California Public Employees’ Retirement System (CalPERS) Chief Investment Officer Ben Meng has made a forceful rebuke to advocates wanting the pension plan to divest of fossil fuel stocks, stating that the pension plan cannot “constrain itself to a limited set of investment opportunities.”
Pension plan officials of the $380 billion fund have for years resisted divestment, but Meng’s direct statement on the matter at a CalPERS investment committee meeting November 18 was unusual.
At CalPERS, normally sustainability officials of the pension plan deal with the issue, but advocates have been sending dozens of representatives to meetings, many of them CalPERS retirees, to demand the system take action.
The Nov. 18 meeting was no exception, but Meng spoke before any of the environmental advocates got their turn. The argument he laid out is that CalPERS is only 70% funded and needs to pay out $24 billion in retirement benefits each year.
Meng said that 60 cents of every dollar to pay the retiree benefits comes from investment returns. “We need those investment returns now and in the future,” he said. “If the market fails us, or we miss our targets, the hard-working people of California and the employers take on the financial burden.”
Meng said that outside groups, referring to the environmental advocates, need to be mindful of CalPERS’s financial condition and challenges.
“For non-stakeholders, such as outside parties, who do not bear the financial risk of our fund, but advocate using our fund to take actions beyond the scope of our fiduciary duty, and advocate using our fund to advance their agenda, we ask that they respect our fiduciary duty,” he said.
Meng’s statement comes as CalPERS is expected to issue, as soon as today, a report on climate-related risks in its investments and how the pension plan’s engagement activities are altering those risks.
The new report is required to be released by CalPERS by Jan. 1 under legislation signed into law by former California Gov. Jerry Brown in 2018.
The environmental advocates say CalPERS is losing money by remaining invested in fossil fuels holdings. They cite a report last month by environmental groups that found CalPERS would have generated an estimated additional $11.9 billion in investment returns had the fund divested of fossil fuel stocks a decade ago.
The report by a coalition of environmental groups, which includes Fossil Free California, Fossil Free PERA, and Corporate Knights, a media and research organization with an environmental bent, highlighted the fact that energy stocks have seen the worst performance of any of the S&P 500 sectors for more than 10 years.
The report also looked at the California State Teachers’ Retirement System (CalSTRS)—as well as the Colorado Public Employees’ Retirement Association, and said combined with CalPERS, the three pension plans combined missed out on $19 billion in investment returns over the last decade by investing in fossil fuel stocks.
Meng did not address publicly at the meeting why he thinks investing in a broad range of fossil fuel companies will bring better investment returns in the future, but many investors argue that the energy stocks will perform better in an inflationary period.
“Cherry-picking selective time periods to analyze investments and then making broad, sweeping conclusions about how those investments will perform in the future does little to inform the discussion or address the issue of climate risk,” said CalPERS spokeswoman Megan White in an emailed statement after the report by the environmental groups was released.
Meng touted CalPERS’s efforts on addressing climate change before ending his remarks Nov. 18.
Meng said even with “our constraints and unique challenges, we continue to lead on climate change initiatives on a global scale.”
In specific, Meng mentioned Climate Action 100+, an organization founded by CalPERS and other institutional investors in late 2007, to pressure corporations around the world to address climate change issues.
“We are also staunch supporters for the Paris Agreement and carbon pricing,” he said. “The least of our accomplishments and examples of our global leadership do not stop here and will continue our work in engaging and advocating. But given our fiduciary duty and unique challenges we face, we cannot, and we do not compromise on our investment underwriting.”
The environmental advocates have argued that work by Climate Action 100+ does not put enough pressure on large carbon emitters to change their way and more drastic action like divestment is needed.
In a progress report three months ago, Climate Change 100 + officials said they have reached agreement with some of the 161 focus companies to decarbonize including; Heidelberg Cement, Duke Energy, Nestle, Daimler, VW, Thyssenkrupp, ArcelorMittal, BHP Billiton, Centrica, and Saint-Gobain.
The group, however, acknowledged that “Despite these examples of first-wave leadership, analysis shows a significant step change is still required from the majority of focus companies in addressing climate change as a strategic business risk.”
No major state pension system in the US has divested of fossil fuel stocks, although CalPERS and several other systems have sold stock from a smaller subsection of coal companies.
Advocates have had better luck with foundations and endowments. The largest endowment to divest of fossil fuel stocks is the University of California Regents, with more than $13 billion in assets under management. The approximate $70 billion UC pension system is also in the process of divesting of fossil fuel stocks over a five-year period.