CalPERS and CalSTRS Under Pressure to Divest From Fossil Fuel Investments

Recently CalPERS and CalSTRS, along with many other pension systems, have been under pressure to divest from fossil-fuel-related investments.

A recent article in the Calpensions blog reported that "CalPERS is stepping up its ESG [Environment, Social, and corporate Governance] investment program, despite evidence that funds based only on environmental, social and corporate governance strategies have tended to under-perform." CalPERS has long been a leader in ESG investment strategies, having divested from most tobacco-related investments in 2000. Critics of CalPERS tobacco divestment policy have pointed out that the pension system has "lost" some $3.6 billion since the policy was introduced.

The "loss" from not investing in tobacco stocks arises from the fact that these stocks have dividend yields that are approximately twice those of the average Dow 30 or S&P 500 stock. However, the criticism of pension fund divestment from tobacco stocks does not take into account the health care costs associated with tobacco use. Much of the extra health care costs come in the form of higher premiums for employer-paid health insurance, which makes it more difficult for employers such as the CSU to meet their pension contribution obligations, and for active and retired employees to cover their share of health insurance costs.

Much the same battle now is taking place over pension fund divestment from fossil fuel investments.

A state law passed in 2015 required both CalPERS and CalSTRS to divest from most coal investments, and by 2017 both systems essentially were out of thermal coal investments. Again critics complained that the systems "lost" money on account of these decisions, because the Trump Administration's actions reducing environmental restrictions on coal temporarily boosted the fortunes of the coal companies. However, rapid declines in the cost of competitive energy sources such as cleaner natural gas and clean renewables including solar and wind are pricing coal out of the market.

The scientific evidence connecting the burning of fossil fuels to long-term climate change has reached the point where it essentially is irrefutable, and estimates of the time remaining to make changes in our energy use that will prevent irreversible climate change continue to decrease. This has prompted activist groups such as Fossil Free California to call upon CalPERS and CalSTRS to divest from all investments in fossil fuels as a means of hastening the conversion to renewable energy sources. In addition, California Treasurer Fiona Ma, who is on the boards of both CalPERS and CalSTRS, has called for CalSTRS to completely divest from fossil fuel stocks.

At a recent CalSTRS investment committee meeting, after a series of public comments urging the fund to divest from fossil fuel investments, the Chair of the CalSTRS investment committee said that "CalSTRS understands that climate change poses material risks to humanity, the world economy and our investment portfolio" .... "CalSTRS, as part of a global coalition of investors, is currently engaging with the major fossil-fuel companies to advance a transition to a low-carbon economy."

While CalPERS appears to be moving more slowly to address investment issues related climate change, it has developed a sustainable investments program that includes addressing climate change.

For the moment climate activists are focusing their energy on CalSTRS, but as the effects of climate change become more and more pronounced in California, and as those effects become more costly for local and state government to address, the pressure on CalPERS to make investment decisions that hasten the transition to a carbon-free economy will mount.