The third-largest pension fund in the U.S. announced plans to decarbonize fully by 2040 and begin a four-year review of its energy sector investments for potential divestment.

New York State Comptroller Thomas DiNapoli announced the New York State Common Retirement Fund will set interim goals to reach net-zero greenhouse gas emissions for its entire portfolio by 2040. It is also starting a process to identify companies across the fossil fuel sector for potential divestment by 2025.

"Achieving net-zero carbon emissions by 2040 will put the fund in a strong position for the future mapped out in the Paris Agreement [on climate change]," DiNapoli said in a news release. "Divestment is a last resort, but it is an investment tool we can apply to companies that consistently put our investment's long-term value at risk."

A coalition of organizations launched the #DivestNY campaign more than eight years ago after Hurricane Sandy caused widespread damage in the northeastern U.S. in 2012. The campaign, in a news release, called the news "the biggest leap forward worldwide on climate finance action in 2020." The pension fund announcement sets a new bar for climate finance action as the world prepares for the 26th UN Climate Change Conference, known as COP26, in Scotland in 2021, the divestment campaign said.

"This victory — after years of campaigning by so many people — is a great victory for the climate because it both demonstrates the waning power of the fossil fuel industry and because it accelerates that decline," said Bill McKibben, the co-founder of #DivestNY supporting organization 350.org, in a news release.

READ MORE: Sign up for our weekly ESG newsletter here, read our latest coverage of environmental, social and governance issues here and listen to our ESG podcast on SoundCloud, Spotify and Apple podcasts.

DiNapoli's decision will likely be viewed with respect and prompt further response from the broader investment community, Tom Sanzillo told S&P Global Market Intelligence. Sanzillo is the director of financial analysis at the Institute for Energy Economics and Financial Analysis. While groups focused on a transition from fossil fuels such as the Institute for Energy Economics and Financial Analysis support divestment because it will accelerate change in the energy market, DiNapoli has "done the homework" and sees the financial risks that fossil fuel companies are facing, Sanzillo said.

"This is the voice of reason and experience telling [other institutional investors], 'It's time to really make a move because we're not seeing the changes that we need, both financially and from a climate perspective,'" Sanzillo said.

Pressure is rising on a wide array of companies and institutions supporting the fossil fuel sector. Several investors recently joined shareholder advocate As You Sow in filing climate-focused resolutions with a large segment of the U.S. banking industry, including JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp., Goldman Sachs and Citigroup.

Within four years, the comptroller plans to review all investments in energy sector companies. Using standards to assess transition readiness and climate-related risk of its investments, the fund will divest from companies that do not meet its minimum standards.

The pension fund divested 22 coal companies from its investments in June after announcing a review of 27 coal miners in January. The fund used a threshold of 10% of revenues derived from coal to screen those companies.

For the next round, DiNapoli is reviewing the transition readiness of companies involved in oil sands and expects to complete that part of the process by the first quarter of 2021. The nine companies under review as of Dec. 9 were Imperial Oil Ltd., Canadian Natural Resources Ltd., Husky Energy Inc., Suncor Energy Inc., MEG Energy Corp., Athabasca Oil Corp., Cenovus Energy Inc., Japan Petroleum Exploration Co. and PJSC Tatneft.

Subsequent reviews will be completed by category, including shale oil and gas, integrated oil and gas, other oil and gas exploration and production, oil and gas equipment services, and oil and gas storage and transportation, including pipelines.

The fund will regularly reassess the remaining companies for ongoing compliance with minimum standards, and companies that do not stay on track will be subject to future divestment. The news release said the comptroller will release annual progress reports on implementing the plan and updates on companies that are under review.

The fund reported holding assets valued at an estimated $226 billion.