The Maine Public Employees Retirement System, Augusta, cut its fossil-fuel investments to 6.5% of total assets in fiscal year 2023 from 7.8% in fiscal year 2022, said a MainePERS report tracking progress in the state law calling for divesting fossil fuel holdings.
The report also warned that eliminating all fossil-fuel investments by the law's Jan. 1, 2026, deadline would be cumbersome, complicated and costly.
"Achieving and maintaining a fossil fuel-free portfolio by 2026 would require both disposing of significant existing investments as well as making fundamental changes to MainePERS' investment approach," according to the report, issued at the Dec. 14 MainePERS trustees' monthly meeting.
The law, enacted in 2021, didn't mandate zero fossil-fuel investments. For both divesting and halting purchases, the law doesn't preclude "de minimis exposure" of fossil-fuel investments by the pension fund or by the state.
The law doesn't define "de minimis exposure," but it says MainePERS must apply "sound investment criteria (that is) consistent with fiduciary obligations."
The pension system held approximately $1.22 billion in fossil fuel assets as of June 30 when total plan assets were $18.8 billion. Total assets are now $19 billion. The report didn't identify what was divested. CIO James Bennett declined to comment.
A majority of the pension system's fossil fuel exposure is in private markets — $786.8 million for FY 2023 vs. $962.3 million for FY 2022. Public market exposure was $428.4 million for FY 2023 vs. $445.5 for FY 2022.
The most challenging investments are those in private markets, primarily infrastructure and private equity.
"Complete removal of fossil fuel exposure would require MainePERS to sell its entire interest in any private market fund containing a fossil fuel asset," the report said.
Based on an analysis by NEPC, the pension system's divestment consultant, MainePERS "could expect to incur discounts on the sale of its partnership interests ranging from 10% to 60% depending on the asset class and fund characteristics," the report said.
"This suggests a minimum discount of over $100 million," the report said. "The system would also incur substantial legal and other costs associated with the transfer of partnership interests."
MainePERS made its last private markets commitments to investments with a fossil fuel focus in 2017. Exposure to fossil fuels within private markets will decrease "over time due to the runoff of historical commitments to fossil fuel-focused strategies and the growth of infrastructure investment opportunities related to the energy transition," the report said.
It predicted the private markets portfolio of fossil-fuel investments "will decline by roughly one-third by 2026 relative to its level of exposure in 2022."
Removing fossil fuels from public market investments would exact a cost and affect the pension system's diversification strategy, the report said.
For example, the system holds $2.49 billion in Russell 1000 investments through a separately managed account, (SMA) including $192.6 million in fossil fuel investments. "These holdings can be sold at will," said the report, adding that there will be transaction costs due to selling and reinvesting the assets.
Other public market investments are through commingled funds. "In these cases, divestment would require exiting these commingled vehicles and redeploying capital into SMAs where the capital could be directly invested into the non-fossil fuel constituents of each benchmark index," the report said.
"In addition to the transactions costs associated with liquidating and then redeploying capital, SMA creation involves custodial and legal costs, in particular for those accounts holding non-U.S. assets," the report said.
Excluding fossil-fuel investments from the MainePERS public markets portfolio "would result in a lower level of diversification," thus increasing investment risk, the report said.
If MainePERS chooses a more customized strategy of public markets investing to avoid fossil fuels, management fees would rise and portfolio servicing costs would increase, the report said.
State law defines fossil fuels as coal, petroleum, natural gas or any derivative of coal, petroleum or "natural gas that is used for fuel."
It focuses on the 200 publicly traded companies "with the largest fossil fuel reserves in the world" as well as "the 30 largest public company owners in the world of coal-fired power plants."
In addition, the law covers companies that have as their "core business the construction or operation of fossil fuel infrastructure," or have as a core business "the exploration, extraction, refining, processing or distribution of fossil fuels."
The law also covers "fossil fuel infrastructure," which means, among other businesses, oil or gas wells; oil or gas pipelines and refineries; oil, coal or gas-fired power plants; oil and gas storage tanks; fossil-fuel export terminals; "and any other infrastructure used exclusively for fossil fuels," the law said.
