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Virginia Retirement System Has a “Fiduciary Duty” to Divest from Fossil Fuels ASAP

"When an industry faces existential risk, there is no floor price"

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Back in April 2015, I wrote about how then-Governor Terry McAuliffe was dead wrong about fossil fuel divestment, when he responded “NO!” to a question about whether “the state of Virginia and its retirement fund and other relevant funds should divest from fossil fuel companies.”

Of course, as I pointed out then, the correct answer was – and is – “absolutely YES…for a powerful combination of economic, environmental and moral reasons.” In fact, “Numerous Independent Studies Show Fossil Fuel Divestment Has Negligible Or Even Positive Impact On Returns,” with Impax Asset Management, which finding that “over a five-year period, ‘removing the fossil fuel sector in its entirety and replacing it with ‘fossil free’ portfolios of energy efficiency, renewable energy, and other alternative energy stocks, either on a passively managed or actively managed basis would have improved returns.”

Which is why, as I wrote at the time, it’s imperative for pension funds like the Virginia Retirement System  (VRS) to be considering, seriously and urgently, whether they NEED to divest from fossil fuels, and quickly, in order to protect their investors… not even taking into account their moral obligation to the planet, future generations, etc.

Fortunately, investors are increasingly starting to understand all this. For instance, see Sharp rise in number of investors dumping fossil fuel stocks, At last, divestment is hitting the fossil fuel industry where it hurts (“Trillions of dollars of investments are being taken out of carbon-intensive companies. Governments must now take notice”) and A new fossil free milestone: $11 trillion has been committed to divest from fossil fuels, The University of California system is ending its investment in fossil fuels (“The university is cutting fossil fuels from its $80 billion portfolio because of their financial risk.”), Norway’s $1tn wealth fund to divest from oil and gas exploration, Cuomo Calls for More Fossil Fuel Divestment, etc.

Which raises the question, why on earth does the Virginia Retirement System (VRS) *still* have fossil fuels in its $75 billion+ investment portfolio? (note: see here for the VRS’ 2018 Comprehensive Annual Financial Report, which clearly shows investments in things like “pipelines” and “energy and mining”) Because there’s really no excuse at this point, no matter which angle – economic, environmental, moral, etc. – you look at this from.

Finally, on a related note, thanks to Bill McKibben for tweeting about IEEFA update: Fiduciary duty and fossil fuel divestment, which argues that “fiduciaries now may have obligation to divest from fossil fuel unless their beneficiaries are over 90 and terminally ill.” See below for the core argument, which is that fossil-fuel investments are too risky, with potentially negative returns over the medium- and long-term. And for young beneficiaries, investments in oil and gas companies are almost impossible to defend.” Also note that, “When an industry faces existential risk, there is no floor price.” And that is absolutely the case with the planet-killing, increasingly out-competed-by-clean-energy, fossil fuel industry. So get the heck out of it, ASAP – the planet, and the pensions, you wave could very well be your own!

For a small fraction of beneficiaries (think, 90-year-olds with looming terminal illnesses), investments in oil and gas companies that pay high dividends might be deemed appropriate. For most beneficiaries, however, fossil-fuel investments are too risky, with potentially negative returns over the medium- and long-term. And for young beneficiaries, investments in oil and gas companies are almost impossible to defend.

FOSSIL FUEL COMPANIES ARE CLEARLY A MISGUIDED LONG-TERM INVESTMENT

This is not breaking news. Once a market leader, the fossil fuel sector has been a poor investment for a decade. Financial returns have been abysmal. The energy sector, which does not include renewable energy, finished dead last among sectors in the Standard & Poor’s 500 in 2018, in the wake of years of underperformance. In 1980, seven of the top 10-ranked companies in the Standard & Poor’s index were oil and gas companies. Today, there are none. In 1980, energy companies comprised 28% the S&P 500. Today, it is closer to 4%. The outlook for oil and gas companies is weak, at best.

In short, the financial case for fossil fuel divestment is well-established. When an industry faces existential risk, there is no floor price, according to equity research firm Redburn. Not known for being “starry-eyed idealists,” Redburn analyts conclude that oil and gas companies are facing existential risk. Their shares have no floor. The only question is not whether, but when the bottom will drop out.

Many investment advisers were slow to get out of relatively small holdings in coal and lost their clients millions, as a consequence. The losses that will accumulate from staying too long in oil and gas will be even greater.