It’s time to protect pensions from the rapid decline of the fossil fuel industry in addition to their liability and lack of ethics

WHY FOSSIL FREE PERA?

Beyond cuts to retirement benefits and increases in contributions from taxpayers and employees, the Fossil Free PERA Coalition aims to ensure that the PERA Board of Trustees is looking at the long-term soundness of its investments, in particular in the context of fossil fuel investments and long-term climate risk that may pose a threat to the fund’s portfolio.

Other pension funds are moving to divest from fossil fuels for fiduciary reasons, including the U.S’s largest state pension fund, New York City’s. The Fossil Free PERA Coalition calls on PERA to address the investment risks and projected losses around the likelihood of stranded assets, fossil fuels that will become unburnable in the wake of global commitments to curb climate change.

Currently, PERA has upwards of $1.5 Billion invested in over 300 oil, gas and coal companies. PERA has holdings in Extraction LLC, an oil and gas company that lost $500M in 2016 and is proposing some of the most controversial projects in Colorado, such as fracking in close proximity to the Bella Romero 4th-8th grade school in Greeley (which is underway less than 1,000 feet from the school playground), and on Boulder County Open Space lands. We are concerned that our public money is funding projects that compromise the health and safety of Colorado residents, including our children.

Over 1,000 institutions have committed to divest from fossil fuels with a $8 trillion impact to date. As of 2017, 43 US cities and states have committed to some form of divestment from fossil fuels. In the first-quarter of 2018, New York State, New York City and London called on their public pensions to divest. The World Bank is ending its lending to fossil fuel projects. Governments are also looking at fossil fuel divestment, including Ireland and Norway. Colorado can and should follow suit, showing bold leadership in a state that can lead the way in investing in cleaner, renewable energy technology.

 A recent report from the Institute for Energy Economics and Financial Analysis states, “In the past several years, oil industry financial statements have revealed significant signs of strain: Profits have dropped, cash flow is down, balance sheets are deteriorating and capital spending is falling. The stock market has recognized the sector’s overall weakness, punishing oil and gas shares over the past five years even as the market as a whole has soared.”

Currently the price of fossil fuels companies’ shares is calculated under the assumption that all fossil fuel reserves will be consumed. If they can’t bring reserves up from the ground, their value will go down, exposing institutions to material loss. Stranded asset estimates range from $304 Billion (IEA by 2035) to $100 Trillion (Citi).

Coal, once the titan of the U.S. economy, no longer has even one representative in the S&P 500. Coal’s investors have lost billions, a trend which has been most clearly illustrated by Peabody Energy’s downfall; the company’s 93% drop in share value resulted in a loss of $16 billion for investors, according to IEEFA.

PERA has holdings in the coal industry, which has already undergone a massive wave of bankruptcies. Statistics show that over the next 35 years, the coal industry can expect to see annual returns reduced by 26% to 82%. Similarly experts project that oil and utilities are projected to see expected median returns fall by 38% and 60% respectively over the same time frame (Source: Mercer, Climate Change Investment Risk Management: A Guide for U.S. Public Defined Benefit Plan Trustees, 2016).

PERA also has holdings in Exxon Mobil Corporation, which reflects declining stocks over the past five years. According to Seeking Alpha, shares have delivered a total return of around 1 percent annually over the last five years, falling far short of the S&P 500. At the same time, the company’s return on capital employed has fallen from over 25 percent in 2012 to 9 percent in 2017 (Source: Exxon Stock Not So Slick, May, 2018, Seeking Alpha). Exxon also had to borrow money to pay out dividends and buy back shares (Source: Warning: Exxon Mobil may be in irreversible decline, CNN Money, Oct, 2016). According to the Wall Street Journal, despite billions of dollars in spending cuts and a modest oil-price rebound, Exxon Mobil, Royal Dutch Shell, Chevron, and BP didn’t make enough money in 2016 to cover their costs.

Could these trends continue?

Leading global index provider MSCI found that fossil free funds outperformed conventional ones by 1.2% during 2010-2017. Furthermore, S&P 500 Low Carbon Index returns are steadily increasing since 2012. Lost revenue from oil and gas assets is probable as demand declines and new competitive alternative technologies emerge, like electric vehicles and other renewables with strong potential in Colorado such as wind and solar.

Mercer Investments, a leading adviser of institutional investors including pension funds, evaluated several climate change scenarios and found that climate-related financial risk would affect investment performance. According to Moody’s Investors Service, the oil and natural gas industry faces significant credit risk due to carbon-related global policy initiatives, changing consumer preferences and disruptive technological advancement. New regulations and policies designed to reduce greenhouse gas emissions will increase the operating costs and in turn place downward pressure on the profitability of carbon intensive sectors and industries.

According to The Guardian, New Yorkers could have made an extra $4,500 each if fossil fuel divestment had occurred earlier. In fact, over $5 billion could have been generated if the transition to investing in renewables had happened sooner (Source: The Guardian, 2016). Over the last ten years, CalPERS (California’s state pension fund) lost approximately $16.2 billion or $8,526/beneficiary due to poorly-performing fossil fuel stocks, while CalSTRS lost $24.3 billion or $26,016/beneficiary. And the worst is yet to come: A Cambridge University report suggests that pension funds could suffer permanent losses of more than 25% within five years, in the event of a climate-related market shock (Source: See Unhedgeable Risk, Cambridge University 2015, p. 7).

ETHICAL CONCERNS

Fossil fuels are a main driver of climate change – and simply put we need to reduce greenhouse gas emissions as quickly as possible. Fossil fuel divestment can help to preserve a safe climate, fill the renewable energy investment gap. The fossil fuel era is ending, and must be replaced by a cleaner, renewable energy economy.

Fossil fuels are also at play in other major catastrophes such as air pollution, contaminated drinking and groundwater from fracking, negative public health impacts, exposure to toxic chemicals, and accidents including spills, fires and explosions. In Colorado, there have been 13 explosions and fires at oil and gas sites since the tragic Firestone explosion last spring. Furthermore, fracking operations use billions of gallons of freshwater, of particular concern in our state where drought is an ongoing threat.

In 2016, PERA increased its holdings by 1200% in Extraction LLC, an oil and gas company that is proposing some of the most controversial projects in Colorado, such as fracking less than 1,000 feet from the Bella Romero 4th-8th grade school and playground in Greeley. Colorado public money should not be endangering public health and safety.

Furthermore, companies like ExxonMobil (who PERA has investments in) are under investigation for having deliberately misled the public, shareholders and governments over climate change science and climate risk for decades in order to protect their profits.

While it is true that we all live in a fossil fuel era, it needs to come to an end before more irreparable damage is done.

CLIMATE AND LITIGATION RISK CONCERNS

There is a growing number of lawsuits that seek billions of dollars in damages from the biggest contributors to climate change, which may significantly impact the value of oil and gas companies and investment returns for PERA over the long term.

According to Client Earth, pension funds are at an increasing risk of litigation if trustees fail to develop their approach to climate risk in line with improving data and market practices. Lawyers have already warned some of the UK’s largest pension funds of this risk. Fiduciaries have an obligation to act reasonably when making investment decisions for the funds they oversee.  If this fiduciary responsibility is violated, those managing pension funds may be held personally liable for actions or inactions that harm the beneficiaries.

ClientEarth lawyer Joanne Etherton said: “As some of the biggest pension schemes in the UK, these schemes represent the retirement income of a large number of people, making it crucial that they step up their actions on protecting and future-proofing members’ pensions. Trustees’ legal duties are not static and a court would look to the evidence available and how their peers are responding in determining whether they are in breach – in short, legal duties on climate risk are evolving.”

The scientific and international communities have come to the overwhelming consensus that burning fossil fuels is causing climate change.  Most people who have studied this problem with an open mind have concluded that the only way to prevent profound human suffering on a global scale is to transition from fossil fuels to renewables, and this transition is in process and growing quickly.  In this context, it is reasonable to expect that the fossil fuel industry will experience a significant decline in the near future, as has already happened in the coal industry. Fiduciaries who have retained exposure to the fossil fuel industry when this happens will fall under heavy scrutiny.

According to a global study, climate litigation cases are growing rapidly, with U.S. lawsuits the most numerous.  The study found that the number of lawsuits involving climate change has tripled since 2014, with the United States leading the way. Researchers identified 654 U.S. lawsuits—three times more than the rest of the world combined. Many of the suits, which are usually filed by individuals or nongovernmental organizations, seek to hold governments accountable for existing climate-related legal commitments. The study was done by the United Nations Environment Program and Columbia University’s Sabin Center for Climate Change Law.

Rep. Emily Sirota and co-sponsor Rep. Chris Hansen have introduced a bill focused on the need for Colorado’s State Pension Fund, Public Employees Retirement Association (PERA), to assess climate-related financial risk.  More info on the bill: HB19-1270

Proposed Bill Overview and Summary: This proposed bill moves PERA to assess climate-related financial risks through the undertaking of a robust climate-related financial risk study.  The bill requires the board of trustees (board) of the public employees’ retirement association (PERA) to retain a firm with experience in public sector pension plans to conduct a study to analyze any climate-related financial risk to the total assets of PERA (fund). The board is required to administer a competitive selection process to solicit unbiased and independent third-party firms with the necessary credentials to bid for the study and to enter into a contract with the selected firm.

What would a climate-related financial risk study accomplish? The study will conduct a comprehensive analysis of the climate-related financial risk of PERA’s public market portfolio, and the exposure of the fund to long-term risks. The study will also assess the methods and results of PERA’s engagement related to climate-related financial risk with companies that are the most carbon intense, such as utilities, and oil and gas producers within the fund. The board will be required to deliver a report to the general assembly detailing the findings of the firm’s analysis by July, 2020.

*Climate-related financial risk refers to a set of conditions caused by both the physical impacts of climate change and the regulatory, technology and litigation responses to the global effort to transition to a low carbon economy which will likely impact assets, either depress or destroy the value of fossil fuel assets, and lead to declines in investment returns.

Why is this important now? What general trends are at play?

The energy sector was solidly in last place in the S&P 500 in 2018, and second to last place in 2017. Profits have dropped, cash flow is down, long-term debt loads are rising and growth opportunities are limited. Investment risks are also mounting, as are the number of lawsuits seeking billions of dollars in damages from the biggest contributors to climate change, which may significantly impact the value of oil and gas companies and investment returns for the fund.

In light of these trends, the proposed study will address whether PERA is adequately meeting its fiduciary duty & addressing investment risks and projected losses around the likelihood of stranded assets – fossil fuels that will become unburnable in the wake of technological advancements in renewable energy coupled with global commitments to curb climate change. The study will consider possible paths forward in considering investments in an urgent era of climate risk.

Are other pension funds concerned about climate related financial risk? Yes. According to a report issued in 2018 by Arabella Advisors, a philanthropy services firm, 61 pension funds worldwide — including the New York City pension funds, which hold $189 billion in assets — have committed to divesting from fossil fuels since 2016, bringing the total number of pension funds that have joined the movement to 144. Some research indicates that fossil fuel-free investments could offer better returns than conventional ones, though other experts say that fund performance will depend on a variety of market factors.

Is there anyone in Colorado working on this issue? Yes. There is a growing coalition of PERA members, beneficiaries and Colorado taxpayers who are calling on PERA and the Colorado General Assembly to responsibly address climate-related financial risk and take action to minimize the impacts of climate change on the state and pension fund. You can learn more at www.FossilFreeCoPERA.org. These efforts align with the accelerating divest-invest movement, which accounts for over $8 Trillion in combined assets already divested from fossil fuels over the past five years.

Key points

• • While PERA may already be reporting on elements requested in the proposed study, I’m calling for an even more robust analysis of PERA’s holdings, in particular fossil fuel holdings.
  • PERA should consider the long-term soundness of its investments, in particular in the context of fossil fuel investments and long-term climate risk that may pose a threat to the fund’s portfolio. This study will ensure that PERA is taking its analysis to the next level.
  • As a member, I am concerned that PERA may not be adequately taking into consideration the short-term and long-term implications of climate risk in assessing the fund’s portfolio.
  • PERA should be addressing investment risks and projected losses around the likelihood of stranded assets, fossil fuels that will become unburnable in the wake of global commitments to curb climate change and shift to cleaner, renewable energy.
  • What just happened in Colorado per Proposition 112 and now HB19-181 points to how new regulations will impact fossil fuel investments in the future. PERA should be addressing these risks as they relate to the fossil fuel industry now in order to adequately protect pensions in the long-term.
  • In light of these concerns, I support this study which will assess investments in companies that are the most carbon intense, such as utilities, and oil and gas producers within the fund. This study presents an opportunity to take PERA’s analysis to the next level.
  • PERA should be thoroughly assessing its holdings in the rapidly changing fossil fuel industry – and the study proposed will meet this goal. Consider the coal industry, which PERA has holdings in. The US coal industry has already undergone a massive wave of bankruptcies. Statistics show that over the next 35 years, the coal industry can expect to see annual returns reduced by 26% to 82%.  Similarly experts project that oil and utilities are projected to see expected median returns fall by 38% and 60% respectively over the same time frame. (See Mercer, Climate Change Investment Risk Management: A Guide for U.S. Public Defined Benefit Plan Trustees (2016).) Coal had its lowest return on assets in 2016: -17.54% (average return on assets is .85%) – from CSI Market.  
  • PERA should also be looking at its holdings in companies such as Exxon Mobil Corporation, which reflects declining stocks over the past five years. “Exxon’s stock is grossly under-performing, and has been for years. Shares have delivered a total return of around 1 percent annually over the last five years, falling far short of both the S&P 500 and its Big Oil peers. At the same time, the company’s return on capital employed has fallen from over 25 percent in 2012 to 9 percent in 2017.” (Source: Exxon Stock Not So Slick, May, 2018, Seeking Alpha); Furthermore, according to a 2016 report, annual revenue is down 45% over the past five years, and long-term debt has quadrupled to nearly $30 billion. Exxon had to borrow money to pay out dividends and buy back shares (Source: Warning: Exxon Mobil may be in irreversible decline, CNN Money, Oct, 2016)
  • Mercer Investments, a leading advisor of institutional investors including pension funds, evaluated several climate change scenarios and found that climate-related financial risk would affect investment performance across asset classes.
  • According to Moody’s Investors Service, “The oil and natural gas industry faces significant credit risk due to carbon-related global policy initiatives, changing consumer preferences and disruptive technological advancement.”
  • According to the Wall Street Journal, despite billions of dollars in spending cuts and a modest oil-price rebound, Exxon Mobil, Royal Dutch Shell, Chevron, and BP didn’t make enough money in 2016 to cover their costs.
  • New regulations and policies designed to reduce greenhouse gas emissions will increase the operating costs and in turn place downward pressure on the profitability of carbon intensive sectors and industries.

• Given the above trends, a more comprehensive and unbiased, third-party study of climate-related financial risk is not only prudent and forward thinking, but also in line with fiduciary duty.

• • I’m also concerned about the growing number of lawsuits that seek billions of dollars in damages from the biggest contributors to climate change, which may significantly impact the value of oil and gas companies and investment returns for the fund.
  • Lost revenue from oil and gas assets is probable as demand declines and new competitive alternative technologies emerge, like electric vehicles and other renewables with strong potential in Colorado such as wind and solar.  
  • Leading global index provider MSCI found that fossil free funds outperformed conventional ones by 1.2% during 2010-2017. Furthermore, S&P 500 Low Carbon Index returns are steadily increasing since 2012.
  • The energy sector was solidly in last place in the S&P 500 in 2018, and second to last place in 2017. Profits have dropped, cash flow is down, long-term debt loads are rising and growth opportunities are limited.
  • Fossil fuel investment risks are mounting, as are the number of lawsuits seeking billions of dollars in damages from the biggest contributors to climate change, which may significantly impact the value of oil and gas companies and investment returns for the fund.

• Again, given the above trends, a more comprehensive and unbiased, third-party study of climate-related financial risk is not only wise, but also ensures that the greatest care is being taken with regard to the long-term safety and security of Colorado pensions.

For Further Reading:

Divestment 101: 10-point FAQ primer on a new mindset around energy sector holdings

Carbon Bubble Could Spark Global Financial Crisis

IEEFA Update: 2018 Ends with Energy Sector in Last Place in the S&P 500

In Response: Colorado’s PERA Shouldn’t Bank on the Future of Oil and Gas