July 21, 2022

Should public pensions get out of fossil fuels?

Welcome back to The Planet You Save May Be Your Own, your weekly newsletter on local and state climate action. I'm Taylor Kate Brown and I am now a person who "enjoys" reading SEC filings. Well, at least sometimes.

(The Rotunda, Maine State Capitol Building, by J. Stephen Conn on Flickr)

One of my superpowers and downfalls as a journalist is being way too interested in the how. It's the first question I had when I read Maine had become first state to require their public funds to be divested from fossil fuel businesses by law. California's legislature required divestment from coal several years ago, but Maine's mandate is far more expansive.

So I pitched the idea to Governing, an online magazine whose audience is primarily the people who are employed in city and state governments. If anybody wants to hear about implementing laws, institutional investors and fiduciary duty, I figured, it's those folks.

You can read the story here, but let me back up to share why this might be interesting to you, someone who I assume is not a local government finance employee.

Movements to take public money — the vast majority of it tied up in public pensions — out of fossil fuels are predicated on the idea that public institutions should not be financing companies that are most directly responsible for climate change. The idea is that if enough people sell, growth at these companies will become extremely expensive — compelling them to actually transform what they do or go out of business entirely.

You may or may not have a pension, but pension funds and other major institutional investors hold lots of fossil fuel stocks, in part because they have been key elements of major stock exchanges for decades. Fossil fuel stocks are also key parts of index and retirement date funds at major brokers. If you have a retirement account of any kind, you almost certainly have exposure to these businesses.

If America's largest pension fund — CalPERS — announced it was selling off all its fossil fuel stocks tomorrow, it would be huge deal, potentially a market moving event.

But that, especially for CalPERS, is unlikely to happen. As I described in the story, they have been outspoken on not requiring divestment. They don't see selling outright as the most effective way to reduce emissions — and risk from climate change — across their portfolio. Instead, CalPERS says they are focused on proxy voting and other shareholder engagement, using their ownership position to pressure companies. They backed the headline-grabbing effort to change members of Exxon's board — but did not create it themselves.

It's hard to know — especially for someone who isn't in these conversations — what shareholder engagement has been effective in doing or changing. Another wrinkle: some of the most carbon-intensive parts of these companies are being sold off to places with less disclosure and fewer public shareholders.

For divesting or engagement to work, though, it depends on investors generally rowing in the same direction: Maine is a relatively small pension fund, and divestment from fossil fuels will not make a huge dent. But they are not alone: this conversations is happening over and over again, not only for pensions, but city investments, unions, religious organizations and major private investors.

The second element of divestment campaigns, especially ones targeting pensions, is encouraging funds to see fossil stocks as a bad long-term investment, and a short-term investment that makes all their other long-term investments worse off.

From a pure investing standpoint, you don’t want to be the last investor holding these companies, especially when you have a duty to tens, possibly hundreds of thousands of public employees and teachers — you'll lose a lot of money. But, as one institutional investing reporter told me last year, most large investors aren't there yet on fossil stocks and investments being bad bets.

I asked her when she thought that calculation might tip.

"I don’t know," she said. "We’d all make a lot more money if we did."

A pipeline question mark

My recent Guardian story was about a long-term PR effort trying to improve public opinion about gas and tie the fossil fuel to renewables. Who was footing the bill for this campaign? Pipeline operators.

In the story I referenced a few active expansion projects by the backers of Natural Allies, especially in the geographic areas where these ads are being most often seen. One of those projects the Williams Companies' Regional Energy Access project, which will increase the amount of gas transported along existing lines owned by Williams and deliver it to Pennsylvania, New Jersey and Maryland.

Except: Last week, New Jersey filed with the federal regulator to say "Well, actually we don't need that gas, thanks."

I'm being a little facetious, but in a filing to FERC, the federal agency considering the pipeline, the New Jersey Board of Public Utilities requested the agency consider a new report, accepted by the board in June about whether the state needed more gas to meet future demand. The study, done by London Economics International, found in all but the most extreme scenario, New Jersey had enough gas supply to meet demand through 2030 — and suggested 10 gas pipeline alternatives to cover any future shortfalls.

By itself, it's probably not enough to convince FERC either way, but it's notable to me for two reasons: First, this from the utility commission, not an outside political organization. And second, the filing points out its report has come to "materially different conclusion" from the only other evidence in the docket on the key question FERC is supposed to rule on: Is this pipeline needed?

Some newsletter notes

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One of my regular readers (aka the great Colleen Hagerty) wanted to hear more about heat pumps in a future edition, as I and other writer reference them a lot in stories about moving homes off the gas. It's a bit daunting, but I think its worth a Back to Basics edition. What do you want to know about heat pumps? Reply to this email with your questions.

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