In one of the first actions of its kind by a US public pension plan, the board of the $25.5 billion San Francisco Employees’ Retirement System (SFERS) has approved divesting the stock of five fossil fuel companies if the corporations don’t agree to reduce oil and gas reserves and transform their business model to address climate change.
The five companies, Hess Corp., Apache Corp., Gulfport Energy Corp., QEP Resources Inc., and WPX Energy Inc., would not be divested immediately. Pension investment officials will first attempt to persuade the companies to change their policies as part of the pension system’s “prudently phased divestment plan.”
Investment staff will focus on the five companies first, but the board at its meeting on October 10 also directed investment staff to put another 18 energy companies on the system’s watch list. Those companies could also be divested if engagement efforts are unsuccessful over the next several years. They include some of the world’s biggest oil and gas companies: ExxonMobil, ConocoPhillips, Occidental Petroleum Corp., and Petrobras SA. Others on the list are: Marathon Oil Corp., Husky Energy Inc., Anadarko Petroleum Corp., California Resources Corp., Baytex Energy Corp., Encana Corp., Meg Energy Corp., Santos Ltd, Bonavista Energy Corp., Concho Resources Inc., Energen Corp., Peyto Exploration & Development Corp., Rosneft Oil Co. PJSC, and Tullow Oil.
Andrew Collins, the pension system’s director of environmental, social, and governance (ESG) investing, told the retirement board the five companies chosen for divestment have the worst metrics of all the companies selected by SFERS staff to be on the watch list.
“So we assume that these companies were high risk because they have risky reserves in their pipeline,” he said. “They also have a poor financial health measured by their solvency risk and it appears that they’re spending cash on more Capex (capital expenses) to acquire more reserves.”
The plan details that the companies must make radical changes to avoid divestment, including showing the economic viability of their oil and gas reserves, ending lobbying against climate change directly and through their professional organizations, and aggressively reducing emissions.
The International Energy Agency has said to keep temperature rise under 2 degrees C as stipulated under the Paris Climate Agreement, up to 33% of oil reserves and 50% of gas reserves will need to remain unused.
Its unclear how fast divestment could occur if officials of the five companies are unable to show San Francisco pension system officials progress in meeting climate goals, but board documents lay out a potential multi-year process.
In addition, the board also approved restrictions in investments in two other companies, Crescent Point Energy and Arc Resources Ltd. The retirement system has no holdings in the companies but the two were lumped together with the other five divestment targets because of their poor metrics, say San Francisco pension officials.
Hess, the largest company targeted by the San Francisco divestment effort, has maintained in corporate filings, “there is a high likelihood our reserves will be monetized.” The company assert that climate change advocates are misstating the problem.
The San Francisco system only has $8.5 million in separate accounts in the five companies that could be divested, a relatively insignificant amount given market capitalization of the companies. Hess alone has a market capitalization of more than $14 billion
Regardless of the size of the stocks divested by the San Francisco pension system, a divestment would certainly bring worldwide media attention and be a boost for environmental organizations who have been pushing institutional investors to eliminate fossil fuel holdings.
Including the fossil fuel companies on the watch list, the San Francisco system has more than $120 million invested in fossil fuel stocks that could ultimately be divested.
Only one other public pension system in the US has divested of fossil fuel stocks and that system is relatively small. The $8 billion District of Columbia Retirement Board divested its entire $20 million of fossil fuel stocks in 2016. Other systems, including giants like the $360 billion California Public Employees’ Retirement System (CalPERS), have argued that it is better to remain invested in fossil fuel companies because it gives them a seat at the board table to change corporate policies.
Some smaller endowments and foundations have also divested of all fossil fuel stocks. More common has been divesture of coal companies, which both CalPERS and the San Francisco system in part have done.
Divestment of fossil companies has been more common in Europe, but even in that continent, the bulk of pension plans have fossil fuel holdings.
While voting unanimously to divest at its October 10 meeting, both San Francisco retirement system board members and the system’s chief investment officer, William Coaker Jr., expressed concerns that the San Francisco system could lose out on investment returns if it was forced to divest of the energy stocks.
SFERS board President Brian Stansbury, a San Francisco police officer, noted that the stock price of Hess Corp. had gone up 50% in the last year and that another stock to be divested, WPX Energy, had seen a 73% rise in the same period.
Coaker said that the portion of the SFERS energy portfolio managed by external managers is up 21% in the last half-year in what is otherwise is a flat stock market environment. “You’ve heard that global growth is really quite strong and when global growth is strong, demand for energy is very strong. And that’s what’s happened the last six months,” he said.
Under the divestment criteria adopted by the retirement board on October 10, prices of individual stocks or company valuations are not taken into account. The analysis on whether to divest is based on future risk of energy companies under climate changes scenarios.
The biggest critic of the divestment, however, is retirement system’s general investment consultant NEPC and its consultant assigned to the San Francisco system, Allan Martin.
“The thing that will drive energy companies to stop producing fossil fuel is when the demand for fossil fuel goes down and that will take time to get there,” he told the board. “I personally hope the day happens sooner rather than later. But in the meantime, selling the securities forfeits our chance to influence the behavior of those companies.”
Martin says the system could also miss out on future returns , noting that energy stocks perform well in an inflationary environment, an environment that is increasing looking like a possibility.
In liberal San Francisco, the retirement system has been under pressure from the city’s governing body, the Board of Supervisors, to divest of fossil fuels since 2013. The board voted that year to require the retirement system to divest of all of its more than $500 million fossil fuel portfolio.
The board of the retirement system resisted going along with the measure but in January of this year approved a plan that allowed the system to divest of some of its fossil fuel holdings. That led to last week’s vote to begin a phased divestment of Hess and the four other stocks.
At the October 10 meeting, it was retirement board member Asha Safai, who is also a member of the Board of Supervisors, who was the most vocal in support of divestment.
“I just want to put this on the record that you also begin to stigmatize those types of investments,” he said on the divesting of fossil fuel stocks.