CalPERS should divest from fossil fuels. CalPERS’ opposition to divestment does not make sense. Instead, CalPERS should “revest” its money into other assets, preferably more beneficial assets such as clean energy solutions.
Fossil fuel divestment seeks to remove financial investments from companies involved in the fossil fuel industry (see, e.g., Howard E 2015). In California, efforts have included pressure on California Public Employees’ Retirement System (CalPERS), including attempts at legislation, to cause CalPERS to divest from fossil fuels. CalPERS has resisted these efforts. I believe CalPERS should redirect its investments away from harmful activities, including industries closely associated with fossil fuels, and towards better uses of its funds. I call this revestment.
Divestment provides only one half of the answer of what to do with assets. It means taking money out of something, in this case something undesirable (harmful fossil fuel industries). But it leaves open what to do with the money. The great potential for good comes from shifting money into activities such as clean energy, nature restoration, or other beneficial activities. Thus, divestment needs to be matched with corresponding investment in better alternatives.
The word investment derives from Latin investire, “to clothe in, cover, surround”. The word meant the “act of putting on vestments” (Etymonline A), or to “to clothe in the official robes of an office” (Etymonline). It developed a commercial sense in the 1600s, perhaps from giving new form to capital. The word revestment is used in law to describe a court regaining authority over a case (The Free Dictionary, US Legal). This idea of vesting something with authority, or transforming it as by clothing, can be repurposed. In revestment, I see the reclothing of the earth, the revesting of power in life. We can revest the monetary resources now allocated to harmful extractive industries and put them to work for beneficial and regenerative purposes.
We can imagine reclothing the earth, and we can also undertake it, whether on a large or small scale. The photographer Sabastião Salgado has traveled the world for decades capturing people and nature in beauty, drama, starkness, contrast, and difficulty. Since the 1990s, he and his wife have been regrowing the forest on their farm, reclothing it in wildlife (Instituto Terra A). On a much smaller scale, we have been working to rewild a very small portion of land, the front yard of our home – observing the wildlife the plants this attracts and harvesting seeds to sow. The land reclothes itself, as well: a super bloom in California is a dramatic manifestation of the power of life to sow itself and to wait patiently for the moment of its florescence.
There is an alternative to an earth clothed in life. It was imagined thousands of years ago: “Behold, My rebuke dries up the sea; I turn the rivers into a desert; the fish rot for lack of water and die of thirst. I clothe the heavens in black and make sackcloth their covering.” (Isaiah 50-3). That is the world we are creating today by burning fossil fuels and destroying the earth. I read of rivers drying up, and I live through seasons of fire that darken the sky and rain ash, as, clothed in sackcloth, the sky grieves. The life of the earth calls out to us, and where are we? If you are on the board of CalPERS, you are falsely resisting divestment while failing to imagine revestment.
In March 2023, the CalPERS board voted 7-1 to oppose SB 252 (Gonzalez et al 2023), a state bill which would prohibit CalPERS and CalSTRS from making new investments in fossil fuel companies, divest existing fossil fuel investments by 2031, and report on the status of fossil fuel holdings and divestments. Fortunately, SB 252 is moving forward. It passed the CA senate on May 25th and will now be taken up by the assembly. This success comes despite spending on lobbying by fossil fuel companies of $9.4 million in Q1 2023 and $34.2 million in 2021-22. The bill enjoys broad support, including unions representing 470,000 workers. (Bacher D 2023.)
CalPERS explained their opposition (CalPERS 2023). CalPERS’ main arguments are that:
- Divestment would not reduce greenhouse gas emissions. By way of example, they say it would not impact company operations and does not alter market behavior, e.g., fossil fuel use in vehicles.
- CalPERS claims that they are making progress by pushing to change companies from within.
- If CalPERS divests, then another investor will just replace them.
- CalPERS believes that being forced to divest the $9.4B that meet SB252’s definition would “create a ripple effect” on their returns.
Below, I will address their arguments and some aspects that they omitted.
At a minimum, even accepting that CalPERS does not want to divest, there is still no need to object to the whole of SB 252. The bill addresses three main items, only one of which involves divestment, yet CalPERS opposes the bill in its entirety. CalPERS could support the reporting requirement, which should have no effect on returns. CalPERS is already able to generate an appropriate report, since they already calculated their investment in fossil fuel companies at $9.4B. CalPERS is better positioned to do this calculation than, say, a typical member of the legislature or random member of the public. CalPERS’ is invested in thousands of assets, and it is not clear from inspection which ones are fossil fuel companies or associated industries like utilities. The list of investments would need to be run through a tool that would pick out such investments. CalPERS could therefore at least support the reporting requirements of the bill, even if it objects to divestment.
Claim 1, that divestment would not reduce greenhouse gas emissions, misses a lot. By divesting, they can put downward pressure on the price of the shares, increasing the cost of capital for those businesses. This may incentivize firms to change. CalPERS also need not act alone; more and more investors are shunning fossil fuel investments. A signal of no-confidence from CalPERS would strengthen this movement. But CalPERS is missing the main point: revestment. Their fossil fuel investments could be redirected to beneficial investments in businesses pursuing clean energy, phasing out of fossil fuels, nature restoration, addressing transportation emissions, etc. The list is long. This revestment can reduce GHGs.
Claim 2, that CalPERS is working within companies to change them, rings hollow. It is not credible that the best approach to reduce GHGs is to work within fossil fuel companies. These companies exist to extract, transport, refine, and distribute fossil fuels. What transformation does CalPERS envision for these organizations? Efforts to reform them from the inside have not been particularly successful as these companies continue to extract immense quantities of fossil fuels. CalPERS even describes what limited success they have had through their advocacy work with Climate Action 100+. They cite, for instance, BP’s “ambition to achieve net-zero emissions by 2050 or sooner” (CalPERS 2020). Notice that this relates only to BP’s direct emissions, not all the emissions due to the quantities of fossil fuels BP would continue to extract, among other issues. Further, CalPERS does not provide evidence that this announcement by BP was due to CalPERS’ advocacy actions; perhaps BP just made this announcement independently of CalPERS’ involvement.
In addition, if CalPERS is, say, attempting to wind down fossil fuel company operations, then it is acknowledging a reduction in their market value. Essentially, these companies are themselves stranded assets. Their future cashflows must stop sooner rather than later. Thus, the returns from these investments must decrease. By acting to wind-down their operations, CalPERS would be actively undermining the returns it claims it requires to ensure it can meet its future obligations. Therefore, to be consistent with its fiduciary duties, CalPERS should shift its money to other investments with better prospects, rather than attempt to reduce the value of investments it continues to hold. By holding these investments, CalPERS sets up a conflict of interest between phasing out fossil fuels and its investment targets.
Claim 3, that another investor is waiting in the wings to purchase the investments, is true, but it does not argue against revestment. The game of pass the bad investment is alive and well in the market. Given what we know of the effects of fossil fuels, it is ruinous to be trading in their stocks, to both the planet and to the holder of the stock. The path of burning fossil fuels with abandon, as we are doing, leads only to planetary collapse, dragging with it to the abyss any notion of monetary value. But, if your time horizon is short enough, and you can find a sucker to buy the bad investment, then you can still make a buck. Now, just because someone else might do something bad does not justify that one should continue doing the same bad thing. That bad thing is, of course, the issue: investment in harmful fossil fuels, which is essentially aiding and abetting in earthcide. Another word for seeking more, especially while causing harm, is greed.
Claim 4, that divestment would create a ripple effect, is interesting and opens additional aspect. It is unclear what CalPERS means by a ripple effect. They do not actually say that divestment would reduce returns or prevent CalPERS from generating necessary returns, though they certainly make it sound like divestment implies a reduction in returns. They write “Every missing dollar of investment returns must be offset by employer and employee contributions.”, but this is incomplete: those $9.4B and their associated returns are not going to go missing since they would be reinvested in something else. The argument is, therefore, that the “something else” would earn a lower rate of return.
Risk and return for fossil-free portfolios can be similar to unrestricted portfolios (Plantinga A and Scholtens B 2021). Fossil-free portfolios may even outperform regular portfolios. The S&P 500 Fossil Fuel Free Index had annualized 10-year total returns of 12.43% over 2013-2023, while the S&P 500 (which includes fossil fuel stocks), had 11.93% returns over the same period (S&P Global 2023). CalPERS should at least publish an analysis of alternative investment strategies that exclude fossil fuels. Without some analysis of alternatives, we lack an estimate of the effect that divestment would be expected to have on returns.
A loss of returns goes to the heart of CalPERS assertion of fiduciary duty. Investment in fossil fuels may, historically, have had negligible effect on long-term returns. But, going forward, we can expect that investment in fossil fuels will be less prudent. Fossil fuels need to be left in the ground to avoid planetary collapse. One analysis put the stranded value of fossil fuels at $30.6 trillion for a Net Zero 2050 scenario (Chen YH 2023), while another analysis using fossil-fuel industry valuation methodologies estimated forgone profits of up to $17 trillion, much of it from reduced demand, with half of the losses occurring by 2030 (Hansen TA 2022). Fossil fuel extraction must decline, with one study finding that 60% of oil and methane and 90% of coal must not be extracted to keep to a 1.5 C warming scenario, with oil and gas extraction declining at 3% per year until 2050 (Welsby D et al 2021). If fossil fuel companies maintained their 2010-2018 growth rates through 2050, then they would exceed their remaining coal, oil, and gas budgets for a 1.5 C warming scenario by 68%, 42%, and 53% respectively (Rekker S et al 2022). The market does not seem to have, as yet, incorporated this into its valuations of fossil fuel companies, possibly due to actions by the fossil fuel industry to make switching out of fossil fuels harder (Buchanan M 2022). Entities holding fossil fuel stocks are subject to risk of losses, including exposure through pension funds and financial markets, with a “net transfer of more than 15% of global stranded asset risk to OECD-based investors” (Semieniuk G et al 2022). Assuming that the world takes action to meet a 1.5 C increase, then the value of fossil fuel companies should plummet. Thus, CalPERS is at risk of losing large sums just from its investments in fossil fuels and related industries.
CalPERS should be divesting of fossil fuels, even without a law requiring divestment, simply to avoid the risk of losses in those investments. By not having a process to wean itself off of fossil fuel assets – as is called for in SB 252 – CalPERS is actually shirking its fiduciary duty. CalPERS should also propose a plan for how it will divest of fossil fuels and related industries, such as utilities. Similar analyses have been done (e.g., Weber O and Chelsie H 2018). This analysis should include the expected change in returns, volatility, and risk for different investment approaches and economic projections consistent with a 1.5 C warming scenario. It should also estimate the carbon footprint of the rebalanced portfolios. Further, CalPERS should consider the positive impact it could have by revesting in preferrable activities, such as clean energy. As an example, in 2021 CalPERS had $1.4B in renewables and green infrastructure (CalPERS 2020), a lot less than the $9.6B invested in fossil fuels – there are clearly many opportunities to revest out of fossil and significantly increase CalPERS’ impact on stabilizing the climate.
Though CalPERS invokes its fiduciary duty when it serves its argument against divestment (even if it is misplaced), CalPERS is actually failing in its fiduciary duty on a much larger scale across its portfolio. This failure is similar to its inability to deal constructively with fossil fuels and climate change. CalPERS is vastly underfunded, at only 83% of its obligations (Equable 2022). So, it does not have the resources to pay its future obligations. In addition, it uses a discount rate for its obligations which is based on an expected average rate of return rather than the rate needed to repay its debt obligations (Randazzo A and Bui T 2015). CalPERS uses a discount rate of 6.8% (CalPERS 2021) when a more reasonable discount rate accounting for its debt obligations would be around 3%. This means that future obligations are discounted much more heavily, creating the appearance that CalPERS has lower obligations. While this is not uncommon among state pension funds, it does not make it a good way to value future obligations.
Adjusting the discount rate is politically challenging. A higher discount rate shifts the burden of payment to the future. A lower discount rate shifts the burden of payment to the present, increasing the contributions current employees (and employers) would have to make into the fund. When CalPERS was discussing adjusting the discount rate, many stakeholders showed up to protest against a reduction (Cal Cities 2021). The city of Walnut Creek spends 15% of its operating budget on pensions, while a reduction in CalPERS’ discount rate of 0.5% would cost Walnut Creek the equivalent of four police officers. The City of Sacramento also spends 17-18% of its general fund budget on pensions. Additional speakers against a drop in the discount rate included Rural County Representatives of California, California Special Districts Association, California Schools Employee Association, Rancho Cucamonga Fire Protection District.
These stakeholders are important, but their testimony, and CalPERS’ method of valuation, ignore an important point: if the state is not setting aside sufficient funds to pay back its obligations, then current employees will face the loss of future income, or future generations and employees will bear the costs of paying for their retirement. This is remarkably similar to intergenerational decisions associated with climate change. We can spend now to address climate change, or we can let our future selves and future generations bear the costs. Choosing to defer much of the cost to the future is not only an inequitable choice, it is unrealistic. In the case of climate change, we cannot defer action to, say, 2050 or 2100 when new fangled magical technologies will suck all the bad carbon out of the air and instantly restore our planet to a stable and life-filled world. No, if we wait then it will be impossible to reverse climate change, and we face the prospect of ecological collapse. Species that go extinct will not come back to life, ecosystems that collapse will not magically reconstitute themselves, and no economy will survive a scenario of deferred action. Rather, we need to invest now (when it is also cheaper to do so) to stabilize the climate. We cannot punt action to the future.
Like CalPERS, some might say that we cannot act on fossil fuels because we have to make money on them, because we still need to drive cars, because we still want things. But this is an illusion. We cannot afford to not act on fossil fuels, because the planet is dying. There is no life on a dead planet, there is no food and no joy. If we do not address these things, then there will be no economy, and money will be worthless. There is a simple word for wanting more while causing harm: greed. Yet, a world of life is ours, and it is ours to restore and protect. Just as CalPERS cannot act on its obligations for payment, it finds itself unable to act on fossil fuels. CalPERS has choices, and those choices matter. The choice of sackcloth to clothe the sky, or for life to clothe the earth, is before us. CalPERS stubbornly chooses sackcloth, when it could choose revestment.
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