New Jersey pension investments now guided by social, environmental values

James Nash | NorthJersey

Show Caption Hide Caption NJ state budget package passed after twelve hours on Sunday, July 1, 2018. Senate President Stephen Sweeney (NJ-D) discusses passing of NJ state budget.

New Jersey is increasingly putting retirees' money where Gov. Phil Murphy's mouth is.

Since the Democrat took office in January, managers of the state's nearly $77 billion in pension investments have increasingly factored in social and environmental justice, using the power of the purse to push companies to change the way they do business.

The State Investment Council has withdrawn investments from a company that manufactures high-powered firearms, pressured two private-equity firms not to foreclose on Puerto Ricans displaced by Hurricane Maria last year, and urged Target not to do business with trucking companies that classify their drivers as contractors rather than employees.

The state's socially conscious approach to investing could accelerate, as the investment council now is working on a formal policy on what is referred to as ESG — considering environmental, social and governance factors in deciding where to put pension investments.

Supporters of the approach say pension funds — with their public governance and billions of dollars in assets — are well-positioned to encourage good corporate citizenship. Opponents say it's foolish to sacrifice investment returns to accomplish social goals, especially when many funds, including New Jersey's, are struggling to meet their obligations to future retirees.

"ESG forces you to take a longer view," said Chris McDonough, director of the Division of Investment, which controls the pension funds. "Most investors would say they've always considered ESG factors in their decision-making."

Under Murphy, who managed hundreds of billions in investments for the global bank Goldman Sachs in the early 2000s, New Jersey has elevated environmental and social considerations. The Democrat often speaks of the need for a "fairer" economy.

The approach mirrors that of other progressive states and cities. California's two massive public pension funds have withdrawn investments from coal companies and pushed businesses to make it easier for shareholders to nominate directors. New York City's pension funds took their money out of companies that operate private prisons.

Around the country, about 30 states have adopted policies governing social responsibility for their pension funds — usually requiring divestment from state sponsors of terrorism, such as Iran.

Prioritizing social responsibility comes at a cost, however.

According to a November 2016 study by the Center for Retirement Research at Boston College, funds with divestment policies earned an average of 0.4 percentage point less than other plans. In New Jersey, that translates to more than $300 million a year.

"It's concerning when public pensions use the fund itself to push these ESG vehicles, because their primary goal should be to protect the retirement benefits of retirees," said Anqi Chen, assistant director of savings research at the center. "It's hard to justify sacrificing returns on that level and sacrificing potential benefits in the future to push these ESG goals."

New Jersey has some of the nation's worst-funded public pension plans.

Credit rating agencies have warned that billions of dollars in unmet pension obligations have nudged the state toward fiscal collapse, and they have urged the state to increase funding toward its retirement obligations. The state pledged $3.2 billion toward pension payments in the budget for the year that began July 1, a record amount but still less than recommended by actuaries.

By the state's most recent calculation, its pension funds have about 55.8 percent of the assets they need to meet their obligations to retirees — a gap of $40.7 billion.

McDonough said the state hasn't forecast how much in investment returns it might give up by steering the pension funds toward environmentally and socially responsible companies. But he maintained that the two goals are compatible.

In selling its $1.9 million stake in the firearms and ammunition manufacturer Vista Outdoors after a rash of school shootings, New Jersey wasn't making a statement about the social value of guns, he said. Rather, the state was concerned that potential legislation restricting certain types of firearms could depress the company's profits, he said.

New Jersey's other recent nods toward socially responsible investing have come after activists pressed their case with the State Investment Council. The council has formed a working group to develop a more formal policy to guide investments toward social and environmental goals and to push for corporate governance reforms.

The council admonished two private equity funds to refrain from foreclosing on Puerto Rico homeowners who lapsed on payments after Hurricane Maria ravaged the island last September. A representative of the Private Equity Stakeholder Project called on New Jersey to use its investments in TPG and Blackstone to pressure the companies' affiliates not to initiate foreclosure proceedings.

"We've had a really good experience there," McDonough said. "Both companies have been really good at engaging with us and would be less likely to do so if we weren't investors."

In separate statements, TPG Sixth Street Partners and Blackstone said they appreciated New Jersey's involvement. Blackstone added that it has been guided by Department of Housing and Urban Development rules governing foreclosure proceedings on federally backed reverse mortgages.

"Blackstone and Finance of America have advocated strongly for HUD to extend and amend the foreclosure moratorium to include reverse mortgages, recognizing that these changes would provide much-needed relief to homeowners in Puerto Rico," Blackstone said, referring to its lending affiliate.

“Any successful investment partnership should include shared values, and we are a beneficiary of the thoughtful engagement of NJ’s investment staff, especially during difficult situations where investor dialogue is a priority," TPG said in its statement.

The State Investment Council called on Target to investigate its use of trucking companies that purportedly underpay their drivers, after hearing from a representative of the International Brotherhood of Teamsters.

The union has accused trucking companies of misclassifying drivers as independent contractors rather than employees to deny benefits and fair pay and working conditions. The issue gained attention after a USA TODAY series spotlighted abuses last year.

McDonough said he has not received a response to his April 26 letter to Target.

In a statement, the retail giant said it has been reviewing its practices since the USA TODAY series and is committed to fair treatment of drivers.

"The mistreatment of workers within our team, vendors, suppliers, or anyone that does business with Target is unacceptable," the company said.