California Passes Bill To Force Two Biggest Pension Funds To Divest From Coal
The California State Assembly has passed a bill, SB 185, which will force the state’s two largest pension funds to divest their holdings in thermal coal.
SB 185
The bill, which was passed on Wednesday by a vote of 47-27, requires the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to divest their holdings in companies that receive at least half their annual revenue from coal mining.
California assemblyman Rob Bonta presented the bill before the assembly, and said in a read statement that SB 185 “aligns our investment policies with our values.”
“According to CalPERS, its portfolios currently contain approximately 30 coal mining producing companies valued at $167 million,” Rob Bonta continued on the assembly floor, reminding the assembly that CalPERS is the United States’ largest public pension fund, with assets totaling $295 billion.
If signed into law by Governor Jerry Brown, SB 185 — also known as “Investing with Values and Responsibility” — will make California the first US state to legislate fossil fuel divestment, a model many organizations (including Fossil Free California) hope other states and nations worldwide will follow.
“Coal is losing value quickly and investing in coal is a losing proposition for our retirees; it’s a nuisance to public health; and it’s inconsistent with our values as a state on the forefront of efforts to address global climate change,” said Senate President pro Tempore Kevin de León, and author of the bill. “California’s utilities are phasing out coal, and it’s time our pension funds did the same.”
The bill was approved on April 13 by the California State Senate Public Employment and Retirement Committee after it was proposed by de León, and has since gone through several other California administrations. In April, the boards of both CalPERS and CalSTRS voted to take no position on SB 185, leaving it up to the legislature to decide.
Too Little, Too Late?
This comes as little surprise, considering the recent report published by Trillium Asset Management, which found that, together, CalPERS and CalSTRS lost over $5 billion in the last financial year due to investments in the world’s largest 200 oil, gas, and coal companies (by carbon reserves).
“These freshly incurred losses starkly demonstrate coal’s financial risk, and illustrate the potential benefits of SB 185 to California pensioners.” said Will Lana, Partner at Trillium Asset Management.
Speaking via email, Ricardo Duran, the spokesman for CalSTRS confirmed that “CalSTRS did not take a position on the bill.”
“We are assessing the level of thermal coal that meets the legislative definition and believe it may be approximately a $40 million holding,” Ricardo Duran continued. “CalSTRS’ preference is always that of engagement.”
“Even before passage of the bill, CalSTRS began its research to evaluate the portfolio for thermal coal holdings. The process began at the Investment Committee’s direction in April 2015. This was the first of a multi-step process to determine the impact of possible divestment. This assessment is expected to take 4 to 8 months.”
Whether any such assessment reaches the same conclusions as those made by Trillium is unclear — especially considering that Trillium revealed that CalPERS and CalSTRS lost a combined $840 million from stock investments in the world’s largest coal companies alone, not to mention other fossil fuel investments. The authors of the report also noted that “the review indicates a 25% decline in the pension’s coal stocks” over the past year.
“Any effort to remove thermal coal from the portfolio must first meet the board’s standard of fiduciary care,” explained Ricardo Duran via email. “CalSTRS’ first priority is, and always has been, safeguarding the financial futures of our members and their families, and to make decisions solely in the interest of our members and their beneficiaries.”
A Positive Response
The news of SB 185’s passing has garnered a lot of approval from those in and around California.
“I wrote the first-in-the-nation resolution calling for fossil fuel divestment, which passed my Ventura County Democratic Party back in 2013, and was ultimately passed by the California Democratic Party this spring,” said RL Miller, cofounder of Climate Hawks Vote and Chair of the California Democratic Party’s environmental caucus. “Though SB 185 is narrower, as it only calls for coal divestment, the work within the state’s Democratic Party has enlightened a lot of activists to the need for full fossil fuel divestment, and SB 185 is the right bill at the right time. Once passed, I expect the bill to unleash a flood of actions in other states with similar bills.”
“Addressing the climate crisis is a moral imperative,” said Jim Miller, member of the American Federation of Teachers, Local 1931 VP/Chair SD-Imperial Counties Labor Council Environmental Caucus. “Although much more still needs to be done, SB 185 and the Climate Leadership Package are an important step in the right direction if we are serious about saving our children’s future.”
Image Credit: via Fossil Free
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“Coal is losing value quickly and investing in coal is a losing proposition for our retirees; it’s a nuisance to public health; and it’s inconsistent with our values as a state on the forefront of efforts to address global climate change,” said Senate President pro Tempore Kevin de León, and author of the bill.
“California’s utilities are phasing out coal, and it’s time our pension funds did the same.”
No wonder non of the presidents of the UC system don’t know of the name “Nikola Tesla”, nor does 99% of their staff. The all have a big chunk of coal in their mouth and oil for brains.
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Divestment always gives me a double feeling. It’s a nice gesture with clear symbolic value, but there is a big problem with the idea: if a reasonably ethical investor sells his shares in a fossil fuel company, these shares get bought by an investor with fewer ethical qualms. And the less ethical the shareholders (owners) of a business are, the more environmentally damaging its practices will become.
For coal I’d still argue for divestment, if only because not doing so would go against a fund’s duty to achieve the highest possible returns for its clients. The coal industry has no future and share prices are tanking.
But look at an oil company. These still have a place in a greener future through their (petro)chemicals businesses, which underpin even the greenest of industries like renewable energy. Their energy (fuel) business, on the other hand, should be phased out ASAP.
The ethical investors in an oil firm could plausibly amass enough shares to push such a business in that more sustainable direction. If they sell their stake to investors that care only about short term profit, the oil firms will have an incentive to keep investing heavily in their unsustainable but highly profitable fuel arms.
Interesting point. I tend to see the real effect of divestment not so much as financial losses (like you said, someone else will buy the stock), but more as bad PR for these companies. As long as the news keeps talking about groups calling for divestment it’s eroding the social and political capital of the fossil fuel industry.
Then again, how damaging is bad PR to a business that mostly sells business to business (as companies in the energy sector do)? Also, your typical mining or oil giant is already at rock bottom as far as image goes.
To us, maybe. The general public probably doesn’t see it that way. Tobacco companies are a good example of where the fossil fuel industry needs to be!
I hope you don’t mean making serious bank. Unfortunately Tobacco is still doing well. Smoking is down now, but there’s still a lot of smokers outside the US. Coal will continue to go down – then I’m sure we’ll start using in situ retorting and coal seam methane once natural gas reserves drop. Here’s two of the biggest tobacco companies in the US stock since the 1998 federal court case:
The effect on share prices is all a matter of scale: if enough folks divest, share prices will drop. And at some point, that becomes a real problem for a company.
It’s essential that existing coal plants are closed quickly. Once they’re closed they are too expensive to restart. Gas and ICE transportation needs to be coming into the cross hairs also.
How much does one shareholder affect the operations of any company?
How ethical can a coal company be?
Institutional shareholders (pension funds, sovereign wealth funds etc) hold several percent of the shares in even the largest companies in the world.
Retail investors like you and me have less influence, but can (and often do) band together to form powerful voting blocks.
As for coal: it can’t, I said as much. Coal has no major uses other than generating dirty power and heat. Oil and gas, on the other hand, have a wide range of uses besides energy generation that are both environmentally and economically sound. Chemicals, mostly.
If an oil business like Exxon gave up exploration and fuel refining today, it would still be a profitable (and much more sustainable) business. It has a vast and highly innovative chemicals arm and enough existing oil wells to keep it going for centuries if it wants to.
Proxy Vote is a great concept, as are making shareholder resolutions.
Anything less than 10% ownership is ignored, then there are the other 11 people on the board who are bought off. I don’t see the ethic of mining and burning coal when it pollutes, causes health problems then buries people in toxic coal ash.
Ever been to a shareholder meeting? Clearly not.
It’s rare for large businesses to have any shareholders that have more than 10% of the shares. And yet, activist investors have often been able to turn around or even break up entire businesses with under 5% of shares.
The reason? If the big shareholders all have about 5-ish percent of shares, you can simply take ten people to lunch and persaude them that your vision works.
What a board has got to do with it is unclear to me, please do explain?
And again, for the third time: I am not suggesting there is ethical coal. Do you actually read what someone writes before commenting?
Uh?
The ones who sell, sell at a loss already.. divesting is just realizing the losses that have already been made by hanging onto these stocks for so long.
Who buys those papers for such a low price?
Who cares.. the company is dead in the water anyway with the market capitalization taking a nose dive. No one sane (and cold hard calculating) is throwing good money after bad.
So what is that polluting company gonna do, where does it get it’s money from to stay in biz?
You know what I worry about?
All these years those companies created ‘shareholder value’ and ‘dividends’ and those got paid out and are safe and sound with those former – now ethical-turned – investors, who probably put that capital into RE or something else.. who knows.
Once the company is hollowed out and files for chapter 11, who is going to pay for all the remediation works?
Right.
Now you can start to worry.
Divestment can drive down stock prices. Lower stock prices means that it’s harder for the company to raise capital for expansion or resource development.
So far, divestment has not seriously affected stock prices. And issuing new shares is an uncommon form of finance for large, established firms anyway; they can issue bonds or borrow from banks at fairly low interest rates.
One would probably want to do a careful analysis of the crash of US coal stock prices before declaring divestment has done nothing.
Borrowing money and selling bonds is not as easy if your company has lost a lot of its book value.
I would imagine that coal stocks crashed not because of moral divestment but because people expect coal to do poorly.
You think divesting might make some news and lower expectations for those companies whose stock are being sold off?
Coal is not sold to retail customers, it’s a purely business to business affair. And the businesses that buy lots of coal (energy and metals giants, mainly) tend to not to be that concerned with their image.
Coal’s demise will be driven mainly by the massive imbalance between a growing supply and falling global and national demand. And demand is not falling because of the PR issues of coal, but simply because it is uneconomical relative to gas and renewables.
No, little coal is sold to retail customers any longer, but businesses made decisions based on expectations based on how they view the prospects of other companies. Banks that are watching divestment and falling stock prices are likely to be reluctant to make loans, bonds will be harder to sell. Outside investors will be hesitant to pump in money for expansion. Individuals will be less likely to purchase stock if the stock has a history of price collapse and is ‘blacklisted’ by the largest investors.
The stench of death….
It might impress me more if California divested from oil and banned fracking and West Virginia divested from coal.
California is a center of Chevrons major oil refineries.
Quick stock tip for everybody. Short every coal company currently being invested in by CalPERS.
Calpers had been negligent…I’ve listened to their bullshit about losing a voice for change in dirty energy companies…divest totally you friggin idiots!
I don’t know. I really think retirement plans should be purely market cap weighted. Its really stupid that they have a manager or something making these decisions. Cap weighting is the only logical way to invest retirement funds.
If you use a purely market cap weighting, you will by definition get the average market return.
Since California (and most other states) base their calculations on far higher real rates of return than the market average over the last decade, they have to try active investing and hope that they can magically consistently beat the market and even the best hedge fund managers in order to achieve rates of return in the region of 6% and over.
Better would be to simply curb overly generous defined benefit schemes and raise contributions, but that takes courage. Several European countries did this (including ones like Sweden known for generous welfare policies).
Haha. Them wanting to do better than the market return is like me trying to flap my arms and fly. Its actually impossible to consistently beat the average**. Once you add in the cost of active investing it gets even worse.
**unless you happen to be a senator/rep on an important committee.
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Do any retail electricity suppliers in California offer supplies that are 100% renewable or off-set for zero carbon emissions?