by Carlos Davidson
California, famous worldwide for its leadership on climate change, is making big news in fossil fuel divestment, and it is doing it with some surprising union support. The California Senate recently approved a bill calling on its two massive public employee pension funds to divest their holdings in coal companies.
Two unions representing state employees in K-12 and higher education have decided to support the divestment efforts. The California Faculty Association (CFA), the union representing 25,000 faculty, librarians, counselors, and coaches in the 23-campus California State University System, sent the bill’s author, State Senate President pro Tempore Kevin de León, a letter of support. And the California Federation of Teachers (CFT), which represents 120,000 K-12 education workers, has also endorsed divestment. The unions’ support is particularly meaningful because their members are covered by the pension funds to be divested, so they have a direct stake in the issue.
Unions have to look out for the financial health of the pension funds that their members contribute to and count on for their retirement. Therefore, unions can be hesitant about divestment efforts that require the pension fund to sell particular holdings, even if they support the politics of the divestment campaign, whether that was apartheid in South Africa, or now fossil fuel companies. Even though there is good evidence that divestment can be accomplished without sacrificing returns or increasing risks, the union still has to deal with the perception that the political statement of divestment may come with a financial cost. In this case several factors likely helped convince the California Faculty Association and the California Federation of Teachers that they could support coal divestment without any financial risk to their pension funds.
First, the SB 185 coal divestment bill had built into it an “off ramp” clause that lets the two pension funds not divest if they believe it is not financially prudent to do so. And maybe partly as a result of that, the boards of both pensions funds decided to take a neutral position on the proposed legislation.
A second big factor is that holdings in coal make up a minuscule share of the pension funds holdings. The California Public Employees’ Retirement System (CalPERS) has holdings of approximately $295 billion, with about $167 million in coal, so less than 0.05 percent—that is, five one-hundredths of one percent. The California State Teachers’ Retirement System (CalSTRS) has $193 billion in assets with a reported $40 million invested in coal companies, or about two one-hundredths of one percent.
And third and maybe most convincing is that coal is a bad investment. Fossil fuel companies have large coal, gas, and oil reserves in the ground. If the world is going to address climate change and stabilize greenhouse gases in the atmosphere, most of these reserves will have to be left in the ground unburned. This is the “stranded assets” or “carbon bubble” argument: that fossil fuel companies are currently overvalued and therefore not a good investment. It is for this reason that even some businesses have started to reduce their financial ties with the coal industry. Recently, AXA, France’s largest insurance company, decided to sell off $560 million of holdings in coal companies, citing the risk of climate change. In early May, Bank of America announced that it was going to reduce loans to coal mining companies.
The California coal divestment bill now moves to the State Assembly, where it will face a stiffer challenge. Governor Brown has already indicated his willingness to sign the bill if it makes it to his desk. If it does, California will be the first state in the country to enact any form of fossil fuel divestment.
Carlos Davidson is Professor of Environmental Studies at San Francisco State University and a member of CalPERS and the California Faculty Association.