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Public Pension Funds Have Lost Billions On Their Fossil Fuel Investments

Above Photo: US public pension funds would be worth billions more if they divested from fossil fuels. Climate Clock.

Six major US retirement funds would be worth a combined $21 billion more today if they had divested a decade ago.

For U.S. public pension funds, divesting from oil, coal, and gas would result in overall higher financial value.

That is the key takeaway from a new study examining the past decade’s portfolio performance for several of the largest public pension funds in the country. The analysis by researchers at the University of Waterloo, published today in partnership with the organization Stand.earth, has found that the total cumulative value of six major U.S. public pension funds would have been about 13 percent higher had they divested from fossil fuel holdings ten years ago – equivalent to around $21 million in earnings.

Using Bloomberg Terminal data, the researchers looked at the actual portfolio performance between December 31, 2012 and December 31, 2022 of six funds: the Alaska Permanent Fund Corporation, California Public Employees’ Retirement System, California State Teachers’ Retirement System, New York State Teachers’ Retirement System, Oregon Public Employees’ Retirement Fund, and the State of Wisconsin Investment Board.

Then they analyzed how the funds would have done over the same time period if the fossil fuel investments had been divested, and their value spread evenly among the remaining holdings.

The analysis found that while the total actual value of the six funds was $402.8 billion at the end of 2022, they would have been worth $424.6 without the fossil fuel holdings.

“Financially it doesn’t make sense to stay invested [in fossil fuels],” Olaf Weber, a University of Waterloo sustainable finance professor and co-author of the study, told DeSmog.

He said the findings are consistent with other similar studies, such as a 2019 analysis which found that California and Colorado’s public pension funds would have been a combined $19 billion richer had they divested from fossil fuel holdings in 2009.

Although major fossil fuel companies have reported record profits over the past year, this growing body of research suggests that it has not significantly boosted the value of pension funds that remain invested in these companies.

Experts have pointed out that in addition to the great volatility of the fossil fuel industry’s value,  the sector appears to be bound for long-term, perhaps even permanent, decline.

“Today the oil and gas sector is in a pitched battle for last place in the stock market,” said Tom Sanzillo, director of financial analysis at the Institute for Energy Economics and Financial Analysis, during an April webinar timed to the release of a report calling for major hospital systems to divest from the industry.

While the fossil fuel sector commanded about 28 percent of the stock market in 1980, it now accounts for about 5 percent or less of the market, Sanzillo said during the event.

Oil and gas sector profits “are unsustainable,” he said, “and their future is on shaky ground.”

Fossil Fuel Divestment ‘A Win-Win Situation’

One often-used argument for staying invested in fossil fuels is that it allows investors to try influencing companies through shareholder engagement. The problem with this argument is that shareholder engagement has not been very effective at compelling big polluters to take serious climate action.

“The results show there is not really an effect of engagement because if [investors] put pressure on the fossil fuel companies to reduce production, it will have a negative impact on the share price as well,” Weber said. “So that’s kind of a conflict.”

Weber and his colleagues also looked at the greenhouse gas emissions associated with the public equity investments of eight U.S. pension funds: the same six plus the Colorado Public Employees’ Retirement Association and the Alaska Retirement Management Board. They found that if the funds had divested from fossil fuel holdings ten years ago, their cumulative carbon spew would have been about 16.6 percent or nearly 280 million tons lower  – the equivalent of the annual energy use of 35 million homes.

“[Fossil fuel] divestments are able to create a win-win situation with higher financial returns and lower carbon footprints,” the researchers concluded.

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