Mr. Makras said the pension board in February approved a policy to consider climate change in its proxy votes at fossil fuel companies. He said the board is considering expanding efforts to engage companies directly.
If board members determine those efforts have failed, only then would they consider divestment, Mr. Makras said.
Equity investments in oil, gas and coal companies made up 5.8% of the pension fund's $10.3 billion equity portfolio as of Dec. 31, pension fund data show.
If the San Francisco retirement system were to decide to divest, it would be the first public pension fund to do so, said Jay Huish, executive director.
The two largest public pension funds in the U.S. — the $300.4 billion California Public Employees' Retirement System, Sacramento, and $184.8 billion California State Teachers' Retirement System, West Sacramento — are known as leaders in socially responsible investing. Both have taken an engagement approach with fossil-fuel companies, rather than divesting.
“Washing your hands of the problem is not going to force fossil-fuel companies to make the necessary changes,” said Anne Simpson, senior portfolio manager and director of global governance at CalPERS.
Ms. Simpson said that CalPERS selling its shares could cause negative performance implications for the pension fund. She also said fund executives look at the issue through an economic lens. For example, requiring companies to stress-test assumptions about financial risks posed by stranded energy reserves would help mitigate the retirement system's investment risk over the long term.
“For a fund our size, responsible ownership is the preferred strategy,” Ms. Simpson said.
Ms. Simpson said CalPERS engages companies directly and through a network, the Investor Network on Climate Change, organized by CERES, an investor advocacy group addressing climate and other sustainability issues.
Some endowments and foundations have taken more decisive action, although the number that actually has divested is still relatively small.
Stanford University in May became the largest institutional investor to approve a divestment policy. The university, responding to pressure from student and environmental activists, announced its $18.7 billion endowment would sell its stock in coal-mining companies. But university officials rejected demands that it expand the divestment beyond coal to the 200 largest publicly traded fossil-fuel companies.
In June, the University of Dayton, Ohio, board of trustees approved a new divestment policy for the university's $670 million endowment. Divestment of fossil-fuel companies in its domestic equity portfolios will occur first, followed by international equities and, eventually, restrictions on holdings in new private equity and hedge fund investments.
And in April, Pitzer College, Claremont, Calif., announced plans to divest its $125 million endowment of fossil-fuel stocks.
But others, like the $32.7 billion Harvard University endowment and the $2.9 billion Brown University endowment, have rejected calls for divestment.