Plaintiffs allege New York Pension Fund trustees breached fiduciary duties in adopting fossil fuel divestment strategies
The newly filed complaint in Wong v. NYCERS, et. al., Index. No. 652297/2023 (N.Y. Sup. Ct. filed May 11, 2023) presents pathbreaking litigation that will test the ability of investment fiduciaries to engage in ESG investing while meeting their fiduciary duties to beneficiaries.
In Wong, the plaintiffs allege that the trustees of the New York City Employees’ Retirement System, Teachers’ Retirement System of the City of New York, and the Board of Education Retirement System of the City of New York (collectively, the funds) breached their fiduciary duties of loyalty and care by adopting blanket fossil fuel divestment policies, doing so for political reasons, rather than to maximize returns for their beneficiaries.
The plaintiffs allege that the divestment decisions were made under political pressure in connection with a 2018 plan by then New York City Mayor Bill De Blasio to have city government divest from companies involved in the fossil-fuel industry, which included all New York City employee pension plans. The defendant funds complied, immediately divesting billions of assets and adopting policies to exclude investment managers that did not comply with net zero climate objectives.
According to the plaintiffs, those decisions violated the strict fiduciary duties of trustees, which include a duty of undivided loyalty to act in the interest of beneficiaries and the duty to make investment decisions under the prudent investor rule.
In support of their claims, the plaintiffs stated that the trustees to the defendant funds did not consider the needs or impact on beneficiaries, the financial benefits or risks related to divestment, or any studies or investment processes or policies in making the decisions. The plaintiffs also cited (i) statements made by trustees of the defendant funds at open meetings, which concerned the need to help fight climate change, the need for environmental sustainability, and the need for New York City to be a global leader on climate change, and (ii) decisions by other retirement systems rejecting blanket divestment policies, including two other New York City pension systems that refused to comply with the divestment plan on the basis that it would violate the fiduciary duties owed to beneficiaries.
The plaintiffs contend that these policies resulted in substantial losses to the funds and have threatened the stability of the funds. The plaintiffs have requested (i) monetary damages against the funds’ trustees to make the funds whole for the losses caused by the divestment actions; (ii) an injunction against the divestment policies; (iii) the appointment of a monitor to ensure that trustees comply with their fiduciary duties; and (iv) the appointment of an independent investment fiduciary to make a report on what fossil fuel-related investments, if any, should be acquired to replace the divested assets.
Investment fiduciaries should pay close attention to this case and how it develops. Furthermore, the implications of this matter may extend to regulatory concerns, as the Securities and Exchange Commission vigorously examines registered investment advisers to determine compliance with the Investment Advisers Act of 1940 and enforces alleged violations of the same.
If you have any questions regarding this case and its implications, please contact the authors.
SEC proposes mandatory climate-related disclosure and governance rules
21 March 2022 .4 minute read