A successful effort to convince CalSTRS to divest in fossil fuel stocks would be first significant economic victory in fight against global warming.
By Andy Cohen
Most people accept that global warming is real and that it’s happening. But even for those who continue to willfully deny the facts right underneath their noses, it is getting more and more difficult to ignore the increased frequency and intensity of the superstorms that have devastated our landscape.
The arguments against global warming are almost nonsensical, ranging from “God would never allow it” theology to ideological orthodoxy. Since global warming is the major threat to the recession proof oil and gas industry—an industry that represents enormous power and influence with the ability to sway policy on a whim—many climate change deniers simply reject the abundance of empirical evidence out of their own economic self interest. The decline of the oil and gas industry, after all, in their mind, is the demise of the Western World’s entire economic existence. Oil provides the energy that makes the world go ‘round. What would we do without it?
To the true believers, fossil fuels are, and will continue to be, the lynchpin to the American and global economies.
At long last, many in the denial brigade are starting to come around to the fact that global warming is indeed a real phenomenon, although even those who have reluctantly come to accept it still refuse to believe that man has had anything to do with the increase in global temperatures—and the severe and deadly storms that accompany it.
But if the fight over global warming is ever to be won, it will be in the economic arena where the most intense and meaningful battles are going to take place. If the world is to wean itself from its dependence on carbon based fuels there will have to be a viable economic argument for it. Here in San Diego, the sprouts of that argument are beginning to emerge from the ground.
Gary Waayers, a biology professor at Palomar, Grossmont, and Southwestern Community Colleges, has begun a petition campaign to convince CalSTRS, the state teachers retirement system and the second largest pension system in the country (behind CalPERS), to divest its entire portfolio of carbon fuel stocks. He hopes to gather the signatures of 30,000 California teachers, and in the process win the backing of the teachers unions along the way.
It is a bold effort to be sure, and he faces an uphill battle. After all, how could the second largest pension system in the entire United States possibly survive if it rids itself of all oil, coal, and natural gas stocks, depriving itself of some of the highest performing securities in the world? These companies are reaping record profits, even through the worst financial crisis since the Great Depression.
Back East, college students are galvanizing to convince their colleges and universities to rid their endowments of fossil fuel stocks, with some success. But the success stories thus far are limited to small colleges and universities. Harvard University, with the largest such endowment in the country at $31 billion, has flatly rebuffed efforts by its students to adopt a divestment strategy, despite the support of 72 percent of its undergraduate student body.
So if it’s deemed too risky for a $31 billion endowment, how could a pension fund with assets of over $167 billion be convinced that it’s a sound strategy?
Not so fast. A recent study by the Aperio Group has found that it might not be all that risky after all. (Click here for the link to the actual study.) The study found that, where a human stock picker would have a tracking error—the amount of deviation from stated benchmarks—of about five percent, divesting a portfolio of fossil fuel stocks will result in a tracking error of only .01 percent, and a “theoretical return penalty” of .0034 percent, indicating the lost opportunity for income if a fund divested of fossil fuels.
What Waayers is hoping to convince CalSTRS to do is to adopt a policy of no new investments in fossil fuels, while gradually phasing out existing investments within five years. He says the fund has risk management guidelines that include climate change. “They are set up to address it,” he said.
The economic argument cuts both ways. Waayers notes the steady increase in frequency and severity of weather patterns throughout the world, including droughts, which affects crops and thus the food supply. “It’s going to be very difficult to support seven billion people if we continue to see these severe weather patterns,” he says.
“We currently have about a 60-70 day supply of grain, about as low as it’s ever been.”
Waayers also notes that India and China are “seeing the writing on the wall,” with the cost of a barrel of oil skyrocketing, and are taking major steps to shift toward renewable forms of energy, well ahead of the United States. The global community has already agreed in principle to start the shift away from fossil fuels, although to this point it’s been mainly talk and very little action.
Eventually fossil fuels are going to be viewed as “stranded assets.” As the world begins to take global warming more seriously, investments in fossil fuels are going to lose their value, says Waayers. That time may not come for the next 15 years or more, but it will come, he says. At some point the global community will place real, serious limitations on fossil fuel use in a shift to a greater emphasis on renewable sources of energy, such as wind and solar (among others), making fossil fuel stocks less valuable. Which, not coincidentally, is why the oil companies have fought so ferociously against emissions and fuel efficiency standards and other steps to curb fossil fuel use.
According to writer and environmentalist Bill McKibben, author of the widely read and cited Rolling Stone article “Global Warming’s Terrifying New Math,” there is far more oil, gas, and coal in the ground than we can possibly (safely) use, yet the oil companies count those reserves as current assets on their balance sheets. If the demand for fossil fuels slows down, it damages their bottom line and profitability. They’d be stuck with an asset that they can’t get rid of. Financially it is in their best interests to bolster the climate change deniers.
(Read the McKibben article if you haven’t already. It’s pretty intense.)
Eventually, though, says Waayers, the carbon bubble will burst just like the housing bubble, and investors will be stuck with worthless stocks. Thus the economic interest for pension funds to divest.
For their part, CalSTRS is aware of Waayers’ petition drive (as well as other efforts to encourage divestment), and are just now beginning the process of evaluating the potential impact it would have on their portfolio.
“We have to balance our fiduciary obligations to our members with social responsibility,” said Ricardo Duran, a spokesman for CalSTRS.
Among the factors being considered is the overall value of the fossil fuel investments, and how well they are they performing. Also to be determined are the types of industries that are to be included in the mix. Are just oil and gas companies to be considered, or should pipeline companies, refiners, and distributors also be included?
“We are taking the impact of fossil fuels on our portfolio seriously. The long term environmental impacts are just one factor,” said Duran.
Given the unanswered questions about which types of companies are to be included in any divestment strategy, Duran said that the fund was unable to estimate just how much of the CalSTRS portfolio consisted of fossil fuel stocks.
“We have divestment policies in place, and we must follow them carefully,” said Duran.
If Waayers is ultimately successful, and the second largest pension fund in the nation gets on board with divesting in carbon fuel stocks, it could signal the first major salvo—and become the first major victory—in the economic fight against global warming. It would be the first tangible evidence that the fossil fuel stranglehold on our markets is not unbreakable, and that there is hope for economic growth beyond oil and gas.