California Pension Thermal Coal Divestment Would Be a First

If the proposal passes, California would be the first state to divest its pensions, the two largest in the U.S., from thermal coal.


California Public EmployeesÕ Retirement System (CalPERS) offices, in Sacramento, California, U.S., on Monday, September 13, 2010. Photographer: Ken James/Bloomberg

Ken James/Bloomberg

The California Senate voted Wednesday in favor of legislation that would require the state’s — and country’s — two largest pension funds to divest of their investments in thermal coal power companies. The bill’s next stop will be a vote in the California State Assembly. If California passes the coal divestment legislation, it will become the first U.S. state to do so.

Introduced by Senate President pro Tempore Kevin de León earlier this year, the proposed legislation calls on the $296 billion California Public Employees’ Retirement System (CalPERS) and the $186 billion California State Teachers’ Retirement System (CalSTRS) to exit from all investments in thermal coal companies by July 1, 2017. The bill passed the Senate 24–14, in a vote split down party lines in favor of the Democrats. In the assembly, which currently holds 52 Democrats and 28 Republicans, the bill will need 41 votes to pass.

The proposed legislation, though ultimately mandating divestment, does make a nod to the role of the pension systems’ engagement with energy companies. One of its provisions notes: “In making a determination to liquidate investments, the board shall constructively engage with a thermal coal company to establish whether the company is transitioning its business model to adapt to clean energy generation, such as through a decrease in its reliance on thermal coal as a revenue source.”

The bill adds that if a board determines in its engagement that a company is bound to remain one that generates 50 percent or more of its revenue from the mining of thermal coal, the system will have to divest.

CalPERS executives have made clear that they prefer engagement with energy companies over outright divestment, though its investment committee voted in April to take no official position on the proposed legislation. Last summer, in response to a call from three East Bay mayors for CalPERS to divest from fossil fuel companies, CalPERS head of corporate governance Anne Simpson argued in an op-ed for the Sacramento Bee that “the solution lies in engaging energy companies in a process focused on finding solutions, rather than walking away.”

CalSTRS spokesman Ricardo Duran says that in April, his system’s board directed staff to begin researching the possibility of dumping its coal stocks, in anticipation of this divestment legislation moving forward. He says the staff has been assessing the effect that divestment would have on the portfolio, and arranging meetings with industry experts about risks facing the industry.

Similar divestment legislation is on the table in Massachusetts and Vermont. In both states, drafts have been refiled this year after failing in previous sessions and pension system administrators have vocally opposed legislating divestment, arguing that such a move could unwittingly compromise returns. Vermont Treasurer Elizabeth Pearce, who serves as the vice chair for the $4 billion Vermont Pension Investment Committee (VPIC), has stated in no uncertain terms that she’s opposed to divestment, and points to internal research to explain why. A November 2014 report by the Vermont State Treasurer’s Office estimated that avoiding fossil fuel companies would cost VPIC $10 million, or about 4 percent, of annual expected returns. The report also found that one-time transaction costs to meet the legislation’s requirements could reach another $8.5 million. The system’s investment adviser, Boston–based NEPC, confirmed in its own report that divestment would cost the system millions of dollars per year.

But asset managers who run fossil-free strategies say divestment doesn’t have to mean a blow to returns — though it does require that managers undertake careful risk rebalancing. Matthew Patsky, CEO and portfolio manager at Trillium Asset Management, a $2.2 billion Boston-based sustainable-investment firm, says Trillium’s fossil-free strategy has returned an annualized 8.5 percent over the past eight years, beating the 7.3 percent gain for its S&P Composite 1500 benchmark during the same period.

Scores of religious institutions and foundations and nearly 20 U.S. university endowments have agreed to ban fossil fuel investments, among them Stanford University. More than two dozen U.S. cities have pledged to divest, including Cambridge, Massachusetts; Portland, Oregon; San Francisco; and Seattle.

Get more on pensions.