Public pension funds are tasked with safeguarding the financial futures of their members, which requires making the best possible investment choices. There is a glaring irony when those choices may endanger the lives they are intended to support, such as when such funds finance fossil fuel production. Policy-makers and fund managers must acknowledge this discrepancy and address how pension funds and other public investment institutions are contributing to global warming.
New York is taking responsibility. Over the next five years, the city’s five public pension funds will divest the $5bn they hold in fossil fuel investments as its officials sue the five biggest oil companies: BP, Chevron, ConocoPhillips, Exxon and Shell.
While New York’s divestment is the largest of any US city to date, it is not the first public body to make such a move. In 2015 California ordered its two largest public pension funds to divest the $200m they held in fossil fuel companies. The following year, the city of Washington’s retirement board disposed of $6.5m of such assets. These actions are significant for the oil industry, and contrast sharply with President Donald Trump’s refusal to acknowledge climate change as a legitimate policy concern.
The European Union has been more consistent. In late 2017 the European Parliament passed a resolution calling on all public and private investment institutions to divest from fossil fuels. Earlier in the year, the Irish parliament approved a bill requiring its sovereign fund to sell off all fossil fuel assets.
Once this is implemented, Ireland will be the first country in the world to achieve full divestiture of public money from fossil fuels. Norway’s sovereign fund has also divested from a significant amount of fossil fuel assets after legislators ordered it to remove investments from companies that generate more than 30% of their revenue from coal.
Progress has been more disappointing in the UK, in spite of its legislated commitment to reduce greenhouse emissions by 80% from 1990 levels by 2050. Several large public pension funds, including the £17.2bn Greater Manchester fund, still have assets allocated to fossil fuel companies.
Local public pension funds have £16.1bn invested in fossil fuels, comprising 5.5% of total assets. A comprehensive shift away from these investments would require policy guidance to clarify that doing so would not betray public pension funds’ fiduciary duty to find the best financial returns for members.
Critics are quick to highlight the financial burden of divestment, especially when fossil fuel investments make up a significant share of a fund’s portfolio. There could be consequences to a fund’s ability to finance current pension incomes, for instance. This is why divestiture must be executed strategically, as the examples in Norway and the US show.
Beyond divestment, funds need to become more proactive in selecting climate-conscious investments. With the growing availability of green financial instruments, there are alternative investment opportunities that support sustainability goals. Over $100bn worth of green bonds were issued in 2017, 125 times the number a decade ago. While this is still a relatively small amount, green finance is growing quickly and will become an increasingly important component of funds’ portfolios.
Public investment funds are different from other investing institutions as they have a social function. Pressure to find the best investment returns have compromised this role.
If pension funds are genuinely committed to protecting their members’ future livelihoods, they need to assess the broader implications of investment decisions carefully and rectify actions that counter their ultimate objective.
Kat Usita is Economist at OMFIF.