unrelated to the financial interest of our beneficiaries,” Hannigan said. Still, she said, “We believe our practices will encourage portfolio companies to consider how climate change and the energy transition will impact long-term shareholder value.”

Climate Change Investments

The emission reduction strategy follows the division’s recent decision to put $200 million into a climate-themed private equity fund, Rise Climate managed by TPG Capital Partners, which invests in companies working to develop opportunities related to climate change and carbon reduction. It was the division’s second investment in a climate-change related fund, following a 2020 investment of $100 million in the Stonepeak Global Renewables Fund, which is dedicated to “executing renewable energy investments.” (See NJ Ups Pension Investments in Climate Funds.)

The council on Wednesday also reviewed another proposed climate change investment putting $600 million into the Brookfield Global Transition Fund. The fund has a “strong ESG and sustainability focus,” the division said.

Ryan Goodwin, an investment analyst who presented the Brookfield proposal, said the fund will invest in “wind and solar projects as well as industrial companies with the intention of generating both strong financial returns and a positive and measurable environmental impact.” The fund has a goal of “decarbonizing each investment made,” and expects an annual return of 13%, said Goodwin. He called it “one of the largest private owner and operators of renewable assets,” with 21,000 MW globally.

The division said the Brookfield proposal is still under negotiation and will need the final approval of Acting Director Shoaib Khan.

New Jersey’s climate-themed investments reflect a growing interest among much larger pension funds in backing such investments and leveraging their funds to pressure companies to take steps toward reaching net-zero emissions.

For example, New York State Comptroller Thomas P. DiNapoli announced in December 2020 that the $226 billion New York State Common Retirement Fund would “transition its portfolio to net zero greenhouse gas emissions by 2040.” The initiative will involve a four-year review of the fund’s investments in energy sector companies that will assess “transition readiness and climate-related investment risk,” according to a release announcing the move.

Climate Risk Analysis

Hannigan, summarizing New Jersey’s policy, said it had been reviewed by the division’s Investment Policy Committee, Operations and Governance Committee and the Environmental, Social and Governance (ESG) Committee before being brought to the council.

“Broadly speaking, the division must consider all risks and opportunities that can have a material impact on risk-adjusted returns,” Hannigan said. These include environmental, social and governance (ESG) factors, she said, adding that “today, climate risk is the most meaningful of those.”

The division’s “holistic approach” means that “we will look at all economic sectors, subsectors, asset classes and geographies when analyzing our exposures,” she said.

“Climate risk spans the economy. Utilities, manufacturing companies, transportation, agriculture, all have high emission intensity, in some cases higher intensity than fossil fuel companies do,” Hannigan said. “So, we will review each of those exposures over time.”

The measures outlined at the meeting included:

• the incorporation of “climate risk assessment” into the division’s investment evaluation process, and its proxy votes in “accordance with our ESG policy;”
• the creation of an in-house Climate Change Practice Group, which will evaluate the exposure of each investment to climate change forces and review risk mitigation strategies at the companies or funds in which the division invests;
• the adoption of a policy of “engagement” with companies, through letter writing and shareholder proposals, proxy voting and using the power of investor coalitions to pressure investment managers on climate change issues. The division will also use “due diligence questionnaires and interviews on private investments;”
• advocacy with peers and the public to promote “transparency and targets around material climate risk.”

Hannigan said that the first phase of the portfolio evaluation would begin early next year.

“These principles and practices are intended to ensure that our portfolio companies are fully integrating climate change considerations into their governance and strategies with the goal of maximizing risk-adjusted returns for the pension fund,” she said.

Council members, aside from two questions on the policy’s implementation, did not comment on the plan.

Fossil Fuel Concerns

While welcoming the division’s initiative, Divest NJ said it is still just one step in the right direction, and real change will require the agency to divest from fossil fuel companies.

Barbara Pal, co-chair of the organization, told the council that nearly 1,500 institutions from 71 countries, representing $39 trillion worth of assets, have “committed to full or partial fossil fuel divestment.” Among them are two pension funds in New York City, which removed $4 billion from fossil fuels in January.  Canada’s second largest pension fund, Caisse de depot et placement du Quebec, said in September it would divest from oil production.

Pal urged the division to divest from fossil fuels.

“All of these organizations have the same goal as the NJ State Pension Fund,” she said. “They want to maximize their profits, and they are convinced that the best way to go about it is by divesting from fossil fuels, not holding onto them.”

Weishaus said she is encouraged that the division has hired additional staff to focus on the climate change evaluations. Melinda Caliendo, division spokesperson, said the agency appointed Hannigan as its first sustainable investing portfolio manager, appointed Jeff Warshauer as corporate governance officer, and dedicated several analysts to ESG work, which includes climate change.

At the same time, Weishaus expressed skepticism that a policy of engagement could work with the fossil fuel industry.

“The history of the fossil fuel sector is one of deception, disinformation, lobbying against any kind of serious climate mitigation,” she said.

“If you’re dealing with a construction company or a cement company, you can demand that they decarbonize their production process,” she said. “But if you’re talking to a fossil fuel company, you’re telling them to not be who they are, which is a company that explores, drills and burns the very thing that is kind of suffocating the world.”