As a former mayor of the city of Newport Beach, I took very seriously the financial obligations related to our pension liabilities, the impact of pension costs on city services and the ability to keep our commitments to our employees, which is why recent developments in California concern me.
For years, a small group of voices nationwide has called for universities, pension funds, and other groups who hold investments in fossil fuels to abandon those investments. This movement, known as divestment, believes that abstaining from investment in fossil fuels is key to combating climate change. However, the divestment movement has found it difficult to gain traction, in large part because making political statements through public or institutional investments runs counter to the fiduciary responsibility of pension fund managers. Those who depend on pensions expect their fund managers to make decisions based off sound and profitable investment strategy, not political agendas. There is also no real evidence that walking away from fossil fuel stocks does anything to actually help the environment.
Frustrated by their failure to gain ground, divestment advocates have turned to new methods of create momentum. For example, state lawmakers in California have been asked to consider a rash of bills related to pension funds. In 2017, the legislature considered two bills related to this topic. Senate Bill 560, which ultimately died, would have required CalPERS and CalSTRS, pension funds that serve California’s teachers and public employees, to consider climate risk when managing their funds. Assembly Bill 20 forced these pension funds to examine their financial holdings related to the controversial Dakota Access Pipeline. This year, a third bill, Senate Bill 964, would require CalPERS and CalSTRS to report every three years on any investments related to climate change. If these well-intentioned but misguided policies are enacted, the impacts will be felt by cities through rising pension liabilities and a reduction in funds available for basic city services like public safety and parks.
Rebranding their efforts to focus on climate risks, as opposed to directly calling for the abandonment of fossil fuel holdings, divestment advocates are taking new approaches toward the same goal. But while some might view these bills as well-intentioned measures to help the environment, the reality is quite different.
For starters, there is no evidence that these measures do anything to help the environment or combat climate change. Even Assembly Bill 20, with its targeted focus on a single pipeline, has had no impacts on the Dakota Access Pipeline’s investments or implementation. Rather, the value of passing such a measure lies mostly in its symbolism, a fact acknowledged by Bill McKibben, an environmental activist helping to drive the divestment agenda.
In practice, “climate risk” measures open the door for playing politics with retirement funds. This is especially dangerous for large funds tasked with protecting the future of Californians. Consider, for example, that the state’s public employees fund, CalPERS, manages the largest public pension fund in the United States, serving nearly 2 million people and holding around $300 billion in assets. CalSTRS, which serves education employees, is the world’s largest educator-only pension fund and the second largest pension fund in the U.S., managing a portfolio of more than $200 billion. Recent figures show that more than 200,000 retirees currently depend on CalSTRS for their pensions. Divestment from tobacco related stocks has already cost the CalPERS system more than $3 billion according to recent studies. We simply cannot afford more of this waste.
There is clearly an incredible amount at stake when it comes to managing these funds and others like them in California, with job number one being safeguarding the money that these employees worked so hard to earn. Both CalPERS and CalSTRS, California’s two largest pension funds, explicitly require fund managers to adhere to their fiduciary responsibilities. Misguided legislation requiring pension managers to follow political agendas when managing money only distracts from that duty, putting public funds and retirement nest eggs at great risk. Now more than ever, pension managers must focus on achieving returns that address the looming unfunded pension crisis, not on playing politics.
The truth is that divestment and related ideas like climate risk have always lived on shaky ground. Instead of walking away from investments in fossil fuels and losing a seat at the table, isn’t the better approach to affect change through active engagement? Instead of requiring pension fund managers to mitigate climate risks, shouldn’t we allow them to fulfill their fiduciary duty and leave climate discussions to policymakers? Hopefully retirees and their elected officials are paying attention to this dangerous rebrand of the divestment movement. The consequences are higher unfunded pension liabilities and the crowding out of municipal services. With today’s turbulent financial markets, it is more important than ever that we protect the hard-earned money of Californians.
Keith Curry is a former Mayor of Newport Beach and former financial advisor to state and local governments.
