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ESG-Related Divestment Triggers Public Pension Participant Suit

Practice Management

Citing an “unlawful decision to elevate unrelated policy goals over the financial health of the Plans,” a new participant suit has charged three New York plans with jeopardizing the retirement security of plan participants.

More specifically, the suit (Wayne Wong v. NYCERS, TRS and BERS) targets the New York City Employees’ Retirement System (NYCERS) (a $77.5 billion defined benefit plan); the $64 billion Teachers’ Retirement System of the City of New York (TRS); and the $5.9 billion Board of Education Retirement System of the City of New York (BERS) for violating their duty to administer their plans “solely in the interests of the Plans’ participants and beneficiaries, and for the exclusive purpose of providing retirement benefits.”

Instead, the suit—the plaintiffs are represented by Gibson, Dunn & Crutcher LLP (including former Secretary of Labor Eugene Scalia)—asserts that the defendants here “…breached their fiduciary duties and abused their control over plan assets by divesting the Plans of approximately four billion dollars of holdings in companies involved in the extraction of fossil fuels, in a misguided and ineffectual gesture to address climate change.”

The Plaintiffs

The suit indicates that the named plaintiffs include “a New York City subway train operator (Wayne Wong), a veteran New York City public school teacher (Jeriann Jaloza), a school secretary (Jatania Mota), and an occupational therapist in a New York City elementary school who provides therapy to special needs children (Jennifer DiMeglio)” … who “depend on the Plans as a primary source of income in retirement.” Also named as a plaintiff is Americans for Fair Treatment, Inc. (AFFT), described as “a national non-profit organization that offers a free membership program to public sector employees to help them understand and exercise their rights in the context of a unionized workplace.” It claims to include as members 14 New York City municipal employees who are vested participants in either the NYCERS, TRS, or BERS Qualified Pension Plans.

The Divestment

The suit notes that on Jan. 25, 2021, NYCERS’ and TRS’ Boards of Trustees voted to divest their Plans of all their holdings in securities related to fossil fuel companies, “in order to advance environmental goals unrelated to the financial health of the Plans,” and that BERS’ trustees “followed suit” shortly thereafter.  By the end of that year, the suit says this added up to $1.9 billion in plan assets at NYCERS and BERS, and another $1 billion from TRS, with another $1 billion by early 2022. 

The suit comments that those actions “represented the culmination of a three-year pressure campaign mounted by public officials and other activists,” and that, in divesting, “the Trustees chose to withdraw indiscriminately all of their investments in any publicly traded fossil fuel security, a practice which has no basis in sound investment strategy.” At the same time, the suit notes that those Trustees “also voted to allocate more of the Plans’ assets to “green” investments, even though the Trustees cited no credible evidence that such investments perform as well as, or better than, the market as a whole.” 

‘No Mere ESG Investing’

The suit claims that these actions were “no mere “ESG investing,” but that the “politically-driven actions are an utter abandonment of fiduciary responsibilities that no responsible private sector trustee would countenance, and which cannot even be reconciled with a recent Biden Administration rule[1] on environmental considerations in pension plan investments.” Rather, the suit alleges that the defendants here “willingly cooperated in a plan initiated by former Mayor Bill de Blasio, former Comptroller Scott Stringer, and other City politicians to dragoon Plan assets into an ineffectual, inappropriate campaign to address climate change.”

The suit claims that “Pension plan managers expressed initial hesitation, with the Trustees of both the New York City Police Pension Fund (NYCPPF) and the New York City Fire Pension Fund (NYCFPF) raising immediate concerns that divestment was not consistent with their fiduciary duties.” It continues to note that representatives of the New York City municipal workers also expressed opposition, “with the president of the New York City Subway Surface Supervisors Association union urging that efforts to address climate change ‘should not be funded on the backs of our members and the city members that belong to NYCERS.’” The trustees of NYCERS, TRS, and BERS also “expressed wariness” about the politicians’ proposal – but then ostensibly “capitulated” and voted to proceed with the divestment.

The Aftermath

As for the aftermath of these decisions, the suit asserts that “the energy companies shunned by Defendants have, during the same period the Plans were divesting, delivered exceptional returns for their shareholders, with many of these stocks outperforming the S&P 500 index by orders of magnitude throughout 2022. Energy stocks in general are surging and generating substantial returns for investors—but not for the Plans or their participants and beneficiaries. In 2022, the S&P 500 energy sector rose 58 percent, and was the only segment of the S&P 500 index that did not experience a loss for the year.”

The suit further contends that “Defendants’ actions in selling off high-performing securities, and prioritizing lower-yield investments, is especially troubling given the Plans’ chronic and severe underfunding.”

“As a result of Defendants’ breach of their fiduciary duties, Plaintiffs have suffered harm and are suffering ongoing harm, necessitating relief, including monetary damages in an amount to be determined at trial,” the plaintiffs note. They go on to assert their belief that, “unless restrained and prohibited by an order of the Court, Defendants will continue to breach fiduciary duties owed to Plaintiffs through their ongoing divestment actions, further destabilizing the financial integrity of the Plans,” and that they “…have no just and adequate remedy at law, and will suffer grave and irreparable harm as a result of Defendants’ breaches of fiduciary duties through their ongoing divestment actions unless Defendants are enjoined and restrained from this unlawful conduct.”

The plaintiffs here are now asking the court to:

  • declare that Defendants have breached and continue to breach the fiduciary duties they owe to Plan participants and beneficiaries through their divestment actions; and
  • order Defendants to rescind their divestment policies and remediate the harm caused by those policies to Plaintiffs and other New York City municipal workers and retirees.

How will the court respond? Stay tuned.


[1] Indeed, the suit later notes that, “While the Biden Administration rule—which is regarded as favorable toward ESG-investing—does not apply to governmental plans like Defendants here, it illustrates how far the Plans strayed from widely-recognized standards of retirement plan management in their zealous pursuit of a policy agenda. No responsible private plan fiduciary would have behaved like the politically motived trustees here.”