The Maine Public Employees Retirement System, Augusta, reduced its fossil fuel investments to 6.1%, or $1.21 billion, of total pension assets for the fiscal year ended June 30, down from 6.5% for the year-ago period, said a pension system report describing the progress mandated by a 2021 fossil-fuel divestment law.
Although the law directed MainePERS to divest all fossil fuel holdings by Jan. 1, 2026, the report, like previous annual reports, said total divesting by that deadline would incur significant costs and hamper the $20 billion pension system’s investment strategy.
“Achieving and maintaining a completely fossil fuel-free portfolio by 2026 would require both disposing of significant existing investments as well as making undesirable fundamental changes to MainePERS’ investment approach,” said the report presented Dec. 12 at the pension systems’ trustees’ monthly meeting.
“MainePERS’ holdings of fossil fuel investments are widespread, with a majority of asset classes containing at least some fossil fuel exposure,” the report said.
“Importantly, these exposures are not intentional, but rather arise as a result of investment decisions made in order to best balance the System’s goals of generating returns while minimizing investment risks,” the report said.
The report predicted MainePERS would reduce its fossil-fuel exposure to 3.9% of total assets by the fiscal year ending June 30, 2028.
The fossil-fuel law was enacted along with a provision that MainePERS divest its holdings in private prisons.
MainePERS received in 2022 an opinion by Aaron Frey, the state attorney general, that the law doesn’t trump the pension system’s fiduciary duties.
The law doesn’t require divesting and refraining from investing in fossil-fuel and private-prison holdings “unless sound investment criteria and fiduciary obligations require such actions,” the legal opinion stated.
The law says the pension system should act “in accordance with sound investment criteria” and be consistent with fiduciary obligations, Frey’s letter said.
Fossil fuel companies are embedded in index funds, such as the Russell 1000 and ACWI ex-U.S, which are part of the pension system’s investment lineup. Removing these investments from these funds fund would cost $483 million in expenses for transactions, divestment and reinvestment, the report said.
Divesting all private-market holdings that contain fossil fuel investments would cost approximately $400 million due to a discount in the secondary market plus “substantial legal and other costs associated with the transfer of partnership interests,” the report said.
Divestments in public market also would “reduce the portfolio’s level of diversification and exposure MainePERS to a higher level of investment risk,” the report warned.
Avoiding fossil-fuel investing in public markets could cause higher fees – 3 to 5 basis points for U.S. equities and 5 to 8 basis points for non-U.S. equity investments, the report said. This would produce a near tripling of investment management fees for public market investments, which was $956,000 for the fiscal year ended June 30, or 1.3 basis points, the report said.
During the latest fiscal year, the biggest cuts in fossil-fuel holdings came from private markets, whose fossil-fuel allocation percentage dropped to 3.6% of total pension assets for the fiscal year ended June 30 vs. 4.2% for the year ago period.
Public market exposure was 2.4% for the fiscal year ended June 30 vs. 2.3% for the year-ago period
The report also said the MainePERS exposure to private prisons is “nominal,” amounting to $800,000 in two index funds which account for $2.86 billion in pension system assets. MainePERS has no direct investments in private prisons.
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.
