The Private Equity ‘Black Box’ Pours New York Pensions Touting Divestment Into Fossil Fuels

Routing $500 million through a Blackstone fund, the New York State Common Retirement Fund is among the largest investors in a notorious Ohio coal plant.

Lilah Burke   ·   November 30, 2022
Comptroller Thomas DiNapoli has pledged to divest state pension funds from fossil fuel producers that dont have climate transition plans. | NYS Comptrollers office

This article was published in partnership with the Albany Times Union.

In Cheshire, Ohio, the General James M. Gavin Power Plant dumps toxic coal ash into unlined “storage ponds” that sit above the area’s groundwater. Thick blue plumes of sulfuric acid rise up from the plant’s smokestacks and occasionally settle over what’s left of the town. The coal-burning plant, a project of the 1970s, has outlasted most of Cheshire itself. After its former owner, American Electric Power, protected Gavin’s future by buying out nearby homes, a joint venture firm called Lightstone Generation LLC snatched up the massive coal plant, ensuring its prosperity with support from a network of private equity investors.

Ten of the largest investors in the Gavin Power Plant are public pensions. Near the top of the list is the New York State Common Retirement Fund, a massive pension system administered in Albany by a recognized leader on climate action. With a $500 million investment in Blackstone Capital Partners VII — a specific fund raised by the private equity giant — the New York State Comptroller’s Office funnels cash from the retirement fund to the Gavin Plant, according to financial research from the Institute for Energy Economics and Financial Analysis.

The pensioners who draw from the $233 billion Common Retirement Fund likely don’t know that their savings are supporting the coal plant. Comptroller Thomas DiNapoli has pledged to divest from fossil fuel producers that don’t have climate transition plans. Since 2019, his office has divested from 55 oil and gas companies, and it’s in the process of assessing more.

But despite the fact that the Gavin Plant was ranked in August as the sixth most polluting power plant in the country and was rebuked by the EPA for its “storage ponds” earlier this month, the $500 million in funding has not been part of those reviews, because Blackstone Capital Partners VII is not a fossil fuel company. Pension trustees and divestment proponents have only recently started to grapple with the question of how to align private equity investments with their climate goals.

The Gavin Plant was ranked as the country's sixth most polluting power plant. | Wikimedia Commons

“If you’re getting out of fossil fuels on the public equity side through these reviews, you’ve identified that they’re risky companies,” said Richard Brooks, climate finance director at, a divestment advocacy organization. “It doesn’t make sense to then add risk on the private side by investing in the same types of companies who are operating in the oil and gas sector.”

New York City Comptroller Brad Lander told New York Focus he expects that by the end of next year, boards for the city’s three most climate-focused pensions will adopt climate standards for private market investments that he expects will “at least mirror”those for public companies.

That might mean the city again leads the state, as it did on divestment from public companies: DiNapoli’s office said it is exploring ways to address the issue, but shared no similar plans.

Funding Fossil Fuels

Following the lead of advocates, both New York City and State have focused their divestment efforts on public companies. Public assets, like corporate stocks, are relatively transparent, but private equity funds aren’t bound to disclose their activities in the same way, and it can be difficult to know what a specific fund is involved in.

Three city pension systems have pledged to divest from all fossil fuel reserve owners, with nearly $3 billion divested so far and another billion to go. The state has taken a different approach, focusing on the potential financial risk from climate change and reviewing public investments sector by sector, using divestment as a “last resort” for the riskiest companies.

Both the state Common Retirement Fund and the three city pension systems have committed to getting their portfolios — both public and private — to net zero emissions by 2040. But neither have shared the specific steps they’re taking to meet that commitment on the private side.

According to a September report from the Private Equity Stakeholder Project, private equity firms have invested at least $1 trillion in fossil fuels since 2010, and 10 of the largest firms invest 80 percent of their energy sector portfolios in the industry.

“As public entities shed their dirtiest assets, private equity steps in to buy it,” said Alyssa Giachino, director of climate campaigns at the Private Equity Stakeholder Project. “You have a utility company trumpeting that they are reducing their carbon footprint, but the asset still exists, it’s still in operation, and it’s being operated by an entity that is even less accountable for the impact.”

Tom Sanzillo, the director of financial analysis at IEEFA and DiNapoli’s interim predecessor in the comptroller’s office, told New York Focus that the state should already be assessing the financial risks of early termination or sale. Terminating a limited partnership before its expiration date can result in a significant penalty for the investor, and selling a limited partnership can also mean a hefty loss — making private equity harder to divest from than public assets.

“You engage with [the fund managers] to see what’s the right strategy for moving that particular investment out of fossil fuels, to unwind it. It’s a process. And then you come up with an overall strategy for how you do it for the PE investments,” said Sanzillo, who served as deputy comptroller from 2003 to 2007. “If the comptroller hasn’t started that, he should.”

A spokesperson for the state comptroller’s office said the office recognizes that the investment risk from climate change touches all asset classes. The fund has been exploring ways to address that risk in private equity, he said.

“[T]here are significant challenges that we face in addressing climate risk to our private equity holdings because we are limited partners in those funds and therefore we do not select or manage any private equity portfolio companies,” the spokesperson wrote in an email to New York Focus. “Nonetheless, the Fund’s ESG strategy plays a significant role in investment decisions and includes an assessment of all managers’ (including private equity managers) policies, procedures and performance on climate risk before entering into new investment opportunities.”

The comptroller’s office declined to share those internal climate assessments.

Seth Feaster, an energy data analyst at IEEFA whose research traced New York’s retirement savings to the power plant, said the Gavin example points to weaknesses in the state comptroller’s climate approach.

In private equity, he added, the obscurity is by design. “The lack of transparency, the lack of disclosure, is absolutely something private equity is hiding behind. They don’t want you to know what they’re up to,” Feaster said. “More and more money in the form of endowments or pension funds or retirement funds is all going into these black boxes.”

City Starts to Plan

Both the state and the city say they’re thinking through how to manage private equity investments that are exposed to fossil fuels.

At the city level, Comptroller Brad Lander said his office expects to finalize and publicize implementation plans for the 2040 commitment by the end of next year. Those plans will feature an agenda for private equity investments, including ways to benchmark emissions and engage managers.

“One thing that we’re looking at on the private market side is, what are our standards for future investments?” Lander told New York Focus. “We plan to adopt new and stronger standards on the private market space that will I think at least mirror what we have on the public equity side and perhaps even stronger.”

City Comptroller Brad Lander says he expects to set climate standards for private equity investments that will "at least mirror" those for public companies. | NYC Comptroller’s Office

Brooks, who formerly served as coordinator of the Divest NY campaign, said that his impression is that the state office is indeed looking into the climate impact of private equity investments. And they have a looming opportunity to make a change: Most of the state pension fund’s private investments tied to fossil fuels will expire before the net zero commitment takes hold in 2040, he said. But that still leaves the issue of future investments.

Brooks would like to see DiNapoli commit to banning any future investments in fossil fuel-exposed private equity funds. But private equity was slow to appear on divestment proponents’ radars and there has not been much of an advocacy push in New York for that goal so far.

“That is a real, tangible step that New York State hasn’t yet taken, that no public pension fund in the US has taken, but that they need to take to avoid bringing in more risk to the portfolio and obviously bringing in more fossil fuel exposure,” Brooks said.

At least one other jurisdiction has moved in that direction: Maine passed a law in 2021 requiring the state’s money to be divested from fossil fuels, including any fossil fuel-exposed private equity funds. But the law requires officials to balance that imperative with their fiduciary duty to protect retirees’ money.

According to Brooks, the effort to get private equity assets included in Maine’s legislation was successful in part because of the state’s history with the asset class: In 2021, Maine teachers, along with NFL players and Mayo Clinic doctors, lost millionsafter a private equity bet over a troubled US Virgin Islands oil refinery went sour.

In New York, State Senate Finance Committee Chair Liz Krueger, who has sponsored legislation that would require the state pension to divest from fossil fuels, praised DiNapoli for the net zero pledge but suggested there’s more work to be done.

“I agree that government should do everything possible to move toward divestment from fossil fuels, including through private equity funds,” Krueger said via email.

The Private Equity Gamble

Some advocates say that it’s not realistic to tell pension funds to stop all investment in any private equity, and that trustees should instead make their money conditional on a climate transition from the industry. Others disagree, saying that the entire asset class should be shunned.

Institutional investors have generally increased how much money they pour into private equity. Though the funds used to be seen as too risky, governments now use them as a way to keep pensions funded without raising taxes.

In 2021, New York State invested more than $37 billion of the Common Retirement Fund, representing about 13.6 percent of its assets, into 340 private equity funds. Over the past five years, its average return on the investment has been just under 20 percent, according to public financial documents.

Returns that high mean investors are inclined to keep the money moving. But some researchers have cast doubt on those numbers. Fund managers themselves provide the valuations, and research suggests that they are able to artificially inflate how the returns appear on paper.

In June, at Lander’s urging, the New York state legislature passed a bill that would increase how much money from the teacher’s retirement fund can be invested into alternative asset classes like private equity, raising the limit from 25 percent of the fund to 35 percent. The move was supported by New York’s largest teachers union, though national leaders have warned against such investments.

Michael Kink, executive director of the Strong Economy for All Coalition, a labor-backed coalition of progressive nonprofits, said DiNapoli should consider leaving private equity behind.

“He’s putting huge amounts of cash into a black box. You can say you’re getting out of coal plants, and all of a sudden you own a bunch of coal plants,” Kink said. “Private equity is buying dirty assets while many asset managers are patting themselves on the back for getting rid of them.”

Correction: November 30, 2022
This story previously listed the Common Retirement Fund’s investment into 340 private equity funds at $37 million; it is $37 billion. It also referred to IEEFA’s full name as Institute for Energy Economics and Analysis; it is the Institute for Energy Economics and Financial Analysis.

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