CalPERS and CalSTRS Know Fossil Fuel Divestment is a Recipe for Disaster
Instead of pursuing fossil fuel divestment, Sacramento should learn from states like Montana and Arkansas.
In the Golden State, the California State Teachers’ Retirement System (CalSTRS) and the California Public Employees’ Retirement System (CalPERS) are waking up to the fact that divestment hurts retirees and taxpayers.
CalPERS and CalSTRS are two of the largest pension funds in the country (by both membership and portfolio size). As California Senate Bill 252, a bill calling for fossil fuel divestment from public retirement systems in California, continues to move along in committee, CalPERS and CalSTRS have publicly opposed the bill because it conflicts with their duties as pension plan managers.
As ALEC VP of Policy Lee Schalk and I mentioned in our OC Register column last month, politicized investment strategies are a recipe for disaster. Research from Mike Edleson and Andy Puzder found that ESG investing yields lower returns than investing without political constraints. Additionally, researchers at Boston College found that ESG has failed to achieve its stated social goals.
Both CalPERS and CalSTRS realize that divestment hampers their ability to put members’ retirements benefits first, and the research shows divestment does not achieve its stated social goals. As CalPERS put it:
Divestment has little—if any—impact on a company’s operations and therefore does nothing to reduce greenhouse emissions. Forcing CalPERS to sell fossil fuel companies’ stock does not change the amount of gasoline people use to drive to work, to pick up children from school, or to deliver food to the grocery store.
Similarly, CalSTRS stated in their Bill Analysis of SB 252: “The board’s policy is to oppose legislation that restricts its ability to invest in specific areas because, as described in its divestment policy, such restrictions could impair the board’s ability to exercise its fiduciary obligation to act exclusively for the benefit of the retirement plan members and beneficiaries. Divestment carries the risk of adversely affecting an investment portfolio.”
CalPERS and CalSTRS administrators understand the disastrous effects of politicized investment strategies. Both have been constrained by politicized investment strategies since the early 2000’s and have left billions of dollars on the table in foregone investment returns because of it. These constraints mean liability growth outpaces asset growth and taxpayers are left to foot the bill.
Sacramento cannot count on taxpayers to foot the bill forever. According to the latest edition of the ALEC-Laffer Economic Competitiveness Index, Rich States, Poor States, California is ranked 45th in economic outlook. This is due to high income, sales, and property taxes, which have driven out over 1.5 million people over the past decade.
Despite impressive state GDP growth over the past 10 years, the ALEC annual report on unfunded pension liabilities, Unaccountable and Unaffordable, finds that unfunded pension liabilities make up 49% of state GDP. With unfunded pension liabilities making up such a large portion of state GDP, this is not a problem the Golden State can just grow out of!
Instead of pursuing fossil fuel divestment, Sacramento should learn from states like Montana and Arkansas. Montana House Bill 228 revises public investment practices by prohibiting managers of public investments, including public retirement systems, from considering nonpecuniary factors in investment decisions. The bill also prohibits public investment managers from following proxy advisory firms’ advice unless the advice is based solely on financial factors. Montana House Bill 228 was signed into law by Governor Gianforte on April 19. Arkansas Act 498, sponsored by ALEC member Representative Mindy McAlindon, was signed into law earlier this month and places protections on public pension investments similar to Montana and ALEC Model Policy.
And the list doesn’t end with Montana and Arkansas. A bright spot in 2023 has been the growing number of states that have sought to ban politically motivated considerations from being incorporated into public funds – a positive trend that we will continue to highlight.