CalSTRS Studies ESG (Again): Deeper Dive is Needed

Seeking more insight into CalSTRS’ ongoing plans for sustainable investing, Divest CalSTRS Team Lead Jane Vosburg and FFCA Executive Director Vanessa Warheit drove down to San Diego early in October to attend the CalSTRS offsite, for a full day of discussion on the “Transition to a Low Carbon Economy”.  On Thursday, October 3. Director of Corporate Governance Kirsty Jenkinson led a session on the “Transition to a Low Carbon Economy”.  Trevor Houser from the Rhodium Group characterized climate risk as “Clear, Present, and Underpriced”. Alicia Seiger of Stanford’s Precourt Institute for Energy and the Steyer-Taylor Center presented the work she did with NY State Common Retirement Fund’s Decarbonization Advisory Panel.

Despite hearing clear messages from these presenters that climate change is a clear and present danger to the financial health of the fund, questions from the Board failed to reflect a sense of urgency or even an adequate understanding of the crisis.  Board members asked about investment opportunities caused by climate change (since it increases the northern extent of arable land) and possible techno-fixes such as carbon capture and sequestration or geo-engineering.  

A few days after the session, Jane Vosburg suggested that the Board might want to deepen their understanding of climate-related financial risk by inviting a subject matter expert to give a presentation at the November 6 meeting.  Here’s Jane’s letter:

We at Fossil Free California were pleased to hear the powerful presentations from Trevor Houser and Alicia Seiger at your offsite meeting in San Diego on October 3. Both messages underscored the urgency of the climate crisis and its inevitable and imminent risks to our CalSTRS pension. We commend the staff for sharing this information with you; the next urgent step is for you to direct staff at the November 6th Investment Committee meeting to invoke CalSTRS divestment policy and immediately divest the fund of all extracting and producing fossil fuel companies. 

As both Trevor and Alicia pointed out to you, a certain amount of additional warming is already ‘baked into the system’; we are therefore unlikely to prevent a temperature increase beyond the Paris goal of 1.5˚C—which is already way outside the safe zone for civilization. Our job now is to do everything in our power to limit the increase to 2˚C, to avoid total global catastrophe. Two weeks ago, Alice Hill of the Council on Foreign Relations told leaders attending Climate Week in NYC, “A 4˚C world is uninsurable.” And yet, currently, we are racing towards a 4˚C increase possibly as early as 2060, according to a 2012 World Bank report.

We would also like to respond to some of the questions and statements that Board members made at the meeting.

  • While it was clear from Alicia’s presentation that fossil fuel companies needed to be held to account on their transition plans, we noticed a disturbing trust, by board members and staff, that the fossil fuel industry will take the moral high ground. The members’ assessment of Royal Dutch Shell as a good actor because of its plans to help mitigate the climate crisis is misguided.  This article from the Guardian (June 2019) clearly refutes this notion: “Don’t buy the greenwash. Shell’s initiatives, which have won over many conservation groups, are dwarfed by its investment in oil and gas.” Another revealing article that a prudent fiduciary should read is Revealed: the 20 firms behind a third of all carbon emissions. (Oct 9, 2019) which includes this brief but staggering video. The deception and greed of fossil fuel companies know no boundaries. They knew about the dire consequences of continued burning of fossil fuels as early as 1965 and they still continue to extract more regardless of these unsustainable and existential consequences.
  • We were surprised that neither presenter covered the global threat of civil unrest or mass migration that the climate crisis is already causing. The war in Syria was precipitated by a drought that decimated food production; climate-driven floods and famines will continue to cause upheaval throughout the world with greater intensity and devastation, and the US military has identified the climate crisis as a ‘threat multiplier’ for our national security. Trevor’s map of the US, showing loss of GDP, should have been followed by a question: “Where are all those people going to go?” And of course that map showed only the potential for internal When considering climate risk to the US, you should also be asking, “Where are all the people in Central and South America going to go?”
  • Unnerving evidence also suggests that the predictions by climate scientists about the rate of change has been overly-optimistic. For instance, Greenland’s rate of melting today is where scientific models predicted it would be in 2070. This has global implications. “Somewhere between 1.5 and 2 degrees there’s a tipping point, after which it will no longer be possible to maintain the Greenland Ice Sheet,” says Ruth Mottram, a climate scientist at the Danish Meteorological Institute.  And if Greenland’s ice sheet were to melt entirely, it would result in about 20 feet of global sea level rise. Imagine how that would affect our portfolio! At a more local level, even though California has boasted a reduction in its greenhouse gas emissions over the last decade, the staggering emissions of CO2 released by more frequent and more destructive wildfires (45.5 million metric tons last year alone) are not included in the state’s calculations. If California factored wildfire estimates into its final count, the state would have seen overall emissions increase. These in turn contribute to more wildfires, costing the state billions in losses.
  • Finally, we were alarmed to hear the argument put forward that developing countries will need fossil fuels for their energy. While it is absolutely true that developing nations need to be raised out of energy poverty, the argument that this can or should be done with fossil fuels is right out of the fossil fuel industry’s playbook. As the price of renewables plummets, many African countries, such as Ghana and Nigeria, are skipping fossil fuels altogether—in the same way they leapfrogged landlines for cell phones. While some African governments might still embrace fossil fuels, the people of Africa know better; and the African people of Senegal want no part of it.

The bottom line? Continued investments in fossil fuels are not only unconscionable, they present financial risks (stranded assets, litigation, carbon pricing, regulatory, peak demand, technology, investment) that CalSTRS cannot ignore. As Trevor suggested: “Climate has always been the 2100 risk, that you punt to tomorrow. But that’s what’s changed—assets currently held will be impacted by climate change.”

Trevor also asked you a question: “What are you trying to achieve? Are you trying to shape outcomes?” As trustees of a fund whose youngest members who won’t retire until 2060, you have a fiduciary duty to shape an outcome that ensures the continuation of the world they currently live in. As fellow human beings with a tremendous amount of power, we would hope you would be trying to shape an outcome that makes their world at least as good as the one we have enjoyed until now.

With all of that said—we are perplexed at CalSTRS’ continuing resistance to divesting from fossil fuels. For the last six years, portfolios that exclude fossil fuels have outperformed those that include fossil fuels; last year the energy sector was the worst-performing sector of the S&P 500; and an upcoming report will reveal how our CalSTRS pension fund would have been billions of dollars better off today had CalSTRS divested from fossil fuels ten years ago. If not now, when? If not you, who?

Members of the CalSTRS board, procrastinate no longer. The climate crisis is an emergency and should be treated as such. Some of you may remember Al Gore’s words to you in 2015: You have the luxury and obligation to take the long-term view. That’s why CalSTRS’ role is so unique and potentially so powerful.

It’s past time to fulfill your fiduciary duty and include an action item on the agenda of your upcoming Investment Committee meeting, November 6, that will direct staff to divest from all fossil fuel companies in the extraction and production phase. CalSTRS cannot afford to lose any more money from its fossil fuel investments, and our children deserve some hope that the planet will be inhabitable in the decades to come. 

If, after everything you’ve heard, you feel you need more details about the risks of fossil fuel investments and the opportunities of fossil fuel divestment, we recommend you invite Tom Sanzillo, IEEFA’s Director of Finance, and/or Thomas Kuh, formerly of MSCI, or RBC’s Farralon Udom to address the Board and Staff at the November meeting.

Christiana Figueres, Executive Secretary of the UN FCCC, advised investors so aptly in 2016: “(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 to the point that 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.”

Now that you know the impacts, it is imperative that you take urgent action. Our children and our pension fund are relying on your courage and wisdom.

Being too early is less of a risk than being too late—Alicia Seiger