CalPERS’ Portfolio Harbors Nearly $45 Billion in Stranded Fossil Fuel Assets

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As we transition towards a sustainable society, the country’s largest public pension fund claims to be doing its part. CalPERS (the California Public Employees’ Retirement System) is attempting to leverage its $27 billion in fossil fuel investments ($5.6 billion in companies with fossil fuel reserves) to ask the companies powering the climate crisis to change.

However, the CalPERS climate strategy overlooks the fact that the vast majority of fossil fuel reserves must inevitably be left in the ground in order to limit global warming to 1.5 degrees. This means that 90% of coal, 60% of gas, and 60% of oil proven reserves cannot be extracted, and therefore cannot provide returns for fossil fuel investors. By investing countless public employees’ retirement savings in 125 of the 200 fossil fuel corporations with the largest proven fossil fuel reserves, CalPERS is holding billions in investments that will soon be rendered worthless.

For the analysis of the fossil fuel stranded assets in CalPERS’ 2020 portfolio, the authors used publicly available data to estimate CalPERS’ share of the value of stranded fossil fuel reserves held by the fossil fuel companies in which CalPERS invests. Because CalPERS has committed to a 1.5℃ global warming target, the authors used this target to guide the calculations. Then, the authors repeat the calculation of CalPERS’ stranded fossil fuel asset value associated with the higher 2℃ target.

Summary of the Analysis

As of 2020, CalPERS’ share of the billions of dollars represented by unextractable fossil fuel reserves in a 1.5℃ scenario amounted to more than $45 billion, and this total rises to $83 billion by 2050. CalPERS could avoid these inevitable write-downs by reducing its fossil fuel investments on an orderly schedule, beginning immediately. By quantifying the possible financial impacts of stranded fossil fuel assets to the largest fossil fuel companies in CalPERS’ portfolio, this study provides compelling evidence for exiting from fossil fuel investments as soon as prudently possible.

The sudden loss of value of investments in Russia shows that the value of assets can plummet rapidly in the face of sanctions by governments and concerted actions by both individual and institutional investors. Outrage over Russia’s unprovoked attacks on Ukraine has caused canceled projects, loss of business, frozen assets, and even a change in the underlying indexes so that passive investors, including CalPERS, have been forced to divest from Russian equities. The immediate economic fallout of the war in Ukraine heightens the urgency of breaking free from fossil fuel dependence.

The climate crisis will cause stranding of fossil fuels, and pension funds should not be the holders of last resort when fossil fuel investments become worthless. To protect its beneficiaries and fulfill its fiduciary duty, CalPERS should abandon its practice of shareholder engagement and purge fossil fuel investments from its portfolio.

Sindre Carlsen and Jonathan Li are economics students at UC Berkeley, and part of a climate finance research team under the leadership of Prof. Clair Brown.