The Massachusetts public pension system — with $61 billion — has been refusing for years to look at the question of fossil fuel divestment on the grounds that selling fossil fuel stock would be a violation of fiduciary duty. Now it turns out that by hanging on to oil, coal, and gas they have managed to lose $521 million in just twelve months. That’s $10 million a week — down the drain. My estimates are that each member of the system has about $300,000 backing up his or her retirement in which case this loss equals the total retirement funds of 1,400 workers.
I spoke this morning to the investment staff at the pension system, and they could not say whether they have ever given the question of climate risk a moment’s thought. Now THAT is a breakdown of fiduciary duty.
Is there any legal remedy that can pressure the people in decision-making positions in the MA pension system? If they have refused to take into account public calls for re-evaluating fossil fuel stocks previously, their actions or lack thereof may be an example of the failure fiduciary responsibility and legal recourse may be available.
Possibly. Perhaps.
What would you be saying if they had divested a year ago and energy stocks had gone up that much instead of down? It is easy to criticize investment decisions after the results are known, but that isn’t a good way to set public policy.
Also, while $521M sounds like a lot of money, it is less than 1% of the portfolio value. A typical well-managed pension should have a volatility of more than 1% on a weekly basis. So the pension fund should be expected to gain or lose that much money every week. Losing that much in a year is basically noise.
There are good reasons that a pension system for a coastal state should be concerned about climate change and be willing to accept whatever loss in potential returns they have to take to divest from fossil fuel companies. But your argument here is irrelevant to that discussion.
… that they would be saying ‘we pushed divestment as a moral and ethical choice, and not as a fiscal one’ which makes this… ah… shadenfreude… somewhat precariously perched upon the horns of that dilemma. Sending a message to polluters is, I was told, the purpose and not profit motive. I am sympathetic to that purpose: Divestment would hurt but for the sake of doing the right thing we’ll take the hurt.
I’m not very sympathetic to the notion that a commodity has volatility and so there, pbbbphhttt….
I think that to which I object most is the implicit assertion that there were alternatives to fund and that had the pension fund managers done so we’d be $521 greener… This is just simply not the case. Cold blooded calculations will, for the present, reveal the dwarfing of other parts of the energy sector by fossil fuels. The math here is a cold hearted bitch that can’t really be argued with…
Fiduciary duty notwithstanding, we should divest because we want to clean our hands of the very real stain of harm to our home planet: that’s a duty of all stewards. There is no royal road there. It’s going to be long and hard and we have to actively accept some pain and/or discomfort for the privilege of doing the right thing. Pointing out that the wrong thing is the wrong thing to do isn’t going to make that easier.
Warning bells like this and this have been sounding. Fossil fuels will reach their Digital Computer moment – dead technology walking. The market seems to be recognizing this is a bad investment and pension funds certainly could have joined with the investors who recognized the brewing trouble with those stocks.
For the reason you mentioned, I don’t think the recent losses are cause for panic, but they do point to at least an unacceptable level of volatility in fossil fuel stocks. They may swing a bit in coming years, but I suspect it will difficult to time the upswings and that the trend line will point downward.
… since the articles to which you link make note that the fossil fuel aren’t dead until somebody kills them: the risk, according to the articles, is that legislative action to reduce carbon emissions, if the world can agree to a 2C cap on the rise, could have the affect of ‘pulling the rug” out from under the industries feet. And this is likely true: many people got out of the business of selling assault rifles when the government instituted a ban in the ’90’s. The prospects would be similar here as legislation might mimic a ban… or, as the articles put it, ‘legislation would render the remaining oil in the ground unburnable.’ But there is no such legislation pending nor is any likely to eventuate any time soon. Speculation on the second order effects of an uncertain potential action isn’t likely to have very much predictive value.
I don’t think that the level of volatility is all that un-acceptable (from a fiscal point of view) or un-expected. The twin (opposing?) processes of the shale oil boom (fracking) in the US and the rather starling economic slowdown in China explain the inventory glut better, and thus the price, than some inchoate sense of economic peril cum moral high dudgeon.
I don’t think that reducing the loss to <1% is very helpful, for a few reasons:
1. Most subdivisions of the portfolio are going to make things look small. Any market sector is going to be small. Nevertheless, the portfolio folks are responsible for doing their best to getting all portions of the portfolio right.
2. It's not that they made a reasonably good bet that didn't pay out. That happens all the time. The issue in this case was structural — missing an entire industry fail is a lot different than missing an individual stock fail.
3. Divestment of fossil fuels has been newsworthy for a few years now, and fund managers have said time and again that they don't want their decisions hampered. That's cool, I get that. But, at the very least, you'd think that those same managers would pause and put extra effort at evaluating the circumstances surrounding the issue. Did the managers look carefully and still get it wrong? Or did they not bother to look carefully, ignoring the reality that the general public is especially concerned about this sector?
It seems to me that pension fund managers shouldn’t choose to divest for political reasons — our political system should require them to divest if that’s what our values call for. But, pension fund managers should be sensitive to public discussion surrounding pensions — and if there is a clear outcry for divestment of a particular industry, the managers ought to at least spend extra effort to analyze whether or not their ongoing investments in that industry are a good idea.
Going back to jkw’s point: it is true that stocks bounce around with a certain volatility, but that is not the point here. The point is that the fossil fuel industry is in structural decline. There is no chance that coal is coming back in the United States; the losses have been huge, dramatic, and permanent. The question now is whether we are going to see similar decline in oil. All the oil majors are down an average of 30%. Oil demand is basically flat. Goldman Sachs has said that price recovery might take a decade and that we might see $20 bbl oil. We are about to increase CAFE standards to 40 and then 55 mpg. Those who want to know more should consult the UK finance research team, the Carbon Tracker Initiative. They have done superb work on the waste of more than $700 billion annually on immense capital expenditures trying to exploit oil that can’t be burned. All of this means that business as usual — and investment concepts about cyclical and efficient markets — simply do not apply. As the SEC says, “past performance is no guarantee of future results,” and wise fiduciaries pay attention to that fact by looking at what is coming
not just a polluting one.
I don’t know how the state pension board works, but people are actually elected to the teacher pension board (MTRB) by teachers. It’s true we don’t know the people, but we have some measure of control.
one of the other Scandinavian countries castigated for doing just that, divesting their pension fund of fossil fuel stocks? It was called political correctness, if I recall, but looking at the crash in stock prices of many of those companies, it was just smart investing, getting rid of poor performing stocks.