New York's Pension to Join the Divestment Crowd?

Tsvetana Paraskova of reports that a $226 billion US pension fund is considering dumping oil & gas investments:

The $226-billion New York State Common Retirement Fund is undertaking a review of all energy companies it is invested in, to assess their readiness for the energy transition and dump those considered riskiest in climate-related investment.

As it pledged on Wednesday to transition its portfolio of holdings to one with net-zero greenhouse gas emissions by 2040, the pension fund—the third-largest in the U.S. after CalPERS and CalSTRS of California—said that it would complete by 2025 a review of all its holdings in energy companies to assess “their future ability to provide investment returns in light of the global consensus on climate change,” New York State Comptroller Thomas DiNapoli said.

“Those that fail to meet our minimum standards may be removed from our portfolio. Divestment is a last resort, but it is an investment tool we can apply to companies that consistently put our investment’s long-term value at risk,” DiNapoli added.

The Fund is currently concluding its evaluation of nine oilsands companies and will develop minimum standards for investments in shale oil and gas. By 2025, the reviews will include all fossil fuel sectors, including integrated oil and gas companies, other oil and gas exploration and production, oil and gas equipment and services, and oil and gas storage and transportation.

The Fund has been calling for years on ExxonMobil, for example, to start accounting for climate change risks.

In a letter to shareholders ahead of this year’s annual meeting in May, DiNapoli, in his capacity of Trustee of the Fund, wrote:

“As the world, ExxonMobil’s peers, and investors confront the climate emergency, ExxonMobil is carrying on as if nothing has changed. It is crystal clear to us that ExxonMobil’s inadequate response to climate change constitutes a broad failure of corporate governance and a specific failure of independent directors to oversee management.”

After the meeting, at which Exxon’s shareholders rejected proposals for a report on lobbying and a report on the risks of petrochemical investments, DiNapoli said that “Exxon, in particular, has made itself an outlier for its refusal to seriously account for the demands of a lower carbon global economy.”  

I read this article earlier today and it irritated me. It represents everything I hate about the current ESG mania and the politics of oil & gas.

Before I give you my thoughts, let me state flat out a few things so I don't get radical leftist  environmentalists after me:

  • First, I'm not a climate change denier, I'm a hopeless cynic. I knew the world was screwed back in the mid 90s when I took Tom Naylor's ecological economics course at McGill. The combative economist taught us everything we needed to know about the sorry state of the climate 25 years ago. It wasn't good back then and it's far worse now.
  • Second, I welcome innovation and disruption in all fields, including energy. I was investing in solar stocks before the ESG crowd knew what solar and wind power were all about. 
  • Third, if we are going to really tackle climate change, we need to think well past solar and wind and look at nuclear as a clean source of power. Read my recent comment going over OMERS Infrastructure year in review, they are lucky to have Bruce Power as part of their portfolio. I wish more Canadian pensions would look into partnering up with big engineering firms to develop more nuclear power plants to produce clean energy (solar and wind won't cut it and they present problems for electric transmission grids).
  • Fourth, while I believe in ESG over the long run, there is an ESG bubble going on right now as every asset manager on the planet is toppling over themselves to promote ESG and how their funds are the best ESG funds. They call themselves ESG funds but all they're doing is investing in the new tech fintech and cloud computing darlings, fueling a solar stock bubble and of course, fueling an electric vehicle bubble with Tesla being the poster child (even Dr. Bury is calling the company and its founder out).
  • Lastly, and most importantly, apart from tobacco where I agree with those who think it's futile engaging with companies, divestment is a lazy, stupid and potentially dangerous strategy that is more often than not politically motivated.

On that last point, I even know people who argue that as long as Big Tobacco  offers great dividends and cigarettes are not illegal, who are we to make normative judgments? "As long as it's legal, pensions have a fiduciary duty to invest where they find the best risk-adjusted returns." 

That is a viewpoint but like I said, I agree with Dr. Bronwyn King, the tobacco industry is responsible for millions of deaths all over the world and sky high healthcare costs, so even if smoking cigarettes is legal, I think pensions are right to divest as it's a dying industry.

Nonetheless, I don't place Big Oil and Big Tobacco in the same boat. The former provides the world's energy needs and we still need traditional hydrocarbon energy, at least for another hundred years.

Will we have planet one day where everyone is driving around in an electric vehicle? Sure we will but it's not going to happen overnight or even over the next ten years no matter what Elon Musk and climate change politicians tell you.

The world is changing, we all know this, and the pandemic is accelerating change, digitizing the economy and putting more pressure on policymakers  and institutional investors to address climate change.

And large Canadian pensions are doing their part in addressing climate change. They recently united pushing for more ESG disclosure and one is undertaking a mammoth infrastructure project which will end up drastically reducing carbon emissions in my city (this week, CDPQ Infra announced the REM will be extended to the east of Montreal, news I welcome). 

That's all great but none, I repeat, none of Canada's large pensions are divesting out of oil & gas and the reason is simple, they prefer engaging with these companies on ESG matters and they are acting in the best interests of their members. 

Back in September, I wrote a comment on Big Oil for the long run where I said the valuations of integrated oil giants were very compelling and maybe it's time to invest in Exxon (Goldman just woke up and upgraded Exxon today).

It was a friend of mine who first brought Exxon to my attention and he was a bit early investing in it but he kept adding as shares plunged and still has a significant stake: 

I liked it from a purely technical perspective as it was forming a beautiful double bottom on the weekly chart:

Now, my friend and I couldn't care less if CalPERS, CalSTRS or any large US pension are divesting from oil & gas, if it's a compelling investment and looks good on the chart, we buy it.

But I'm not going to lie, the big money these days is in solar stocks like SunPower (SPWR) because that's what the big funds and Robin Hoodies love buying:

Still, if I was a pension manager worried about risk adjusted returns and liquidity, I wouldn't be jumping on solar stocks here and I'd definitely be focusing more on traditional energy stocks (XLE) including pipelines that offer stable dividends.

Having said this, in a world where BlackRock and other large institutional investors keep telling you they're looking to reduce their carbon footprint, investing in traditional energy is like swimming against the current.

I can say the same thing about shorting the Teslas of this world, it's like fighting a losing battle.

Will Dr. Burry be proven right on Tesla? Who knows? I don't think he realizes how markets are much more manipulated nowadays than in 2008 (hard to believe but true).

In a world where central banks and Wall Street choose who the winners and losers are, selling short any company can lead you down the road of ruin if you go against the Power Elite.

As far as the $226-billion New York State Common Retirement Fund, I hope it doesn't follow the divestment crowd but I fear it will, again for purely political reasons, not logical ones based on sound investment decisions (they will say it makes perfect long-term sense but neglect to account for the cost of divesting).

And that's the most important point I want to get across, divesting out of any investment represents a cost, a cost plan members and taxpayers ultimately bear.

In an ideal world, we would all be driving Teslas, singing koumbaya songs and feeling good about the climate, but it's all nonsense and some people need to stop treating ESG as a religion and put their big boy pants and skirts on. 

Pension fund managers have a fiduciary responsibility to deliver the highest risk-adjusted returns. Period. If that includes investing in traditional carbon economy, let them do their job.

Lastly, let me remind you what Michel Leduc, Senior Managing Director and Global Head of Public Affairs and Communications at CPP Investments shared with me after I wrote a comment defending its high-carbon approach (total nonsense but environmental zealots love hyperbole):

On these matters, we respect the legitimate act of people disagreeing with some of our investments. So, by choice, we always begin with finding common ground. There is always something to agree with. We agree that climate change is real, serious and happening now. We also agree about investing in the renewable sector. It is the smart thing to do. Like every other sector, we need to select opportunities carefully. Yet, we have found excellent renewable energy assets to add to the portfolio, achieving meaningful exposures in a relatively short period of time thanks to an exceptional internal team of experts. 

We disagree that divestment is a good option. We believe that a challenge of this global scope requires everything in our toolkit: understanding the forces of change such as technology & innovation; global, national and sub-national policies that will affect the pace of the evolution; and household/corporate purchasing trends. All this data and insights to help us shape our portfolio in step with the evolution from traditional to renewable sources over the next decades. Importantly, some of significant oil & gas companies are among powerful forces, as agents of change, because they have the financial incentives/motives; technical know-how and capital to be instrumental players and integral to the evolution taking place. Starving them of capital takes out a critical part of the toolkit. As noted, every part of the toolkit has a role to play on this. Then, there is the value of engagement influence by strong knowledgeable investors. If not us, then who? 

 Divestment simply does not work. In fact, it is counter-productive to the very cause of the authors.

Let that sink in and this comes straight from Canada's largest and most important pension fund.

Alright, let me end it there, please don't shoot the messenger, I'm all for ESG but remember, I'm a hopeless skeptic and question everything, including the current ESG mania.

Speaking of ESG, Mantle314 and Ortec Finance recently held a very interesting webinar "Acing the TCFD: Scenario Analysis and Climate Disclosure" which you can view here.

Joy Williams of Mantle314 sent me this:

Scenario analysis has been challenging for many and there was too much to cover in one webinar! But we wanted to give everyone a flavour of how significant the preparation is to the entire process of scenario analysis. Also how using specific experts like Mantle314 for strategy and Ortec, as a quantitative modeller, can really help companies leapfrog this process. The one takeaway that I hope everyone heard is that this is a learn by doing exercise. It will be some time before there is a full plug and play option for scenario analysis and the more organizations that start getting into the details, the better. I love this subject and look forward to many discussions with people!

Recall Joy did work for the New York Common Fund's decarbonization advisory panel (see here) and even delivered remarks which you can read here. (the views expressed here are my own, not hers!)

Below, New York State has one of the biggest pension funds — $226 billion — and many are calling for it  to divest from oil and gas companies and decarbonize by 2040. 

Be careful what you wish for, making a rash decision to divest from oil & gas might end up costing New York's taxpayers and pension fund members dearly down the road, but the ESG zealots don't care, they only see Big Oil as blood money (never mind the great jobs the industry produces).

Update: Joy Williams of Mantle314 shared this with me after reading this comment:

Thanks for commenting on this news - I do think it's news that needs to be highlighted - and would like to offer two thoughts in a purely personal capacity (the Decarbonization Advisory Panel wrapped up more than a year ago now). I have a love/skeptical relationship with headlines like these, but want to focus on the substance of the article and your comments. First, I've always said that if an investor takes the step of divestment, which investors do every day with thousands of stocks when they decide to sell, it should be the result of a sound and thoughtful investment process and consistent with their strategy. Divestment in and of itself is not an investment strategy. I believe we are aligned in this as you're saying that investors need to pay attention to how the world around is changing and not jump on bandwagons. Second, I would point out that the NYSCRF has been looking at the issue of climate change for years and, in fact, had done quite a bit before establishing the advisory panel, of which I was honoured to chair. The advisory panel itself took about a year and then the CRF has been active for over another year in implementing their action plan - so not exactly a snap judgement. Wherever the CRF lands on this issue, I know there are many smart people working on it and look forward to seeing more leadership from them.

I thank Joy for her feedback and once again, the opinions expressed in this post are purely my own.

Second, Clive Lipshitz sent me this updated paper from the Boston College Center for Retirement Research on ESG investing and public pensions which explicitly states that boycotting companies is unlikely to have any impact on the price of their stock and ends on this sobering note:

The evolution of social investing from economically targeted investments and state-mandated divestments, where public plans clearly sacrificed return, to shareholder engagement and ESG investing, where the goal, at least, is to maintain market or better returns, is definitely a step forward. But both data and theory show that stock selection is not the way to reduce smoking or slow the rise in the earth’s temperature. And focusing on social factors, at least for public pension plans, does not appear to be costless – plans earn less in returns and fail to capture beneficiaries’ interests. Most importantly for public plans, the people who are making the decisions are not the ones who will bear the brunt of any miscalculations.

I thank Clive for sending me this paper which you should all read here.