Climate risk is the number one threat facing the world; it’s also the number one risk to the global economy. The largest teachers’ pension fund in the United States, CalSTRS, recently voted unanimously to divest from US thermal coal—an important step in reducing carbon emissions. However, CalSTRS’ $1.5 million divestment from coal is overshadowed by its $6 billion investments in oil and gas. These assets are a huge financial risk to its portfolio. To avoid climate catastrophe and to protect teachers’ pensions, CalSTRS must responsibly divest from all fossil fuels.
Esteemed economists, including former SEC Commissioner Bevis Longstreth and former US Secretary of the Treasury Henry Paulson, have been advising investors in recent years that fossil fuel assets will become stranded—rendering them worthless. Why? The current oil glut has certainly influenced the price of oil, but other factors threaten the industry:
- The cost of renewable energy is becoming increasingly competitive.
- New government regulations are being enforced globally.
- An enlightened public is stigmatizing the industry and pressuring funds to divest.
At the CERES 2016 Investor Summit on Climate Risk, Mark Lewis, managing director of research at Barclays, told investors that the risk of stranded assets can no longer be ignored.
Michael Liebreich, founder and chairman of Bloomberg New Energy Finance, explained how the shift to renewable energy is happening much faster than conventional wisdom expected. With tongue in cheek, he also suggested that maybe investors won’t need to go through the hassle of divesting from fossil fuels, since asset loss in this sector is “divesting” portfolios for them.
To support this claim, CalSTRS lost $2 billion in its fossil fuel investments last year alone. Since June 2015, the Vanguard Energy Index has dropped 44%, the Stowe Coal Index 69%, ExxonMobil 24%. ExxonMobil just announced a 58% decline in its quarterly profit. Chevron reported its first quarterly loss in more than 13 years, and several major coal companies declared bankruptcy.
Finally, in her address at the 2016 Investor Summit, Christiana Figueres, executive secretary of the UNFCCC, warned investors:
Your decisions over the next five years are really going to make the difference…. If we put money into the wrong fuel systems, we are going to be dealing with those greenhouse gas emissions,… we will not be able to stay below 2˚C, and I don’t need to tell you what the social, economic, and moral impacts of that would be.
How can CalSTRS continue to insist that shareholder engagement is more effective than divestment? Our state pension funds and many other large shareholders have tried to influence companies like ExxonMobil for the last 25 years. While they were engaging, Exxon hastily covered up its very own research that exposed the dire threat of continued burning of fossil fuels. It then funded a campaign casting doubt on the very existence of climate change. CalSTRS needs to emulate The Rockefeller Brothers’ Fund, which after 10 years of engaging with Exxon, chose the high ground and divested its fund from all fossil fuels—a move that has proven lucrative for the foundation.
With the writing on the proverbial wall for the fossil fuel industry, CalSTRS, as a long-term investor, should consider its fiduciary duty to today’s new teachers. Not only will they need a pension for their retirement, they will also need a healthy planet on which to retire.
CalSTRS has divested from South Africa, tobacco, and some firearm companies. It is now time for CalSTRS to divest, within the next five years, from all fossil fuels—an asset which is destroying the planet and could soon destroy their pensions.