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INVESTING/PORTFOLIO STRATEGIES

California law adding heat to debate over fossil fuels

Activists hope to use state example in push for more divestment, pension funds not on board

Priya Mathur
Priya Mathur said divestment results in concentrating ownership with those who want the status quo.

Fresh from victory after California Gov. Edmund G. Brown Jr. signed legislation that will likely result in the nation's two largest pension plans CalPERS and CalSTRS divesting of coal company holdings, activist groups plan to step up efforts to urge the California plans and others worldwide to sell all fossil fuel holdings.

“Now we must divest from the rest,” said Robert Silvey, a spokes-man for Fossil Free California, in an interview. “Oil and gas companies are bad investments too: bad for human health, bad for the environment, and bad for the portfolio.”

But environmentalists will have a major fight on their hands. Officials of the $291 billion California Public Employees' Retirement System, Sacramento, and the $184 billion California State Teachers' Retirement System, West Sacramento, insist that engagement is the best approach to getting better environmental practices from the companies — which requires the pension funds to keep their stock holdings in those companies.

The actions of the two plans, often leaders in shareholder corporate activism among institutional asset owners in the U.S., could help determine what actions other institutional investors take towards their fossil fuel holdings.

The stakes are high for CalPERS and CalSTRS, for activists and for the entire fossil fuel industry.

The new coal divesture rules for CalPERS and CalSTRS, which require the systems to engage coal companies to move toward cleaner power generation before selling coal stocks, comes at the same time that the number of institutional investors involved in divestment efforts is increasing.

A total of 436 institutional investors and 2,040 individuals representing more than $2.6 trillion in assets globally divested fossil fuel stocks as of mid-September 2015, compared with 181 institutional investors and 656 individuals representing $50 billion a year earlier, according to a report by philanthropy consulting firm Arabella Advisors, Washington.

But the firm's report does not break down whether investors divested just coal holdings or all fossil fuel holdings.

Large pension plans globally that have chosen to divest have focused on coal, said Ryan Strode, Arabella director who is based in Chicago.

He said the fact that coal companies have seen big declines in over the past five years and that the coal industry raises the biggest environmental concerns among all fossil fuel sectors has made it an easier decision to choose to divest than oil and gas holdings.

“Institutional investors make decisions about investments based on their long-term viability, and right now the markets are showing that coal stocks simply aren't economically viable over the long term,” said Shanna Cleveland, a senior manager in charge of the carbon asset risk initiative at Ceres, a Boston-based organization that works with asset owners and corporations on sustainability issues.

Ms. Cleveland said a key factor in determining whether asset owners will divest of oil and gas stocks is their long-term assessment of price appreciation in that sector.

While oil and gas stocks may have been hit hard in the last nine months, she said, “that is just a snapshot in time” and the debate over the long-term worth of the stocks is ongoing.

Small holding

Coal holdings are just a small part of the more than $300 billion in equity holdings by the two California plans. CalPERS has invested $83 million in coal stocks that it would be required to sell and CalSTRS, $6.7 million.

In contrast, fossil fuel equity holdings for CalPERS total nearly $12 billion. CalSTRS holdings also amount to billions, but pension plan officials were unable to provide an exact number.

The small holdings, the fact that coal stock prices have been in tailspin in the last five years and the lack of a desire to battle with one of the California state Senate's most powerful legislators, Democratic Sen. Pro Tempore Kevin de Leon, prompted the pension plans to remain neutral on his divestment legislation and not fight it, sources say.

Mr. de Leon, a legislator from Los Angeles, declined a request for an interview through a spokeswoman.

“I think a lot of the groups have made it perfectly clear that their hope is that investors like CalSTRS will divest from all fossil fuel (companies) and not just coal,” said Brian Rice, a CalSTRS portfolio manager who runs the pension system's corporate governance portfolio, in an interview.

“I think they will look at this as a victory (coal divestment) that will probably empower them to continue their effort,” he said. “It's ultimately going to continue to be CalSTRS position that engagement is better than divestment and that to remove ourselves from a sector as large as energy is probably not the best decision to make right now. “

Fossil Free California's Mr. Silvey said his organization plans a multiprong approach, pushing legislators, meeting with CalPERS and CalSTRS staff and board members and engaging state employees, municipal workers and teachers who are members of the pension plans to convince the pension plans to expand their divesture efforts beyond coal.

Mae Boeve,the executive director of another environmental group, 350.org, which joined with Fossil Free California in its grass-roots coal divesture efforts, said the movement was not taken seriously when 350.org began its coal divesture efforts several years ago. “Everyone was laughing,” she said.

Ms. Boeve said her organization plans to use the CalPERS' and CalSTRS' coal divesture to rally asset owners around the world to begin full divesture of fossil fuel holdings.

But CalPERS board member Priya Mathur says CalPERS can best make a difference improving environmental practices at oil and gas companies by engaging management as shareholders.

“When we sell a stock somebody else is buying it, “said Ms. Mathur in an interview. “If we sell, we are concentrating ownership in the hands of those who want to continue the status quo, who want to do what they've always done: more exploration, more drilling, more excavation of fossil fuels.”

Climate summit

The conflict over divestment vs. engagement comes as the United Nations will hold a climate summit in Paris in early December. World leaders will try to forge an agreement on limiting carbon emissions.

At the summit, an agreement could also be reached affecting how much oil the petroleum industry would have to leave in the ground, ultimately affecting the industry's profitability.

The petroleum industry is also weighing in against divestment. One organization, the Independent Petroleum Association of America, has created the website divestmentfacts.com, arguing that divestment is a bad idea.

In its efforts, the association has hired two university professors who have offered studies that excluding fossil fuel stocks from portfolios over the long-term underperforms diversified portfolios that include the energy stocks. The studies look back 20 years and 50 years respectively to make their assessments.

“Divestment is all economic pain for no gain,” said Matt Dempsey, a spokesman for the International Petroleum Association of America. “It will have no effect on climate change. Other investors will buy the stocks sold by institutional investors.”

But the efforts of removing energy stocks from an institutional portfolio is the subject of debate, and other studies looking at shorter time periods, such as five years, show fossil fuel-free portfolios performing better than those that include the stocks. n

This article originally appeared in the October 19, 2015 print issue as, "California law adding heat to debate over fossil fuels".