The Colorado House Finance Committee missed an opportunity Monday to move state pension funds (Public Employees’ Retirement Association, or PERA) onto a more financially and environmentally sound footing. In an 8-2 vote against the proposed new law (PERA Divestment From Fossil Fuel Companies, HB21-1246), lawmakers held onto mistaken assumptions about the stability of fossil fuel investments. Those views are no longer accurate and do not reflect today’s reality.
Legislators shot down bill HB21-1246 that would have required the pension fund to drop fossil fuel investments within a year of passage. PERA has generally opposed divestment, claiming it would interfere with the fund’s ability to provide solid returns for its members.
That may have been true four decades ago, when oil and gas stocks made up 28 percent of the Standard & Poor’s 500-stock index, and seven of the top 10 S&P stocks were oil and gas companies. It’s no longer true today; those stocks now account for less than 3 percent of the S&P’s value, and none are now listed among the S&P’s top 10. Even petrostates like Norway, where oil and gas revenues have made up 25 percent of the annual budget, are acknowledging that the good times are over.
Divesting from fossil fuel stocks doesn’t necessarily mean that those funds must go into renewables, but evidence is growing that it’s not such a bad idea. Over the last decade, the Morgan Stanley Capital International fossil-free index of global equities has outperformed the MSCI that includes fossil fuels.
Another argument against divestment posits that Colorado’s situation is unique and very different from a place like New York City, which announced plans earlier this year to drop fossil fuels from its pension investments. While much of the debate centered on the environmental costs of fossil fuels, the financial outlook decided the matter. The city sought advice from consultants including BlackRock, the world’s largest fund manager. The consultants found:
- Funds that have divested from fossil fuels have not suffered financially;
- A wide variety of divestment approaches were used and all met financial targets;
- There were no unexpected costs associated with divesting from fossil fuels; and
- Funds that divested included provisions allowing excluded companies to return once they adapted their business model to account for climate impacts.
In its research on behalf of the New York pension fund, BlackRock also tested the “transition readiness” of fossil fuel companies to measure their financial risks in the face of technological leaps in wind, solar, battery storage, transportation, and petrochemicals. It found that most oil and gas companies aren’t prepared for the energy transition.
BlackRock also took its own advice to heart, announcing in January that it would begin reducing the amount of fossil fuel-related investments in its $8.6 trillion portfolio. The two New York City funds announced barely two weeks later that they would drop $4 billion in fossil fuel investments.
Neither BlackRock nor New York City are entering uncharted waters when it comes to getting out of the fossil fuel investment business. A database compiled by the Institute for Energy Economics and Financial Analysis (IEEFA) includes more than 100 globally significant banks, insurers, and other financial institutions (all with assets or loan portfolios topping $10 billion) that have announced plans to divest from coal. Another IEEFA database has tallied more than 70 institutions with plans to drop investments in oil, natural gas, tar sands, and Arctic drilling.
While PERA claimed in January 2019 that it “does not have the authority to determine social policy, economic policy, or any other policy beyond the operation of the retirement system,” the truth is that investors making decisions in a transition environment need to consider multiple social, governance and economic policy questions that transcend traditional financial due diligence.
When it comes to divestment, the market is sending a clear and unambiguous message. The fossil fuel sector historically has contributed handsomely to pension funds around the world. It can no longer do so. Today, it is a much smaller industry, with higher risks, lower profits, and a troubling outlook. The future comfort of our retirees and the present value of our tax dollars are too important to gamble away on outdated investment schemes.
Tom Sanzillo is director of financial analysis at the Lakewood, Ohio-based Institute for Energy Economics and Financial Analysis (IEEFA). He is the author of numerous studies on the oil, gas, petrochemical, and coal sectors in the U.S. and internationally. Sanzillo has 30 years of experience in public and private finance, including as a first deputy comptroller for New York State, where he oversaw a $156 billion pension fund and $200 billion in municipal bond programs.