Financial Risk of CalPERS’ Fossil Fuel Assets

Cover of Report on Financial Risk of Fossil Fuel Assets for CalPERS

Advanced students of Prof. Clair Brown (UC Berkeley Economics) have released a well-researched and thoughtful report titled  “Analyzing the Financial Risk of Holding Fossil Fuel Assets in CalPERS’ Portfolio”. With input from Fossil Free California and other advisers, the students evaluated the risks associated with CalPERS’ investments in the Carbon Underground 200 companies. As compiled annually by Fossil Free Indexes℠LLC, these are the 100 global oil and gas companies and the 100 global coal companies that own or hold rights to the largest “proved reserves” of fossil fuels.

The report details three factors that contribute to CalPERS’ financial risks and potential losses along with the societal costs associated with owned assets of fossil fuel companies:

  • Stranded assets risk. The future cost of stranded fossil fuel assets (SFFA). Fossil fuel reserves will decline in value as renewable energy continues to get cheaper, and as governments regulate and tax greenhouse gas emissions.
  • Litigation risk. Legal liability includes the potential costs to fossil fuel companies resulting from lawsuits against greenhouse gas emitters. Indirectly, these costs will be borne by asset owners and their funders.
  • The social cost of carbon. The costs to society of the harms to people’s health and the environment caused by GHG emissions are already high and will continue to rise rapidly along with the GHG emissions.

CalPERS Portfolio over time

As of June 30, 2016, CalPERS held just over $8.6 billion, or 5.92% of its domestic and international equities in 142 of the Carbon Underground 200 (CU200) companies. (See chart) CalPERS’ CU200 investments represented about 2.8% of the 2016 portfolio’s $302 billion market value. Between 2004 and 2013, the value of CalPERS’ holdings (including domestic equity, international equity, corporate bonds, and international fixed income) in the CU200 increased from $7.07 billion to $10.6 billion. But by 2016, the market value of the CU200 domestic and international equities had declined to $8.6 billion because of the decline in value of coal companies and other factors, including the general state of the bond and stock markets.

One of the strengths of this report is that it shows how several related factors could compound the risks associated with continuing to hold fossil fuel investments.  As investors worldwide are realizing, now is the time to begin winding down these risky investments in favor of clean energy.