Can Divestment help fix PERA?

New analysis highlights the financial risk of investing in fossil fuels


There’s a growing movement both in Colorado and around the world calling on investment managers to rid their funds of coal and other fossil fuels stock in the interest of mitigating climate change. According to a new analysis, divesting from such industries may now be financially prudent as well. 

Earlier this month, the Fossil Free PERA Coalition released the results of a new financial study that shows Colorado’s Public Employees Retirement Association (PERA), along with the much larger California state pension funds CalSTRS and CalPERS, lost almost $19 billion over the last decade by not divesting from fossil fuels. It could be the motivation policy makers need to transition funds to more environmentally friendly investments.

“To me this is a nice bonus that, among all of the ethical reasons to divest, there’s also some financial motive,” says Devon Reynolds, a 27-year-old CU graduate student researching the divestment movement, who is in the process of enrolling in PERA.

PERA, the statewide pension fund with roughly 600,000 members including current and former teachers, state troopers, snowplow drivers, corrections officers, public servants and others, has seen its fair share of scrutiny in recent years. Today PERA is only about 60% funded, despite boasting the ability to pay retirement benefits in perpetuity just two decades ago. The state legislature took action in 2018 in an attempt to keep PERA on track for full funding by 2047. But by the end of the year, PERA reported a 3.5% decline from the previous year, losing approximately $1.8 billion on investments — a blow to the pension fund that already pays out more than it brings in. For those involved with the Fossil Free PERA Coalition, divestment could be part of the solution to PERA’s troubles. 

For more than two years, the coalition has been pressuring the PERA Board of Trustees to divest from fossil fuels, with about 1,000 PERA members and beneficiaries signing onto a petition that asks the Board to conduct a more thorough carbon risk assessment for the fund.

“The people in the Fossil Free PERA Coalition are concerned about the issue from a variety of angles, not just the moral and ethical angle of how fossil fuels are contributing to climate change, but also the fiduciary angle and the concern of how our fossil fuel investments are going to be playing out in the next 10 to 20 years,” says Deb McNamara, 350 Colorado’s liaison with Fossil Free PERA. 

The new analysis comes on the heels of 2019’s failed House Bill 1270. The legislation never made it out of the House Finance Committee, but would have funded an unbiased, third-party study of “the climate-related financial risk of PERA’s portfolio and the exposure of the fund to long-term risks.” 

Instead, funded by individual contributions from PERA members and beneficiaries, Fossil Free PERA commissioned Toronto-based media and research firm Corporate Knights to analyze the pension fund. It looked at PERA’s publicly disclosed holdings over the last decade, calculating a fossil-free scenario that excluded stocks in any companies that generate more than 10% of revenue from extracting, refining, transporting or burning coal, oil or gas. In this scenario, PERA could have generated an additional $1.77 billion — which translates to an additional $2,932 per member — in revenue over the last 10 years had it divested from fossil fuels and instead invested in other sectors of its existing portfolio, according to the report.

Comparatively, other industries like tech, health care, retail and entertainment saw significant gains over the same time period. In its methodology statement, Corporate Knights acknowledges that the numbers may understate the potential savings, given that the analysis didn’t use the entire portfolio.  

The results aren’t necessarily surprising considering that for the past 10 years, the energy sector, which excludes renewable energy, has continuously underperformed, finishing last in 2018, compared to others on the S&P 500.

“When you have a sector that’s in transition, that’s shrinking, that has been shrinking and all the signs are that the shrinkage is accelerating, then as a fiduciary at some point you have to acknowledge that this is a sunset sector, and we have to reconsider our allocation to it,” says Toby Heaps with Corporate Knights. 

During the last century, there was a lot of money to be made in extractive industries, particularly fossil fuels, but that’s all changed in the last decade, he says. What used to be more of a moral or science-based argument for divestment has now become an investment conversation.

“Now the actual growth has tapered off, expectations around the speed of that growth tapering off are changing by the day and the direction is not good for the market confidence in those sectors and the share prices reflect it,” Heaps says. “Today if you asked serious people, like the chief investment officers with the most sophisticated investment chops in the world, do you think that fossil fuels are likely to make more money than the broader market over the next 10 years, I don’t think you’ll find a single serious person put up their hand.” 

The new analysis only reinforces the divestment argument, according to Marie Venner, who became a PERA member in 1999 while she was a manager with the Colorado Department of Transportation. She has been appealing to the PERA board to divest for environmental reasons for more than 15 years.

“I don’t know if I would have expected the last 10 years to have seen such a drop in fossil fuel profits,” she says. “We’re kind of funding our own destruction if we stay invested in fossil fuels, both financially and in terms of the economy and future of our state.” 

Fossil Free PERA introduced the report during public comment at the Nov. 15 PERA Board of Trustees meeting. Reynolds says some of the board members were receptive, acknowledging the problem of climate change as a real threat. But that didn’t come with any promises for divestment. 

“I think there’s openness to the conversation, but we don’t know how far that openness goes,” she says. 

According to a published statement, the PERA Board doesn’t generally support divestment efforts arguing that “increased divestment is costly and limits PERA’s ability to effectively seek the best risk-adjusted returns to secure the retirement benefits of public servants.” However, the board does make room for a possible exception to its stance — if opposing divestment is “inconsistent with its fiduciary duty.” 

Ron Baker, executive director of Colorado PERA, takes issue with the Corporate Knights analysis. In an email statement, he says, “The methodology used in the study is flawed, as it implies that PERA should have made investment decisions in 2009 using information from 2019.” 

He emphasizes PERA’s responsibility to “consider all material factors, including those that may qualify under [environmental, social and corporate governance], in making investment decisions.” Although he does also acknowledge that PERA’s investment managers consider “the effects of changing demand over time.”  

If PERA does take action to divest, it would be the first to do so. In the U.S. to date, no state pension fund has divested from fossil fuels. But a handful of other large pension funds have, advocates argue. Worldwide, 144 pension funds have joined the divestment movement according to Fossil Free PERA — 61 since 2016 alone, including the University of California and New York City, which announced at the beginning of 2019 it would reinvest in climate change solutions.

“Ideologically, the Fossil Free PERA Coalition would wish that PERA would make the choice to reinvest some of those monies into local renewable energy infrastructure and jobs here in Colorado specifically,” McNamara says. “With this report, it’s not focused on that per se. It’s looking at the broader issue of the performance of the fossil fuel investments and where else PERA could invest and do better, quite frankly.”

For many concerned with the ever-increasing impacts of climate change, this is just one more reason to cut all ties with the fossil fuel industry. And, appealing to their fiduciary duty, they’re hoping this argument is enough for the PERA Board of Trustees. 

“The fact that we have some quantifications of these concerns beyond the threat to Colorado and our world is really helpful and I wish they (the PERA Board) were following this more closely,” Venner says. “I wish they were more tapped into what’s happening. They’re putting our retirement and our future at risk.”    

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