Failing to Dump Fossil Investments Costs California Pension Funds $17 Billion Over 10 Years
The two biggest pension funds in California missed out on US$17 billion in income by holding onto their fossil fuel investments for a decade too long, Fossil Free California reports in a study released last week.
Until now, the California State Teachers’ Retirement System (CalSTRS) and the California Public Employees’ Retirement System (CalPERS) “generally have resisted divestment proposals, saying they should be focused on investment returns rather than politics,” the Sacramento Bee reports. “They argue that engaging with the companies as shareholders is a more effective way of preparing for the future than divestment.”
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But Fossil Free California aimed to amp up the pressure to divest by releasing its research ahead of CalSTRS’ board meeting last Wednesday, and the advocacy group is not alone. “Gov. Gavin Newsom recently signed an executive order asking the funds to consider steering investments away from greenhouse gas emissions, and a new law will soon require California to define ‘climate-related financial risk’,” the Bee writes. And “state Treasurer Fiona Ma, who sits on the board of both the state pension funds, has expressed her support for fossil fuel divestment.”
“We’ve been making the moral argument, we’ve been making financial arguments, and I think people in government are starting to see things our way,” said Fossil Free California treasurer .Sandy Emerson.
“If CalSTRS, worth $237 billion, or CalPERS, worth $380 billion, were to divest from fossil fuels, they would be the first state pension funds in the U.S. to do so,” the Bee notes. “The University of California recently announced it would divest from fossil fuels for economic reasons in its endowment and its pension fund, worth a combined $83 billion.”
Both state pension systems are currently underfunded, with CalPERS holding only 70% and CalSTRS just 64% of the dollars they would need to pay all their current and future obligations to retirees. But while a 2017 report by the business-backed American Council for Capital Formation blamed environmental and social investment strategies for the shortfall, the report commissioned by Fossil Free California reached virtually the opposite conclusion.
Toronto-based Corporate Knights “calculated what the funds’ returns would have been had they distributed their fossil fuel investments across the spectrum of the rest of their public equities over those years,” the Bee states. “In 2009, 17.6% of CalPERS’ investments were in fossil fuel companies, according to the analysis. For CalSTRS, it was 16.3%. Had CalPERS instead invested that money proportionally across its indexes, it would have generated an additional $11.9 billion over the 10-year stretch, according to the study. CalSTRS would have generated an additional $5.5 billion.”
Corporate Knights founder Toby Heaps questioned whether fossil companies are a safe investment for public pension funds. “It’s a shrinking sector, it’s a sunset sector, but it made a lot of money for a lot of people over 100 years,” he said. “People operate on that assumption that it’s going to bounce back.”
In the Bee report, neither of the state funds seemed inclined to accept the report’s conclusions. “Cherry picking selective time periods to analyze investments and then making broad, sweeping conclusions about how those investments will perform in the future does little to inform the discussion or address the issue of climate risk,” said CalPERS spokesperson Wayne Davis.
“By engaging with policy-makers and companies, and analyzing a broad range of research and data, CalSTRS will manage climate risk and find the best investments that help deliver climate solutions,” the teachers’ fund added. “These practices will also deliver the returns we need to pay promised benefits.”