CalPERS moves on coal divestment

The CalSTRS board directed its staff and consultants last week to evaluate the risk of investments in thermal coal companies, jumping ahead of pending legislation that would require CalSTRS and CalPERS to divest thermal coal holdings.

Senate President Pro Tempore Kevin De Leon, D-Los Angeles, has a bill that would require the divestment of thermal coal and a feasibility study of divesting additional fossil fuel investments, such as natural gas and petroleum.

CalSTRS, through index funds, is said to have about $40 million invested in a dozen thermal coal companies.

The early move by the California State Teachers Retirement System, which could make it a pension fund leader on the issue, is the first step in a divestment policy that begins with meetings with thermal coal companies and experts in several fields.

“The combustion of coal resources is the single largest contributor to global climate change in the United States,” said De Leon’s bill, SB 185, which has not yet been heard by a legislative committee.

The bill said the purpose of requiring the two pension funds to divest their thermal coal holdings is “one part of the state’s broader efforts to decarbonizes the California economy and to transition to clean, pollution free energy resources.”

Thermal or steam coal is widely used in electricity generation in other states, while California plants mainly use natural gas. California got about 8 percent of its power in 2012 from coal and petroleum coke plants, nearly all of it imported from other states.

CalSTRS, through index funds, is said to have about $40 million invested in a dozen thermal coal companies. The CalSTRS chief investment officer, Chris Ailman, is a divestment skeptic.

“I’ve been involved in five divestments for our fund,” Ailman told the CalSTRS board last week. “All five of them we’ve lost money, and all five of them have not brought about social change.”

CalSTRS and CalPERS both adopted divestment policies in 2009 that prefer “engagement,” using their status as shareholders to urge companies to make changes. Divestment leaves the pension funds without a voice in company management.

“It pains me that my CalSTRS retirement fund invests in the very companies that are putting the world at peril,” Galbraith said.

In an apparent nod to the policy, the De Leon bill was amended to require the pension funds, as part of their divestment process, to “constructively engage” with the coal companies to find if they are “transitioning their business models” to clean energy.

The amendment also said the pension boards would not be required to divest if they find “the action would violate the board’s fiduciary duties established in the constitution,” the responsible management of money held for retirees.

Pension board members are insured for investment decision losses. Giving added protection, the bill declares that the board and officers are “held harmless and eligible for indemnification” for carrying out the bill.

CalSTRS and CalPERS are working with several international groups on the climate risk issue. Some argue that if runaway climate disruption is to be avoided, most of the proven fossil fuel reserves must be left in the ground not burned.

Sunny Galbraith, a Sebastopol high school teacher, was among several educators who urged the CalSTRS board last week to go beyond thermal coal and divest fossil fuels.

She brought a cutout of the head of a toothed dinosaur, part of a class project to create “Fossie,” a 12-foot, three-dimensional dinosaur figure who says: “Keep me in the ground.”

“It pains me that my CalSTRS retirement fund invests in the very companies that are putting the world at peril,” Galbraith said.

Student-led movements to divest fossil fuels have been rejected by the University of California and several other leading universities. Stanford University’s endowment fund voted last year to divest thermal goal, a narrower emerging target.

The World Coal Association responded last November with a fact sheet arguing, among other things, that new technology and carbon capture reduce CO2 emissions and that divestment hinders the reduction of “energy poverty” in developing nations.

In considering divestment, CalSTRS would look at the economic risk of a long-term investment in an industry faulted for climate change, whether the trust of many of its members is being weakened and possibly other parts of its “21 risk factors.”

Divestment’s checkered past may be reviewed. A 1987 state law requiring divestment of firms doing business with apartheid South Africa cost CalSTRS $600 million to $750 million as holdings were sold, replaced and investment opportunities lost.

A Pension Consulting Alliance report also estimated that a voluntary switch to a tobacco-free investment portfolio in 2000, after tobacco divestment failed in the Legislature, cost CalSTRS $1 billion in lost investment opportunities.

CalSTRS and the larger California Public Employees Retirement System opposed legislation in 2007 requiring divestment of stock in foreign companies doing defense or energy business with Iran.

The two pension funds were scolded at a legislative hearing in 2010 for not complying with the law. A followup bill in 2011, aimed particularly at CalPERS, was intended to clarify and enforce the Iran divestment.

Last week the California Federation of Teachers led a large and emotional protest of the CalSTRS failure to divest holdings in the manufacturer of an assault rifle used to kill 20 children and six educators at a Connecticut elementary school in December 2012.

“CalSTRS has hundreds of billions in investments,” Jeff Freitas, CFT secretary-treasurer, told the board. “Even if we take a loss in removing this portfolio from our retirement fund, it is the right thing to do.”

CalSTRS quickly sold $3 million in stock of two other gun manufacturers. But its holding in the assault rifle manufacturer, estimated at $8.8 million two years ago, is part of a $375 million investment in a long-term Cerberus private equity fund.

If it broke the Cerberus contract, CalSTRS could suffer a major financial loss and, some fear, perhaps the ability to contract in the future with top private equity funds, which are expected to provide above-market returns.

“The comments that have been made to date by the federation and its representatives are ones that we agree with,” said Harry Keiley, CalSTRS board chairman. “We are working closely with our staff to come to a resolution that we are all satisfied with.”

The pension funds have dealt in the past with required divestments in Northern Ireland and firms that used slave labor during World War II. Iran and Sudan divestments are still in force.

This year thermal coal is not the only proposed divestment. Another bill, AB 1410, would require the pension funds to divest Turkish bonds because of Turkey’s failure to acknowledge its World War I-era genocide of Armenians.
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Ed’s Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.