Should Investors De-Carbonize Their Portfolios?

Blog entry Jack Ehnes
Should Investors De-Carbonize Their Portfolios?

No doubt the introduction of proposed legislation included in Senate Bill 185, the Public Divestiture of Thermal Coal Companies Act, turns up the heat in the discussion on how investors might approach de-carbonization of their portfolios in response to climate change issues. If passed, this bill would require the CalSTRS and CalPERS boards to engage with thermal coal companies and, if consistent with their fiduciary duties, to divest from those thermal coal companies that are not transitioning to clean energy generation.

We sat down with Generation Investment Management Senior Partner, David Blood, who shared his views on thermal coal investments. This interview examines this issue from the perspective of an active sustainable investor. Keep in mind this video is not intended to reflect the views of CalSTRS.

In fact, CalSTRS’ actions around divestment must be carefully weighed in the context of our fiduciary duty to invest system assets in the best long-term interests of our members, retirees and beneficiaries with consideration of the best tools and approaches available where appropriate. What we find relevant regarding this discussion is that we are listening to all views on the subject of climate change risk, not only in regards to thermal coal, but those presented more broadly concerning fossil fuels.

Climate change and sustainable investing are formally recognized and addressed within the CalSTRS Investment Policy and Management Plan and then, more specifically, the CalSTRS Investment Policy for Mitigating Environmental, Social and Governance Risks. This policy and risk factor model guide the Teachers’ Retirement Board’s investment decisions.

In order to dive deeper into sustainable investment and climate change risk, guest speakers, beginning with former U.S. Vice President and Generation Investment Management Chairman, Al Gore, have been invited to speak with the Teachers’ Retirement Board throughout the year. The goal is to hear points of view from speakers who can both inform and challenge us on cutting edge ESG issues and risks such as climate change.

Along with the risks presented by climate change are also opportunities to shape the future. From our perspective, the ultimate goal is to manage prudently the investments within the fund in the best long-term interests of CalSTRS, which requires us to assess the risks that climate change presents to our portfolio and implement strategies that address these risks, while at the same time preserving our valuable natural resources. In the next five to 15 years, we expect that diversified investors will see a decrease in their exposure to fossil fuels along with an increase in exposure to alternative energy sources, but the rate at which this change will occur proves difficult to predict.

As we undertake this journey, we anticipate encountering a diversity of views. While consensus on issues such as engagement versus divestment may not be immediately solidified, it is clear that right now our economy is tilted toward carbon assets, or fossil fuels. For any investor of our size, those carbon assets are a substantial component in our portfolio of investments. What does that mean for an investment in a portfolio like ours? That is the question we’ll be exploring. 


Divestment from fossil fuels

Continuing to invest in fossil fuels is a form of investing in poor health for our and future generations. Fossil fuels and their production and transport are causing terrible degradation to our clean drinking water, air, and oceans. There should be little need to discuss this issue. DIVEST NOW! Invest only in sustainable energies.

Mr. Ehnes, you say in your

Mr. Ehnes, you say in your post that the timing of the transition away from fossil fuels is impossible to predict---and so it is, if it is dependent solely on "the market." But there's no uncertainty whatsoever that atmospheric carbon dioxide traps heat that otherwise would be reflected from the earth, and is doing so now to the tune of nearly a degree Celsius above pre-industrial temperatures (if we don't move fast to reduce emissions, we are on track for 4 degrees C--maybe more--and a planet that won't support an advanced civilization, by 2100). The more coal, the more CO2; the more CO2, the more heat; the more heat, the more (adverse) consequences for life on this planet. That seems like more than enough certainty for CalSTRS investment managers to work with. All they have to do is abandon some rather quaint and blinkered notions about what constitute the "interests" of those whose funds they are managing. The claim that divesting coal stocks will reduce returns significantly is highly contested and, many claim, a canard. But even if we assume that divesting from coal will have a minor impact in the near term, we should ask about the costs that might accrue if the stocks are retained and coal continues to be used on the current massive scale: Will the returns on coal/fossil fuel stocks in the short-term be adequate to compensate CalSTRS retirees who are forced to relocate due to coastal flooding, wildfire and dust storms, or because some parts of the country have become just too damned hot to live in? Will the returns on fossil fuel stocks now be enough to compensate them for skyrocketing future costs of food and fresh water? Will the returns be adequate to compensate retirees for having to watch, and explain to their grandkids the reasons for, one species after another vanishing forever (a recent piece published in Nature estimates that about a quarter of all species will be "committed to extinction" by 2050 if global warming is at about the middle of the range of predictions)? Will the returns on fossil fuel stocks earned in the near future be adequate compensation for living in a world convulsed by climate-related violence, forced migrations, and terrorism? CalSTRS and CalPERS are large enough to influence policymakers as well as other investors, and therefore they can help expedite the necessary transition away from fossil fuels--a transition which should not be driven by markets, but by rational human beings responding to the findings of the most comprehensive scientific inquiry in the history of the world. Our very survival, and certainly the survival of much of the world's beauty and abundance, may depend on it.

if you care about students, divest

As an educator, I make it my life's work to invest in students' futures. It is a shame that my retirement plan undermines all the hours of labor and dreams of success. Please divest, for the quality of my students' lives. It does no good for CalSTRS to exist for a better future while simultaneously funding forces which destroy health, growth, and ultimately life, itself.

Fossil Fuel Divestment

During this time in human history it is incumbent upon CalSTRS to divest their pension portfolio from fossil fuel investments. The health and welfare of the planet demands this action. Many other investment options are available which can maintain the integrity of the pension fund. Engagement with the fossil fuel industry is futile and only delays appropriate action. The business model of fossil fuel companies is set in stone and will not change through engagement.

Fossil fuel divestment

For too long now a false dichotomy was used to confuse the issue of what should be the appropriate action to take to address environmental concerns, along the lines of: What do you want, jobs or "the environment"? All along the heart of the matter was summarized by my economics professor, Douglas Dowd, when he taught me that without a healthy environment you can't have an economy, period. The reality is: the time to take action is growing increasingly short.

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