It can be difficult for individuals to feel like they’re making a difference when it comes to fighting climate change. Sure, it matters when we recycle, stop eating meat, take public transit, make the switch to EVs and try to make our homes more sustainable, but businesses are the real polluters. A 2017 report found that 100 companies generated 71 percent of emissions globally. If businesses, especially big businesses, don’t commit to quitting carbon, it will be difficult, if not impossible, to stop the worst effects of climate change.
That might sound bleak, but there are ways people — and city and state governments — can tell corporations and their ilk they want them to become more sustainable. Namely,we can use our dollars to let them know what our priorities are. There are tools for individuals with money in mutual funds — usually where money in 401(k)s, IRAs, or 403(b)s, are invested — to see if the businesses they invest in are aligned with their sustainability values.
But public employees, who get pensions from cities or states, can’t use these tools to redirect their funds into investments that align with their values. Their money is managed by state and city pensions boards.
Increasingly, cities and states are divesting their pensions from fossil fuels in order to align with their climate goals. In 2018, New York City became the first major U.S. city pension to divest from both active and passive publicly traded fossil fuel firms. Since then, San Francisco, Los Angeles, Boston, Pittsburgh, Seattle and Chicago have all set their own goals for divesting their pension portfolios from fossil fuels. Worldwide, 200 pension funds have taken $8 billion out of fossil fuel investments. New York’s five pension funds benefit more than 750,000 public workers.
The best part: The divested pension funds have performed at least as well financially as the city’s non-divested funds.
Last year, the New York City Employees’ Retirement System (NYCERS) joined the United Nations’ Net-Zero Asset Owner Alliance, and they’ve been sharing their divestment process with city and state pensions around the U.S. In addition to divesting, they’ve committed to investing $50 billion in climate change solutions, like renewable energy, by 2035.
The City of Philadelphia hasn’t yet committed to divesting its pensions from fossil fuels with measurable goals, but as the health of our municipal pension improves, now might be the time to consider getting our money out of fossil fuels and major polluters.
Using investments to reach climate goals
New York City began the divestment process in 2015 and 2016, when the pension funds began researching the impact climate change could have on the pensions’ investment portfolios.
“We had advocates meeting with us and urging the city’s pension funds to divest from fossil fuels,” says John Adler, chief ESG officer at the Office of New York City Comptroller. “There was this sense that climate change was worsening and its financial impact was getting greater, and there was concern that the risks of fossil fuels and being invested in them outweighed the rewards.”
New York City divested its workers’ pensions from thermal coals as a first step shortly after that research process and made plans to divest from fossil fuels securities — companies that are directly involved with extraction and processing of fossil fuels — in 2018. The city also made plans to invest an additional $4 billion in climate solutions by the end of 2021. Three of the city’s five pension funds — NYCERS, Teachers’ Retirement System (TRS) of the City of New York and Board of Education Retirement System (BERS) of the City of New York — are participating in these goals.
For three years, the New York’s comptroller’s office researched what this would take, then in 2021 they withdrew four billion dollars in investments from fossil fuel companies and invested six billion dollars in climate solutions — two billion more than they’d planned.
They didn’t stop there. That same year, they set goals to make sure their entire investment portfolio reaches net-zero emissions by 2040. By the end of 2025, the pension funds will have invested eight billion pension dollars in companies that are fighting climate change.
How do you reach net zero emissions?
Public pensions have long divested from businesses, like private prisons or gun manufacturers, that don’t align with the city’s or state’s values. Achieving net-zero portfolio emissions is less straightforward than withdrawing funds from other types of companies, however.
For starters, nearly every business has a carbon footprint. So, if a pension withdraws from oil and gas companies, they might invest in a company like Amazon, whose emissions from delivery vans alone grew 190 percent between 2019 and 2023, or Google, whose emissions have increased 48 percent since 2019, in large part due to the companies use of AI.
One way investors can address this is through setting goals for reducing their portfolio’s investments in scope one, two and three emissions. Scope one emissions are those that occur directly from a company’s operations. So, the fuel combustion in an oil company’s drilling rigs, or the gas used to power company-owned vehicles. (Amazon’s increase in emissions from delivery vans would fall here).
Scope two emissions come from electricity, steam and other energy sources a company purchases for its own use. Scope three is the most indirect source of emissions, and includes those from business travel, commuting, the uses of a product a company produces and sells, their investments, etc.
“The only way we’re going to reduce emissions is if finance steps up both to invest in the energy transition and to foster decarbonization.” — John Adler, New York City Comptroller chief ESG officer
NYCERs, the U.S.’s largest municipal public employee retirement system, planned to reduce its portfolio’s scope one and scope two emissions by 32 percent by 2025 and 59 percent by 2030.
Adler says NYCERs is on track to meet these goals by June 2025. (He also notes that each fund has slightly different approaches to achieving net zero.) They’ve also set goals for zeroing out their emissions from private market investments.
“We can’t achieve net zero alone, and so part of our plan is collaborating with like-minded investors, both other asset owners as well as investment managers,” Adler says.
Does fossil fuel divestment work?
It’s unclear whether investors committed to achieving net zero portfolios will actually affect how companies do business. A lot of investors will need to commit to zeroing out their emissions for it to affect a business’s bottom line. That’s part of why the U.N. has programs like the Net-Zero Asset Owner Alliance, which encourages not just pensions, but other institutional investors, to commit to reducing the emissions in their portfolios.
Private companies interested in divesting from fossil fuels and zeroing out their emissions will likely face more scrutiny than public pensions. That’s because private company pensions are regulated by the Employee Retirement Income Security Act (ERISA), a federal law that requires pension investors to act solely on the pension plan participants’ behalf. Different federal government administrations have different views on whether that allows companies to divest from entire asset classes.
On January 20, 2025, the Office of the New York City Comptroller issued a statement saying they remain committed to divesting pensions from fossil fuels, despite Trump’s recent executive order declaring a national energy emergency.
Public pension funds don’t have to follow ERISA, but they generally do, because it sets helpful guidelines for acting in the pension beneficiaries’ best interests. New York City has already been sued for divesting its pensions, but a judge dismissed the litigation last year.
“Three NYC pension funds that have divested are being sued by public employees covered by the plans, who claim that their pension plan assets are being ‘weaponized’ and used for objectives other than retirement plan benefit security,” University of Pennsylvania economist Olivia S. Mitchell, executive director of Wharton’s Pension Research Council, says in an email.
Companies might not take action just because pensions divest; that’s why the second part of New York City’s commitment — investing in green technologies — is so important. These tools help ensure we generate energy from renewable resources, so even if a company doesn’t set specific decarbonization goals the energy they get from their city and state might be cleaner by default.
“Our animating belief is that the best way to address climate change is to accomplish real world decarbonization,” Adler says. “We’re looking to use our role as investors to seek real world decarbonization, consistent with our fiduciary duties, to generate risk adjusted returns to pay for the pensions of our participants.”
Philly is a divestment leader. Why haven’t we done this?
Philly was a leader in divesting its city pensions from guns and private prisons, but it’s lagged behind on fossil fuels. As of 2021, the pension considers a business’ corporate governance, environmental impact and social factors like working conditions when possible before they invest, but the pension doesn’t have any measurable goals, like NYCERS.
Mitchell has concerns that divesting from fossil fuels could strain Philly’s already underfunded pensions. Over the past few years, the City has taken action to improve its pension funding — going from 45 percent funded to 60 percent funded in under seven years — but it’s still not fully funded. (A pension is fully funded when it has enough money to cover its payouts to current and projected future beneficiaries — i.e. they have enough funds to give retirees what they promised). Philly expects that to happen by 2033.
“Moving to divest is unlikely to enhance pension investment performance and not change fossil fuel firms’ behavior, while it will surely generate expensive and distracting lawsuits,” Mitchell says. “Some fiduciaries argue that it’s better to engage with management of the fossil fuel companies instead of divesting, so as to exert pressure and persuade the companies to reduce emissions.”
Funds can generate similar returns even if they divest from fossil fuels, however. When you look at the breakdown of each of New York’s five pension funds individually, NYCERs, BERS and TRS have had about the same performance as the Police and Fire pensions, which didn’t divest. Last year, all five of New York’s pensions reported that together they earned 10 percent returns for the fiscal year — higher than the goal of seven percent set by the state. Their five-year net returns were up 7.4 percent. In 2017, before divestment began, four year returns were also up 7.4 percent.
NYC’s pensions are currently 83 percent funded and on track to be fully funded by 2032. As the economy moves toward using more clean energy, green companies are likely to grow, creating investment opportunities.
Divesting from fossil fuels poses challenges, but in the absence of federal leadership on climate change, it will be more important for cities and states to take the lead. There are multiple ways to do this — including setting their own net zero goals and committing to the Paris Agreement, which Philly has done. Divesting public pensions is another tool — and one that could have broader impacts because it has the potential to influence businesses to reduce their emissions. Even if Philly didn’t fully divest, the City could commit to reducing the amount of fossil fuels invested in, or invest in more green technologies, while keeping the portfolio balanced.
“The only way we’re going to reduce emissions is if finance steps up both to invest in the energy transition and to foster decarbonization,” Adler says.
“We obviously are living in a time where the government’s commitment to addressing climate change is — let’s just say — variable … In the face of that unsteady commitment, finance can and should play a greater role in investing in facilitating the transition to a net zero economy.”
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