All the leaves are brown (all the leaves are brown)
And the sky is gray (and the sky is gray)
I've been for a walk (I've been for a walk)
On a winter's day (on a winter's day)
I'd be safe and warm (I'd be safe and warm)
If I was in L.A. (if I was in L.A.)
The Mamas and the Papas (1965)
UNSPECIFIED - CIRCA 1970: Photo of "The Mamas and the Papas" Photo by Michael Ochs Archives/Getty ... [+]
You know how dreams can be. Vivid. Psychedelic. Exciting. Inspiring. Contradictory. Upsetting. Disturbing. Terrifying. Perplexing.
Perplexing because they are not bound by constraints of any kind. Characters change through shape shifting. Time and space become multidimensional, fluid, reversible, and intersectional. Logic as we know it does not exist. In short, each dream has its own unique and self-defined indelible reality to the dreamer.
This past New England winter weekend felt like a dream to me. The trance came across me when I stumbled across Fossil Free California (FFCA). On its home page in bold black cap letters on a striking yellow background it proclaims:
CALIFORNIA’S PUBLIC PENSIONS ARE FINANCING CLIMATE DESTRUCTION
Just below that in an eye-catching dark orange background it states that:
CalPERS & CalSTRS have $42 billion in fossil fuel investments.
The page further notes that “Pension funds are among the largest institutional investors in fossil fuels. CalPERS and CalSTRS, which serve California’s state workers and public school teachers, have more invested in fossil fuels than any other public pension in the country.” And because of this, “For the past seven years we’ve been building a powerful campaign to hold these pensions responsible for their complicity in the climate crisis.”
CalPERS is the largest U.S. state pension fund. At the end of last year it had $442.2 billion in assets under management. One scene in my dream was the “Divest CalPERS” campaign.
CALPERS FUNDS CLIMATE CHAOS
CalPERS is called “the nation’s #1 funder of the fossil fuel industry” since it “provides over $27 billion to fossil fuel corporations that are building coal plants, oil pipelines and fracked gas wells.” Actually, that’s not how it works. Owning $27 billion in stock is not directly funding for these activities. But why let financial reality get in the way of throwing an emotional rhetorical punch ?
I was confused. Is this the same CalPERS that, along with the NGO Ceres, received a letter from Rep. Jim Jordan (R-OH), co-founder of the Freedom Caucus, warning them of possible antitrust violations because of their involvement in Climate Action 100+ because it is “stifling investments in oil and gas?” (Good luck, Jimmy, with an antitrust lawsuit against a pension fund and NGO.) Climate Action 100+ is “an investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change” comprised of 700 asset owners and asset managers representing $68 trillion in assets under management who are focused on 166 companies that represent 80 percent of global industrial emissions.” Its focus is engagement, not divestment.
Woman In a Transparent Dress and Headdress 3d illustration 3d render
A wraith, stylishly dressed in a $4,980 two-shaded green silk chiffon Gucci dress, whispered to me, “Yes, Bob, and this isn’t a dream. “ Oh, and while I was disappointed not to even be copied on this letter, I wrote a reply offering to be friends with him. Haven’t heard back yet. But since he’s now Chairman of the House Judiciary Committee I realize he probably has his hands full preparing for some exciting ESG Hearings!
The dream scene rapidly shifts to “Divest CalSTRS.” CalSTRS is the second largest pension fund in the U.S. and the largest education-only pension fund in the world. At the end of last year it had $302.1 billion in AUM.
CALSTRS FUNDS CLIMATE CHAOS
And pretty much the same language as for CalPERS saying that it “is using teachers’ retirement savings to finance the fossil fuel industry” and “provides over $15 billion to fossil fuel corporations that are building coal plants, oil pipelines and fracked gas wells—that’s more than any other public teachers’ pension in the country.”
Before my dream-addled brain can take this in that same wraith appears, although this time in a $6,100 beige cotton gabardine mid-length belted Dior dress. She whispers in my ear, “Yes, Bob, this is the same CalSTRS that was one of the leading investors in Engine No. 1’s campaign regarding ExxonMobil.” The campaign former Vice President Mike Pence railed about that led to three “environmentalists” being placed on the board who ‘”are now working to undermine the company from the inside.”
Of course, as I’ve explained in “Looking At Climate Change Through The Eyes Of ExxonMobil,” the reality is nothing like this. The company is earning record profits—$56 billion in 2022 ($6.03 or million per hour or $173,135 per minute), the highest ever of any Western oil company. At yesterday’s market close it had a peak market cap of $477.8 billion, making it the 11th largest company in the world by market cap. It is also investing billions of dollars for the energy transition. Not as fast as I’d like it to be, but that’s not my call. That’s up to the company’s shareholders, board of directors, and senior management. And perhaps it makes Mikey and the rest of his crowd feel better to know that FFCA produced a scathing report on the 2022 proxy voting season about how CalPERS and CalSTRS failed to vote for shareholder resolutions on climate?
Crossfire
My dream is now a nightmare as I find myself caught in the climate crossfire from these politically-motivated attacks on the California pension funds. This morphs into a disembodied state of hallucinogenic U2 vertigo. (Remember that The Mamas and the Papas was a ‘60s rock group.) I grab my chair to reassure myself that I’m not dreaming but am awake in the corporeal world. The chair is there. What a relief!
For the sake of my mental health I decide I needed to determine if there is a reality that could keep me from falling into a permanent state of semiconscious delirium. I figure that rather than dream about what others have to say about CalPERS and CalSTRS, how about checking out what they say for themselves? Turns out they are both saying the same thing, but I’ll start with CalSTRS given their Engine No. 1 apostasy.
CalSTRS is very clear about its perspective on fossil fuel divestment: “CalSTRS acknowledges there are interested parties and stakeholders calling for fossil fuel divestment. Divestment is a last resort action that can have a lasting negative impact on the health of the Teachers’ Retirement Fund, while also severely limiting our ability to shape corporate behavior for long-term sustainable growth.” Much to the great unhappiness of FFCA, it is not boycotting fossil fuel companies.
But, perhaps to the unhappiness of Mr. Pence and many Red State politicians (now too numerous for me to name), it is also aware of the challenges climate change presents to ensuring its portfolio returns for its beneficiaries: “We share this sense of urgency regarding climate change and are focused on understanding and responding to the risks it presents both to the CalSTRS Investment Portfolio and to sustainable economic growth. That’s why it’s imperative we continue to use our influence with policy makers and companies—including the fossil fuel industry—to help ensure an equitable, prosperous and low-carbon world for future generations.”
Text Fiduciary Duty on notepad in front of an office desk
Unlike politicians who can utter whatever nonsense they want, CalSTRS has a fiduciary duty to its beneficiaries. It is focused on earning money, not votes. This means that it takes a very practical perspective on fossil fuels noting:
· Diversification: “Diversification is an important principle in long-term investing to reduce risk and maximize returns by allocating investments among various financial instruments, industries, regions and sectors.” Conclusion: Stay invested in fossil fuels at the appropriate price and in the appropriate amount.
· Global fossil fuel demand: “A rising global population and increasing economic progress in less developed countries and emerging markets are historically correlated to increases in energy demand. The most trusted economic models, such as the International Energy Agency, indicate the world will continue to rely on some forms of fossil energy for several decades, despite significant increases in renewable energy.” Consistent with this, the “Sixth Assessment Report” of the Intergovernmental Panel on Climate Change” (IPCC) states that meeting the 1.5°C will require reductions in coal by 95%, oil by 60%, and gas by 45% by 2050. So not even the IPPC is saying there will be zero fossil fuels by 2050. Conclusion: While we need to get to a net-zero world it will still be a world with fossil fuels.
· Scaling of emerging technologies: “Biofuels, hydrogen use, nuclear, energy storage capabilities, and carbon capture and removal are among some of the emerging technologies that a low-carbon future depends on... As such, investors are engaging fossil fuel companies to use their technical expertise, personnel, existing infrastructure, capital and scale to support the realization and adoption of these essential technologies.” Conclusion: Fossil fuel companies have an essential role to play in the energy transition and investors can play an important role in engaging with them to do so—for the benefit of the long-term returns of these companies and their shareholders.
· Geo-politics and the role of state-owned oil and gas companies: “The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization that includes members from some of the world’s most oil-rich countries. When talking about divesting from ‘big oil’, understand that the majority of the world’s oil supply is produced by state-owned enterprises, which are predominantly owned by countries rather than institutional investors.“ National oil companies account for 56.0 percent of reserves and 45.6 percent of production compared to 12.3 percent and 13.9 percent, respectively, for the Western oil majors. Conclusion: Two, really. First, divestment from Western oil and gas companies isn’t going to change the behavior of national oil companies. Second, we need our own oil and gas for energy security. Who wants to be the next Germany?
· Climate change affects all sectors of the global economy: “While the burning of coal, natural gas, and oil for electricity and heat is the largest single source of global greenhouse gas emissions, representing 25%, another 24% comes from agriculture, forestry and other land uses...A narrow focus on the fossil fuel industry only captures a portion of the much larger carbon emissions challenge and detracts from developing a broader understanding of how the low-carbon transition affects the global economy and the fund’s investment universe.” Conclusion: Or, rather, a question. What are we going to eat (even if we’re vegan) if we divest from agriculture, forestry, and other land uses?
· Final reflections: “CalSTRS has the responsibility to continue to take a holistic approach to addressing climate-related risks across our entire portfolio. Divestment from fossil fuel companies fails to address the myriad issues that contribute to climate change.” And as Professors Shivaram Rajgopal and Jing Xie and I have shown, exclusion and divestment have no economic impact on “sin stocks,” although sin and virtue are in the eye of the beholder when it comes to fossil fuels. Conclusion: Engagement, not divestment, is the best way to generate long-term returns for beneficiaries while addressing the challenges of climate change.
CalPERS also has a very clear policy regarding divestment. It is grounded in the fact that “As fiduciaries, our duty is to our members and their beneficiaries. This duty derives from the California Constitution requiring the Board to act ‘solely in the interest of, and for the exclusive purpose of providing benefits to, participants and their beneficiaries, minimizing employer contributions, and defraying reasonable expenses of administering the system.’” From this it follows that “As a government agency, CalPERS is sensitive to public policy issues, but divestment pits social responsibility against our fiduciary obligations.” Thus divestment conflicts with fiduciary duty since it leads to increased risk, losing voice (a “seat at the table”), and losing money.
Consistent with their fiduciary duty obligations, CalPERS and CalSTRS both opposed a bill introduced last year in the California Senate which would have forced them to divest from fossil fuels. This bill had the active support of NGOs like FFCA and Youth vs. Apocalypse. While the bill cleared the Senate on a 21-10 vote with nine abstentions, it was pulled in a hearing of the Assembly Committee on Public Employment and Retirement, which is chaired by Assemblyman Jim Cooper, D-Elk Grove.
(Original Caption) Peter Cushing returns from the grave in "Tales From the Crypt," 1972.
What is the takeaway from this form of self-therapy to reconcile my Climate Crossfire Nightmare? For all of the talk about how polarized America is becoming and how the people and their politics are in the red and blue states, I’ve found they actually have something in common. Politicians who are getting involved in something that is none of their business!
Of course, politicians should work to develop sensible public policies regarding the energy transition. This has been explained very well in an interview I did with Greg Goff, a former oil and gas CEO and board director at ExxonMobil (from the Engine No. 1 campaign, no less). For example, politicians can create incentives that influence how capital flows, like subsidies for renewable energy and putting a price on carbon.
Legislation requiring divestment of fossil fuels stocks is as senseless as legislation boycotting investors that are ostensibly boycotting fossil fuel companies—even though they aren’t. Disclosure by companies on material risks from climate are also important. This squarely falls within the remit of the SEC. Politicians also have no business deciding whether an issue is a material risk or not. As Dan Crowley (R) and I have argued, material risk disclosures should be distinguished from salient political issues.
Dreams are hard to remember and impossible to predict. But one can always wish for them. Here’s a wish for one of mine. I dream that politicians in both red and blue states keep their ill-informed, ideologically-driven opinions out of the debate about fossil fuel investing and the energy transition. That they quit trying to introduce legislation that interferes with the ability of investors to exercise their fiduciary duty.
And, with that, I’m back to…
California dreamin' (California dreamin')
On such a winter's day (California dreamin')
On such a winter's day (California dreamin')
On such a winter's day
As I await a very cold New England winter weekend. The temperature in Boston could drop to -10F to -20F (-23C t0 -29C) on Saturday and break the record set in 1886.
