The New York State Common Retirement Fund, the nation's third-largest public pension program, is divesting from 21 shale oil and gas companies that it determined are failing to prepare for a low-carbon economy.

The fund is pulling more than $238 million in public equity and debt securities from major shale producers such as Pioneer Natural Resources Co. and Chesapeake Energy Corp.

The Feb. 9 announcement follows N.Y. State Comptroller Thomas DiNapoli's 2021 decision to divest from seven companies with operations in the Canadian oil sands, and his decision a year earlier to divest from coal companies. The state's pension fund has nearly $280 billion in assets.

"This is a business decision; it's about the bottom line for the fund," Mark Johnson, a spokesman for DiNapoli, said in an interview. "After we did our research and assessment, we decided that they didn't meet our minimum standards for transition strategies. They continue to invest heavily in high-risk and high-cost assets."

The portfolio cleanup comes as DiNapoli undertakes a four-year review of the pension fund's investments in the energy sector to determine if they are compatible with the fund's climate goals. Of 42 oil and gas companies placed under review, 16 now remain in the fund's portfolio, Johnson said. The original basket of companies also shrank because of mergers.

Companies that met the fund's minimum standards, such as EQT Corp., CNX Resources Corp. and ARC Resources Ltd., were more likely to have greenhouse gas reduction or net-zero targets, Johnson said. Those companies also assessed and disclosed climate risks and invested in lower-risk operations, he said, adding that the comptroller's office will continue to monitor and engage with the companies to make sure they make progress.

DiNapoli set a goal in 2020 for the pension fund's investment portfolio to reach net-zero emissions by 2040, pledging to identify companies across the fossil fuel sector for potential divestment by 2025.

Strategies differ

Institutional investors are increasingly pressuring companies with fossil-fuel operations to switch to cleaner sources, or in the case of oil and natural gas producers, to reinvent themselves for a carbon-free future.

Some investors use their leverage as shareholders to push climate-related resolutions or to oust board members they believe are not taking their companies in a new direction. Other investors choose to divest, a route that state retirement funds only recently began to explore.

The focus on fossil fuel comes as the world seeks to slow the rapid warming of the planet. The Intergovernmental Panel on Climate Change has said the world needs to keep the global temperature rise to 1.5 degrees C from pre-industrial levels to avoid the worst impacts of climate change.

Fossil fuels used for transportation and electricity accounted for 54% of the U.S. carbon output in 2019, according to the U.S. Environmental Protection Agency's latest inventory.

Industry pushback

Some large oil and gas operations have been pushing back against investor activism, cutting ties with banks they say go too far. Other critics say divestment will not solve the climate problem if the portfolio assets just change hands.

"Divestment is an empty, politically motivated gesture that has no real impact on emissions progress or climate goals," Jeff Eshelman, COO of the Independent Petroleum Association of America, said in an email. "Major asset managers and financial experts agree that engagement is the best approach for tangible solutions to addressing the climate challenge. Rather than walking away, Comptroller DiNapoli should pursue an engagement-first strategy if he's serious about having a leading role in the ongoing energy evolution."

But some environmentalists applauded the New York fund's decision to target shale gas companies, a booming industry with U.S. liquefied natural gas exports soaring.

"Another big divestment from New York State's mammoth pension fund — this time it's frackers that are the target," tweeted Bill McKibben, founder of the group 350.org.