California could soon divest its public pensions from fossil fuel companies, as the state legislature looks to force the nation’s largest non-federal retirement funds to sell off nearly $15 billion in assets.
The Democratic effort is part of a growing international movement by government, religious, nonprofit and academic institutions to divest from fossil fuel companies. For proponents, this is not just about sending a strong message as global temperatures rise, but also about shoring up financial futures as the world transitions to green energy and faces growing uncertain events such as Russia’s war on Ukraine.
Opposing the California measure, however, are Republican lawmakers, the state’s powerful petroleum lobby and the public pension funds that the bill targets, who all argue the proposed change threatens millions of residents’ hard-earned retirement money.
A delay in the bill’s progress has shown how steadfast that opposition is, even in a deeply blue state.
California could join Maine and at least 52 communities across the United States that have divested their public pensions from fossil fuel companies. That list includes several communities in the Golden State, among them Oakland, San Diego and San Jose, as well as the University of California system.
In 2020, New York state announced it would divest its $226 billion retirement fund from fossil fuel companies by 2040. New York City already has divested $3 billion of its pension funds. Worldwide, some 1,600 institutions have divested $40.5 trillion, according to Stand.earth, an advocacy coalition pushing divestment measures.
The California measure, which passed in the state Senate in May, targets 200 of the largest oil, gas and coal companies that account for 2% of total assets for the California State Teachers’ Retirement System and the California Public Employees’ Retirement System. Those pensions serve around 3 million Californians with $778 billion in total investment capital.
This wouldn’t be the first time California’s public pensions have divested in certain sectors: The state has sold off its shares in thermal coal, firearms, tobacco and Iranian companies. While the state lost $4.3 billion after dropping its tobacco stocks in 2001, its pension values have seen $600 million in gains since getting out of coal in 2017.
If the bill now before the state Assembly is passed, the state pensions would have until the end of the decade to divest from the targeted fossil fuels.
The proposed measure focuses on protecting the state’s big pension funds from the risk of future losses on fossil fuel investments, said Dan Cohn, a global energy transition researcher for the Institute for Energy Economics and Financial Analysis, a nonpartisan research group.
Fossil fuel companies are volatile, Cohn added, noting tumultuous world events, increased competition with green technologies and new governmental regulations and legal challenges.
“The fossil fuel sector is looking like a long-term underperformer,” he said. “There is very little in the outlook that is positive for fossil fuels except for their incumbent position.”
Indeed, California’s public pensions lost out on $9.6 billion in gains over the past decade because they did not divest from oil and gas companies, according to a University of Waterloo study released last month.
The study looked at the public pensions for Alaska, California, Colorado, New York, Oregon and Wisconsin, and found that those states would be $21 billion richer if they had divested. The Ontario, Canada-based researchers estimated that the public pension funds lost out on a 13% average return on investment, along with energy savings that could have powered 35 million homes per year.
A tough legislative fight
California’s bill made it through the state Senate with a handful of Democrats joining every Republican to vote against it. However, Assembly leaders last month announced the bill would be briefly shelved until January to allow the bill’s supporters more time to study its impact and to educate legislators and the public of its merits.
Both lawmakers and environmental activists say they are confident it will eventually pass, and that Democratic Gov. Gavin Newsom would sign the bill.
A similar measure is being considered by the New Jersey legislature this session but others failed in Oregon and Vermont.
California Democratic state Sen. Lena Gonzalez, the bill’s author, has said the efforts by the state pension funds to engage fossil fuel companies as stockholders is “futile,” adding there is an urgency to divest as the planet warms from their pollutants.
“It can be done,” she said at a state Senate Judiciary Committee hearing in April. “California is a leader on the environment and social equity issues, so why are we invested in these varied companies?”
Republican state Sen. Roger Niello, who voted against the measure during the hearing, challenged Gonzalez over the possibility of losing out on “a really robust stock market for these varied stocks.”
“The unfortunate fact is what they will divest from others will buy,” he said during the April committee hearing.
The American Legislative Exchange Council, a conservative advocacy group that helps shape state legislation nationwide, called the bill a “recipe for disaster.” The group added that “politicized investment strategies” have left billions on the table.
California’s public pensions agree.
Opposition from retirement funds
The California measure faces its stiffest opposition from the state’s pension funds that the legislature is targeting. Fund leaders fear any negative impact on the portfolio could mean lost benefits to public employees and higher costs for taxpayers.
California’s pension funds are committed to eventually getting to net carbon zero, but this bill is not the way to do it, said Brad Pacheco, deputy executive officer for communications and stakeholder relations at the California Public Employees’ Retirement System, commonly known as CalPERS.
“The bill, unfortunately, for us is more of a symbol, if you will, and not a solution to the climate,” Pacheco said. “It trades the long-term economics for short-term emotion, and that kind of decision is incompatible with our fiduciary duty.”
In the meantime, Pacheco pointed to the more than $40 billion the fund has invested in low-carbon and climate solutions. The fund will be voluntarily net carbon zero by 2050, but will use that time to divest responsibly, he said.
While he recognizes that climate change is a valid risk to their investment portfolio, Pacheco argued the pension funds can have a far greater impact with fossil fuel companies as shareholders, pushing them for greater transparency and changes in their business practices by voting on shareholder resolutions. If they sell their shares, he said, CalPERS loses that power.
That argument doesn’t add up, said Clair Brown, the director of the Center for Work, Technology and Society at the University of California, Berkeley. She recently authored a report that found that California’s engagement with fossil fuel companies has failed to reach top company directors or make substantial changes to company practices.
“The idea that somehow what these pension funds are doing is affecting business strategy and company performance is just not true,” said Brown, who also is a professor emerita of economics. “The companies are in charge of engagement, not CalPERS. It hasn’t lowered emissions; emissions keep going up and fossil fuel companies keep investing in destruction.”
Some of those investments, in fact, are in the form of bonds — a direct loan for fossil fuel companies to build new infrastructure for oil and gas exploration, she said.
She added that the state already is hurting from its fossil fuel investments, noting the more than $700 million that the pensions had in Russian oil company stock that was frozen because of sanctions following the country’s invasion of Ukraine.
For the activists advocating for this bill over the past decade, there is no time to lose in the fight against climate change. The state legislature must act now, said Miriam Eide, coordinating director for Fossil Free California, a group leading the fight for this measure in Sacramento.
“We’ve got to get out before it’s too late,” she said. “What we’re doing isn’t just about California, it’s about protecting everyone.”
