Public employees who contribute to Colorado’s pension system have called on state lawmakers to enact a first-of-its-kind measure that would require the fund to factor the state’s greenhouse gas emission reduction goals into its investment decisions.
The provision, tucked into a sweeping climate bill, mandates that the Colorado Public Employees’ Retirement Association, or PERA, analyze both environmental and financial risk before it casts votes at annual shareholder meetings. If it were to pass, the measure would have far-reaching effects: One in 10 Coloradans is a PERA member.
“PERA is behind the times — they need this guidance,” Devon Reynolds, an employee of and doctoral candidate at the University of Colorado Boulder, testified at a Jan. 25 state Senate committee hearing. “This is my retirement money.”
PERA, which manages about $66 billion in assets, casts about 60,000 shareholder votes a year, giving it many opportunities to influence publicly held companies’ business decisions.
The debate is the latest in a multiyear effort by the state’s majority Democrat General Assembly to hold the 92-year-old pension system accountable for investments in fossil fuel companies. The state is spending $225 million a year in taxpayer money to pay down about $27 billion in unfunded debt to PERA’s more than 670,000 members.
Earlier attempts to require the fund to sell such stocks failed amid pressure from industry lobbyists and opposition from PERA’s board of trustees. Lobbyists with Husch Blackwell Strategies are representing both PERA and Civitas, Colorado’s largest energy company, on the greenhouse gas bill, according to reports filed with the Secretary of State’s Office. The measure is scheduled to be heard next on Feb. 21 in the Senate Finance Committee.
Colorado pensioners aren’t the only ones frustrated with the lack of government action to reduce pollution. Retirees and activists across the U.S. are calling on the nation’s 5,000 public retirement systems, which hold $5.6 trillion in assets, to decarbonize their portfolios.
Pension funds in New York, Baltimore and Los Angeles heeded the call and joined universities, faith-based organizations and more than 1,500 organizations with $40 trillion in combined assets worldwide committed to divest from fossil fuel assets. Private equity investors, such as BlackRock, Vanguard and State Street, are also emphasizing social-good investing, saying climate change is a top priority for clients.
Pension funds are among the largest institutional investors in fossil fuels, with more than $81.6 billion in investments.
Some state pension funds, including Colorado PERA, factor what’s known as environmental, social and governance (ESG) provisions into their financial decisions on a voluntary basis. If approved, the bill, still awaiting its second hearing in the General Assembly, would mark the first time the government mandated how a state pension fund should conduct shareholder votes.
Pension funds are “among the largest institutional investors in fossil fuels,” with more than $81.6 billion in investments, according to a report by the Climate Safe Pensions Network and Stand.earth, an environmental nonprofit. PERA holds $2.2 billion in such investments, researchers found.
Colorado’s proposed PERA legislation seeks to capitalize on renewed interest in the power shareholder voting gives stockholders to influence company behavior. The climate bill’s Democratic sponsor, state Sen. Chris Hansen, who spent two years fine-tuning the greenhouse gas measure, points to a 2021 ExxonMobil proxy fight as an example.
An activist hedge fund, Engine No. 1, which owned just a 0.02% stake in the oil and gas giant, argued the firm’s 12-member board wasn’t transitioning to a low carbon economy quickly enough, among other issues. The fund proffered four candidates, three of whom — with the support of BlackRock — were elected. PERA’s board voted for Engine No. 1’s slate, an analysis by Capital & Main found.
The election portended a larger shift in investor expectations. Shareholders offered a record 273 ESG proposals in 2022, according to Morningstar, an investment research firm. Those that passed doubled to 40 in 2022 from 20 in 2020, the report showed. Public pension funds supported 90% of such resolutions, analysts found.
An analysis by Capital & Main of 2021 climate risk proxy votes found PERA’s board voted against a resolution that requested Chevron Corp. “substantially reduce greenhouse gas (GHG) emissions of their energy products.” The board also rejected a proposal that requested ConocoPhillips set reduction targets for greenhouse gas emissions.
The PERA board did, however, vote in favor of a shareholder proposal that Berkshire Hathaway Inc. publish an annual assessment detailing how it manages “climate-related risks and opportunities,” and for a resolution that Chevron report on impacts of a net zero 2050 scenario.
The policies by which public employees’ retirement savings accounts are managed, which most directors fight to keep apolitical, are increasingly getting pulled into divisive partisan debates in states, as well as in Congress.
Twenty-five Republican state attorneys general and the Western Energy Alliance filed a lawsuit in January in the U.S. District Court for the Northern District of Texas challenging a U.S. Department of Labor rule that enables investment managers to consider environmental, social and governance and climate change issues along with fiduciary factors.
“The new rule violates the law by allowing investment managers to put their political objectives above the financial health of the plans they manage on behalf of workers and retirees,” said Kathleen Sgamma, president of the Western Energy Alliance, which represents 200 independent oil and gas companies, in a Jan. 27 statement.
“Why is somebody coming along saying, ‘We want to use somebody else’s money to promote this social outcome?’”~ Keith Brainard, research director, National Association of State Retirement Administrators
Some scholars assert social impact investing delivers lower returns for beneficiaries: “And focusing on social factors, at least for public pension plans, does not appear to be costless – plans earn less in returns,” according to an analysis by economists at the Center for Retirement Research at Boston College.
Even so, the trend has rattled the fossil fuel industry.
“We have observed how ESG advocacy has negatively affected the industry’s access to capital over the last few years,” wrote Sgamma and Timothy Stewart, president of the U.S. Oil and Gas Association, in a 2021 letter to federal regulators.
In Colorado, the public sector retirement system proposal is part of a massive greenhouse gas emissions reduction bill that contains Democrats’ top climate priorities for the General Assembly’s five-month spring session.
The measure would eliminate all carbon emissions by 2050, offer tax credits on clean lawn equipment, require insurance companies to file a survey with the state that denotes their assessment and management of climate-related risks and put in statute first steps to incentivize carbon capture projects.
The legislation would also require PERA to publish an analysis outlining climate risks in its investments. PERA applauds this piece of the measure. It opposes the section that requires it to weigh environmental concerns, as well as fiduciary factors, when it makes investment decisions.
“The investment program is not intended to derive an outcome in policy — it’s to derive income for beneficiaries,” testified Ron Baker, the association’s executive director, at the Jan. 25 state Senate Transportation & Energy Committee hearing.
Public retirement system representatives nationwide also objected to Colorado’s potentially precedent-setting shareholder voting rule.
“This money is not the property of the state of Colorado — this money belongs to the plan participants to promote their financial well-being in retirement,” said Keith Brainard, research director at the National Association of State Retirement Administrators. “Why is somebody coming along saying, ‘We want to use somebody else’s money to promote this social outcome?’”
The bill’s Democratic sponsors disagree.
“We can’t keep investing in things that are destroying our planet. The long-term prospects are not good for fossil fuels.”~ Giselle Herzfeld, campaign coordinator, 350 Colorado
Environmental, social and governance issues must be analyzed alongside balance sheet concerns to ensure taxpayer money is spent wisely and pensioners receive the best rate of return on their investments, said Hansen in an interview.
“Taking climate into account is very good business and is very congruent with the financial responsibility of the [PERA] board,” he added.
While some of his Democratic colleagues agree, others voiced discomfort with the provision. Democratic state Rep. Marc Snyder said recurring debates over whether lawmakers should require PERA to incorporate climate risk into its financial decisions “raise very tough questions.”
“Social, and in this case, environmental policy, established by the state, are things we should follow through on,” Snyder said during a Jan. 26 presentation by Baker to the Joint Finance Committee.
“On the other side, we’re talking about keeping a fund healthy and paying people the retirement they paid in their entire working life,” he added. “I am not ready to put that in jeopardy.”
While Hansen’s measure would not require PERA to divest its fossil fuel investments, some activists viewed it as a first step toward such a law. A divestment measure is being drafted now, said Giselle Herzfeld, a campaign coordinator at 350 Colorado, an environmental nonprofit.
“We can’t keep investing in things that are destroying our planet,” she said. “The long-term prospects are not good for fossil fuels.”
Herzfeld pointed to a November study, commissioned by 350 Colorado, that found PERA lost $2.7 billion by not divesting in fossil fuels a decade ago. Baker, PERA’s director, said he disagreed with the research methodology.
“Corporate Knights is saying — ‘If you had picked that stock, versus that stock, you would have had $2.7 billion more,’” he said during the Joint Finance Committee’s hearing. “I don’t know how you dispute the idea that if you look backward and you had gone left, instead of right, things would have been better.”
He added PERA’s board considers “myriad factors,” including ESG, when deciding how to vote on shareholder proposals for public companies each year.
Reassurances that PERA is incorporating climate risk into its decision making did not assuage beneficiaries’ concerns.
PERA member Sally Dowiatt, who calls herself a “mostly retired special education teacher,” said her “teacher friends” were surprised when she told them about their retirement fund’s investments in energy firms.
“They were outraged that PERA was so significantly invested in fossil fuels,” Dowiatt testified at the state Senate’s Transportation & Energy Committee hearing.
“Teachers do not become teachers for the money,” she added. “Teachers become teachers because they care about children — my teacher friends were very disturbed their retirement funds are invested in things that are destroying children’s futures.”
