California has some of the nation’s leading climate policies, with hard deadlines to slash greenhouse gas emissions, switch to zero-emission cars and trucks and get 100% of its electricity from carbon-free sources. But so far, its leaders have lagged behind other states, like Maine and New York, in using another important tool — the financial power of its massive public pension funds — to hasten the nation’s independence from fossil fuels.
CalPERS and CalSTRS are the nation’s two largest public pension funds and have nearly $15 billion collectively invested in some of the world’s biggest fossil fuel companies. That includes companies owned by the Chinese government, Saudi Arabia and multinational corporations such as Exxon Mobil, Chevron and Shell that are posting record profits as the planet increasingly burns, floods and bakes from the impacts of climate change and communities suffer.
Helping to fund the destruction of our environment is insanity; profiting from it makes us complicit. We urge California lawmakers to pass SB 252, legislation by Sen. Lena Gonzalez (D-Long Beach) requiring CalPERS and CalSTRS to shed their investments in the largest fossil fuel companies by 2031, and stop renewing or adding to existing investments starting next year.
Young people, including groups like Youth Vs. Apocalypse, are among those pushing hardest for this divestment bill. They are right to be angry that the retirement funds of state employees and teachers are investing in companies that profit from the burning of fossil fuels, and have mounted decades-long disinformation campaigns about the science of global warming and whose continued expansion poses a dire threat to future generations. How do we expect to slow the climate crisis and the industry that drives it if we continue to support it with billions of dollars?
This divestment legislation is the right step, not only on moral grounds, but because it’s financially prudent. In a world where the effects of climate change are intensifying, the necessary and accelerating shift to renewable energy makes these investments too volatile and risky to hold onto long-term.
It’s a conclusion that some of the largest institutional investors in the world have already come to, including Harvard University, the Dutch pension fund ABP, New York City’s public pension funds and the University of California. Divestment commitments of more than $40 trillion in assets have been made in recent years.
The bill provides a reasonable offramp, giving the funds a seven-year timeline to sell off these investments when it’s most financially advantageous. There’s also an option to extend the deadline until 2035 if an unforeseen event like a war or disaster impacts market conditions, and the legislation does not require the boards to do anything unless they determine it is consistent with their fiduciary responsibilities.
A list provided by CalPERS shows that its holdings in more than 100 companies it believes would be subject to divestment under SB 252 add up to about $9.4 billion, or about 2% of its $441-billion portfolio. CalSTRS provided a similar list of investments in more than 150 companies totaling $5.4 billion, less than 2% of its $302-billion portfolio.
The UC system completed selling off more than $1 billion in fossil fuel investments three years ago after determining that putting funds in clean energy was more promising than gambling it on fossil fuels that pose an “unacceptable financial risk.”
Dianne Klein of UC Investments, which has more than $160 billion in assets, said the switch has not hurt the funds’ value. “Selling fossil fuel assets certainly didn’t impede our ability to grow the portfolio over the past three years,” she said.
Looking at the last 10 years of returns shows that stock indices without tobacco and fossil fuels, including one the UC system uses, outperformed those with fossil fuels by about 0.5%. “When you are talking about billions of dollars, those extra percentage points make a big difference,” Klein said.
When New York City divested $3 billion of its pension funds in 2021, it relied on the advice of financial management firms BlackRock and Meketa, who in separate reports found that fossil fuel divestments have resulted in neutral or positive financial performance, and generated no significant negative impacts.
Tom Sanzillo of the Institute for Energy Economics and Financial Analysis, who previously served as first deputy comptroller for the state of New York, which is in the process of divesting from fossil fuel companies, said that pension funds pulling out of fossil fuels is a logical and fiscally responsible response. With the exception of the energy price spikes after Russia’s invasion of Ukraine, the sector has become less profitable and made up less of most portfolios — constituting 4.2% of the S&P 500 stock index today, compared with 29% in 1980.
“You’re looking at an industry that’s in trouble and doesn’t have a turnaround strategy,” he said.
The leaders overseeing the pension funds oppose the legislation, and say that divesting would pose too big a risk to their investment returns, hurt the diversification of their holdings and violate their fiduciary duty to make investment decisions solely in the interest of maximizing the rate of return. The funds’ leaders argue that those financial responsibilities trump any other considerations. But that’s just not the case, historically.
CalPERS says that its divestment in tobacco companies more than two decades ago has cost $4.2 billion in returns and that its divestment from South Africa in the late 1980s and early ‘90s lost $6.7 billion, but that its divestments in Iran, firearms manufacturers and thermal coal were neutral or made money.
Critics have legitimate concerns that if divestment results in losses it would drive up costs to school districts, teachers and state and local governments that will have to pay for the gap between what the funds generate and their underfunded pension liabilities.
But there’s little evidence it will. Furthermore, the cost of climate change is likely to be much greater, and this legislation is the push the pension funds need to get serious and begin a necessary transition away from fossil fuels.
The funds’ preferred method of achieving social or political goals is working with other like-minded investors to push companies like Exxon to be more environmentally responsible through shareholder activism. But there isn’t much evidence that strategy is working when it comes to the big oil companies, which are walking back their climate pledges.
Supporters of the legislation argue that as long as fossil fuel companies remain a part of these portfolios, the pension funds are propping up the industry and must disentangle from them to curb their power and influence. Beyond that, it is clear that renewable energy is the future and that holding onto the planet-destroying and health-damaging oil, gas and coal industries is a risky bet on the technology of the past.
As the climate crisis and its impacts accelerate and the toll of investment becomes clearer with each passing wildfire season, smoke siege and heat wave, business-as-usual is simply untenable. California should stop adding to the risk by investing its money in a sustainable future.