Traditionally understood, public pension funds exist to provide delayed compensation for public employees. Consistent with their fiduciary duty and responsibility to taxpayers, fund managers should craft a diversified portfolio to deliver high and reliable returns. But Brad Lander, New York City’s comptroller, disagrees. An adherent of the environmental, social, and governance (ESG) school of thought, Lander believes that returns should be pursued only alongside other concerns. On his 2021 campaign website, he cited “the climate crisis, rampant inequality, and racial injustice” as the “core systemic risks” that he intended to address with retired New York City employees’ money.
This mindset shapes not only portfolio composition but also the way that the New York City pension-fund system votes in shareholder meetings. Lander views the approximately $250 billion of the city pension funds’ collective worth as a means to influence the direction of the global economy. That produces activism in strange places—the latest example occurring half a world away, at the Toyota Motor Corporation’s annual shareholder meeting last week.
The New York City Employee Retirement Systems (NYCERS) owns a small portion of the Japanese auto giant. With a group of other ESG-focused pension funds, it has decided to pressure Toyota management to speed up its pace of battery-powered electric vehicle production. A June resolution advanced by the Danish fund AkademikerPension and backed by NYCERS censured Toyota management for allegedly seeking “to weaken legitimate attempts by governments around the world to phase out internal combustion engines, and to phase in fuel-economy standards and, critically, pure electric vehicles as the world heads towards renewable energy and electrification.” Lander added, “The growing battery electric vehicle market represents an opportunity for Toyota to regain its status as an innovator and leader during the historic transition of the transportation industry.”
While all-electric vehicles may one day be transportation workhorses (they certainly have the tailwind of government favoritism behind them), that does not necessarily mean that they are Toyota’s only option. After all, the company has produced the best-selling hybrid electric vehicle of all-time, the Prius, and worked for years to develop hydrogen-run cars.
Though a majority of the 3,800 Toyota shareholders in attendance voted down the resolution, it exemplifies a worrying trend. Many public pension funds have adopted ESG framing, to the likely detriment of fund performance. To square votes like this with their fiduciary duty, Comptroller Lander and other fund managers invoke a putative energy transition that will generate windfalls for first-moving firms. Yet ESG performance has lately lagged behind traditional shareholder-focused funds, despite the convergence of ESG and state power.
Even setting aside emissions concerns, the episode raises questions about the tenability of ESG as a public exercise. Lander argues that ESG must be an integrated, comprehensive strategy, not a game of whack-a-mole in which fund managers buy or sell assets without a consistent playbook. Yet focusing on Toyota’s vehicle models necessarily comes at the expense of other concerns that are part of the ESG movement. For instance, electric vehicles rely on supply chains dominated by China and tainted by its troubling labor practices.
Indeed, China exposure is a risk about which Lander seems oddly sanguine, given the sizable Chinese equity holdings of the funds he oversees. Public data reveal that NYCERS owns portions of numerous entities that are entwined with the political agenda of the Chinese Communist Party (CCP). NYCERS owns more than 65 million China Construction Bank (CCB) shares, as of the latest database update. CCB is one of China’s “Big Four” state-owned banks and is a key lender in its Belt and Road scheme, a global infrastructure-building spree that the Hudson Institute’s Tom Duesterberg calls “a signature program of Xi Jinping” aimed at “supporting Xi’s ambitions to reestablish China as a global leader while strengthening its mercantilist economy.” NYCERS also owns about 50 million Industrial and Commercial Bank of China (ICBC) shares. ICBC, another state-owned enterprise, is an even bigger Belt and Road lender than CCB, having funded more than 200 projects as early as 2018. Why did Toyota’s environmental metrics set off alarms at the comptroller’s office, while the governance metrics of the state-owned, party-controlled China Construction Bank and Industrial and Commercial Bank of China passed unnoticed?
NYCERS’s entanglement with the CCP agenda extends to the Chinese surveillance state. The fund holds 146,000 shares of China Telecom, a company the Federal Communication Commission banned from the U.S. in January 2022. The state-owned wireless company, the FCC explained, “is subject to exploitation, influence, and control by the Chinese government” and demonstrates “a lack of candor, trustworthiness, and reliability.” Kaan Sahin, a research fellow at the German Council on Foreign Relations, describes China Telecom as “eager to sway international standards bodies . . . for several AI surveillance forms, including facial recognition, video monitoring, and city and vehicle surveillance.” In 2020, the Department of Defense listed China Telecom among Chinese firms with People’s Liberation Army backing. Not exactly ESG material.
That Lander calls into question Toyota’s governance, suggesting that its board is not “genuinely independent,” makes his China blind spot all the more striking. Toyota’s electric vehicle plans are unacceptable to Lander; providing capital for Chinese development and surveillance initiatives is just fine. These contradictions highlight the pitfalls of saddling public funds with privately held ESG leanings.
If Lander were managing a private fund, the onus would be on investors to select or de-select his services. But he is an elected official and beholden to a different constituency. If investors want to make an environmental impact with their allocation of capital and shareholder votes, that is their prerogative. When it comes to public pensions like NYCERS, the best path is the simplest: stick to traditional fiduciary duty.
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