California fossil fuel pension divestment bill stopped, for now
Photo 130814684 © Andreistanescu |


California fossil fuel pension divestment bill stopped, for now

Fiduciary duty is the only thing pension funds should be considering when picking investments.

In a temporary victory for good policy, California lawmakers set aside a bill that would have forced public employee pension systems to divest from fossil fuels. But the head of one of the nation’s largest pension funds warned she expects the bill to be reintroduced next term.

California lawmakers had been considering Senate Bill 252, the Fossil Fuel Divestment Act, which would’ve forced the California Public Employee Retirement System, CalPERS, and the California State Retirement System, CalSTRS, to divest from assets and companies involved with fossil fuels. The bill initially passed the State Senate by a 23-10 vote but failed to move through an Assembly committee. 

Marcie Frost, chief executive officer of CalPERS, says that the fight is not over because the bill “will likely come back” in the next legislative session. CalPERS representatives have spoken out against the divestment bill, saying it forces them to act against their fiduciary duties by elevating other priorities above managing risk and maximizing investment returns in managing public workers’ retirement money.

Frost said that the proposed law would’ve led to a $9.4 billion divestment from fossil fuel companies and an annual drop in the pension system’s earnings of $327 million. A $9.4 billion divestment could not easily be replaced with new investments, and the subsequent decline in earnings needed to fund promised pension benefits would have to be made up with increases in employer and employee contributions. 

CalPERS noted in a separate press release that even if they divest from fossil fuels, those companies can easily find new investors. Hence, CalPERS officials doubt this divestment strategy will have an impact. They wrote:

As a global investor, directed by the California Constitution to carry out a fiduciary duty to its members and employer partners, CalPERS does not believe that mandatory fossil fuel divestment is an effective solution to the reduction of greenhouse gas emissions.

Divestment has little—if any—impact on a company’s operations and therefore does nothing to reduce greenhouse emissions. Forcing CalPERS to sell fossil fuel companies’ stock does not change the amount of gasoline people use to drive to work, to pick up children from school, or to deliver food to the grocery store.

There is also a question of where top-down divestment decrees would end. CalPERS has been down this divestment road before, including with calls to divest from Russia-related companies after Russia invaded Ukraine. Divesting from companies connected to Russia was much more complicated than legislators anticipated due to the difficulty of finding a seller at an appropriate price. 

A significant worry about calls for divestment is that public pension systems will be severely limited in their investment options in the future. Some retirees who advocate for CalPERS and CalSTRS to divest from fossil fuels, such as former San Francisco State University faculty member Carlos Davidson, have openly said that they know it doesn’t have much of an impact on emissions, but it’s “the political effects that really matter.” This is to say, he believes, it sets a precedent for other states to follow suit, not just in the fossil fuel industry but other political and social movements.

However, fiduciary duty is the only thing pension funds should consider when picking investments, i.e., maximizing returns while minimizing risk to shareholders. Despite this fiduciary duty, public pension plans are still subject to their governing bodies, meaning state lawmakers can try to subvert this duty with laws similar to the recently failed California legislation and those seen in many other states. 

CalPERS recently reported it earned an investment return of 5.8% for the 2023 fiscal year and has a funded ratio of 72%, meaning it has 72 percent of the money needed to pay for pension benefits that have already been promised to workers and retirees.

CalPERS and most other pension funds in the country continue to face significant funding challenges and pressures to overcome growing unfunded liabilities with ambitious investment benchmarks. Limiting investment strategies with political divestment decrees makes it harder for public pension plans to navigate these challenges and pay for the promised benefits.

Lawmakers should avoid inserting their public employees’ retirement security into political issues, given the large number of members with varying political views. While many members favor divestment, many are also strongly opposed.

This failed divestment bill in California was a misguided attempt at using public funds—ones which employees will depend upon after employment—to make a political statement. It would have forced CalPERS and CalSTRS to go against their fiduciary duties of maximizing investment returns for workers while managing risks for those workers and taxpayers, who will be legally obligated to pay for unfunded liabilities.

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