Asset Allocation, Defined Benefit, ESG/SRI, Governance, Institutional Investors, Pension Funds, People, Public Funds

NJ Names Investment Director; Considers Cutting Fossil-Fuel Holdings from Portfolio

The New Jersey State Treasurer last week named Corey Amon as the permanent director of the New Jersey Division of Investment (DOI), the state agency responsible for the management of New Jersey’s $76 billion-plus public pension system. Separately, the Division confirmed at its monthly meeting, last Wednesday, that a study of the asset allocation of the pension plan’s investment portfolio, that commenced in January, is expected to be completed in May. The study’s findings will be adopted at the beginning of the Division’s new fiscal year, July 1. ​The study will also evaluate the effect on the fund’s portfolio of adopting a fossil-fuel-free investment policy.

Amon, who has been acting director of New Jersey’s investment division since the departure of Christopher McDonough last summer, was sworn in as the new director last Wednesday by State Treasurer Elizabeth Mahar Muoio. Prior to becoming acting director, Amon had been deputy director of the division of investment since 2014. McDonough left to accept a position at investment consulting firm Investment Performance Services after four years as director of DOI.

“I’m pleased to support the SIC’s [New Jersey State Investment Council] recommendation that Corey Amon assume the role of Director in a permanent capacity,” Muoio stated in a news release.

“I am most appreciative of the trust and support extended to me by the Treasurer, her team, and the members of the SIC,” Amon stated in the release. “I look forward to continuing to work with the Division’s investment professionals on behalf of over 800,000 participants in the state’s pension plans.”

The DOI supervises the investment management of seven public pension funds in New Jersey, namely Public Employees’ Retirement System, Teachers’ Pension and Annuity Fund, Police and Fireman’s Retirement System, State Police Retirement System, Judicial Retirement System, Consolidated Police and Firemen’s Pension Fund, and Prison Officers’ Pension Fund, which are referred to collectively as the “Pension Fund.”

The New Jersey Pension Fund is currently only approximately 55.8% funded, representing a gap of some $40.7 billion.

DOI’s Asset Allocation Study

In January, the DOI began an asset allocation study of the pension fund’s investments. “The objective of the study is to identify an appropriate targeted mix of assets to achieve attractive risk-adjusted returns over a long period of time,” according to an emailed response to IA from a NJ Treasury Department spokesman. 

Since Democratic Governor Phil Murphy took office in Jan 2018 (succeeding Republican Gov. Chris Christie) management of the New Jersey’s pension investments has increasingly factored in social, environmental and governance (ESG) imperatives. For instance, the DOI—which implements overall investment policies set by the SIC— in the wake of the Marjory Stoneman Douglas High School shootings in Parkland, Florida in February 2018, withdrew investments from a company that manufactures high-powered firearms (Vista Outdoor), pressured two private-equity firms not to foreclose on Puerto Ricans displaced by Hurricane Maria last year (Blackstone Group and TPG), and urged Target not to do business with trucking companies that classify their drivers as contractors rather than employees, according to a local news reports last summer.

“The DOI sold its holding of all investments in manufacturers of automatic and semi-automatic weapons for civilian use…As to the other investments, to be clear, the Division of Investment plays no role in the management of those funds. However, it does remain in regular contact with its investment partners regarding their respective portfolios and provides feedback when appropriate,” the NJ Treasury Department spokesman wrote.

Pension Fund’s ESG Policy

The SIC’s ESG policy for the pension fund, which was adopted in September 2018, says that ESG considerations may encompass a wide range of factors including, but not limited to, carbon gas emissions; fossil fuel dependence; climate change; water issues; clean and renewable energy; workforce diversity; fair trade; human rights; working conditions; reporting transparency; executive compensation; equitability of compensation; board accountability and composition; director independence; shareholder rights; auditor independence; voting practices; and accounting practices and policies.

 “As fiduciaries, the Division of Investment and the Council in all of their considerations take into account potential risks to the portfolio, including those presented by fossil fuel and other ESG considerations,” the NJ Treasury Department spokesman explained. 

This is just as well, because in January, DivestNJ Coalition, a statewide organization advocating for the reduction of the greenhouse gas (carbon dioxide) in the atmosphere to 350 parts per million (ppm) to guard against catastrophic climate impacts, requested that as part of the asset allocation study the DOI also evaluate the viability of adopting a fossil-fuel-free investment portfolio to see what such a portfolio would look like and what impact it would have on the portfolio’s expected returns. The SIC has agreed to conduct such an analysis. “We committed to reviewing the impact of going fossil-free in the asset allocation, and we are doing that exercise,” said Adam Liebtag, acting board chairman of the SIC. The global average atmospheric carbon dioxide is said to stand now at approximately 405 ppm.

 “We are making a strictly financial and fiduciary issue of this—it’s about what’s good for the pension plan,” said Tina Weishaus, a spokesperson for DivestNJ Coalition, who attended last week’s meeting. She added that there is a strong fiscal argument for the New Jersey pension fund to divest from fossil energy investments that has nothing to do with environmental or sustainability imperatives. “Oil and gas stocks have been the worst performing in the S&P index over at least the last two years, and holdings in the sector have been dragging down the performance of the New Jersey pension fund’s entire portfolio. Portfolios without oil & gas stocks have performed equal to or better than portfolios with these holding over the last five years,” she argued.  

She observed that earlier this month, the Norwegian Government recommended to its Sovereign Wealth Fund—the $1 trillion Government Pension Fund Global (GPFG)—embark on a $7.5 billion divestment plan of 134 upstream oil and gas companies.  “At this point they are holding onto the majors in oil and gas in hopes they will pivot to renewables; it will still hold stakes in firms such as BP and Shell that have renewable energy divisions,” she said.  The Norwegian government’s recommendation was reportedly motivated by a desire to protect the Norwegian economy by reducing exposure to oil price falls, rather than climate concerns.

“The objective is to reduce the vulnerability of our common wealth to a permanent oil price decline,” Norway’s Finance Minister Siv Jensen was quoted saying in news reports. “Hence, it is more accurate to sell companies which explore and produce oil and gas, rather than selling a broadly diversified energy sector.” Ironically, GPFG was established in 1990 to manage the country’s oil & gas revenues.

The S&P Oil & Gas Exploration & Production Select Industry Index returned -12.76% over the last year and -15.55% over five years.

In May 2018, for the sixth consecutive year, investment consultant Callan conducted an ESG study that reflected input from 89 unique institutional U.S. funds that were asked about their approach to, and opinion on, environmental, social, and governance (ESG) factors when evaluating investments. Callan said that overall, incorporation of ESG factors into the investment decision-making process nearly doubled to 43% in 2018 compared to 22% in 2013. “Our survey reveals ongoing disparity in ESG adoption rates by fund type and size. Historically, endowments and foundations have consistently had the highest ESG adoption rates. Public funds have incorporated ESG factors into the investment decision-making process at a higher rate than their corporate counterparts, according to the study.

According to Callan, Corporate funds saw the most modest rise in ESG adoption rates, from 14% in 2013 to 20% in 2018; 39% of public funds indicated they incorporate ESG in 2018, up from 15% in 2013; Foundations reported the highest rate of ESG incorporation at 64% in 2018 (vs. 35% in 2013);  Endowments incorporated ESG factors at a rate of 56%—more than double the rate in 2013 (22%).

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