On the Nonsensical Bill to Force CalPERS and CalSTRS to Divest From Fossil Fuel Investments

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Evan Symon of the California Globe reports that a bill to force CalPERS, CalSTRS divestment from fossil fuel investments passes second committee:

A bill to phase out fossil fuel investments in the California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS) state public pension funds was passed in the Senate Judiciary Committee Wednesday, with the possibility growing that a combined $14.8 billion in fossil fuel investments could be disinvested by the end of the decade if passed.

Senate Bill 252, authored by Senator Lena Gonzalez (D-Long Beach), would specifically prohibit the boards of CalPERS and CalSTRS from making new investments or renewing existing investments of public employee retirement funds in fossil fuel companies. Complete divestment from the companies are due by 2030, with an additional five years being given on top of that in case market conditions aren’t favorable for a divestment for a time. Both boards are also required to file a report with the legislature and the Governor beginning in 2025 on which companies they have divested from in the past year.

Senator Gonzalez authored the bill due to CalPERS and CalSTRS continuing to invest in fossil fuel companies despite California’s continuing actions moving away from fossil fuels and combatting climate change. In a fact sheet released last month, Gonzalez said “Californians, along with states and nations around the globe, are facing the real and immediate threats of climate change and its ever-growing impacts on our health, safety, environment, and our ability to pass on a livable planet to future generations.”

“California has been a world leader in taking steps to combat the causes of climate change, setting historic carbon reduction goals, and taking meaningful actions to help prevent environmental destruction and protect communities who bear the overwhelming brunt of carbon emissions. Despite these forward-thinking actions, California’s multibillion dollar retirement pension funds are actively investing billions of dollars in the very fossil fuel companies that are the primary cause of climate change.”

The Senator also pointed out how much both pension funds currently have invested in fossil fuels. CalPERS, which currently has an investing power of $469 billion, is investing $9.4 billion in fossil fuel companies. Meanwhile CalSTRS, worth $327 billion, currently has $5.4 invested in those companies. Both funds have continued investing in the companies in recent years, having a combined $1.3 billion in Exxon alone, as well as $817 million in Chevron.

Based on these facts, SB 252 has virtually united Democrats, with the bill passing the Senate Labor, Public Employment and Retirement Committee last week by a vote of 4-1 and the Judiciary Committee on Wednesday with all 8 Democratic Senators in favor of it. While Senator Gonzalez’s previous version of the bill, SB 1173, died in the Legislature last year, SB 252 has continued to have strong support so far this year. Environmentalists and others praised the passage on Wednesday, with many noting the strong push against oil and gas companies in recent years.

SB 252 Advances in Senate

“Union members, workers, retirees, and pension members have made it clear: we want out of fossil fuel investments and we want out yesterday,” said Fossil Free California Coordinating Director Miriam Eide on Wednesday. “Fossil fuels are toxic, not only to the financial future of pensions, but to the health of our communities. This vote is a massive testament to the power of unions and the power of Californians when we come together across our differences to unite for our collective future. We are counting on the climate leadership of California’s Senate, Assembly, and Governor Newsom. It’s time for California’s elected officials to listen to unions, working Californians, and constituents – not the fossil fuel lobby. For California and for our public investments, it’s not a matter of if, but when, we go fossil-free.”

However, despite many in favor of the bill, SB 252 continued to have detractors, including many economists and investment companies that warned against hasty disinvesting due to the changing nature of the energy sector.

“Right now, a lot of energy companies, including those heavily into fossil fuels, are looking at major market changes,” economist and energy sector researcher Paul Charlemagne told the Globe Wednesday. “Many are putting resources into green energy, buying firms that will ease the transition from oil and gas to wind and solar, or are offering themselves as an energy provider for the electric car market or as a supplier of lubricants for wind power farms. Look at the largest, Exxon. They’ve been going steadily into green energy for years, and are actually the biggest supplier of lubricants for wind farms. Yet they’re on the chopping block for disinvestment in that Californian bill.”

“The bill looks hasty and is putting every company there in a black and white light, instead of actually looking into each and where they will be in 2030. Will Exxon and some others still be involved in oil production in 2030? Yes. But are they all also seeing where the future is heading and working on advances in those areas as well? Yes too.”

“Plus, current Californian pension investments in fossil fuel companies aren’t actually all that much, and they can easily be invested back into by others. Exxon has a market cap of $437 billion. California slowly pulling out $1.3 billion is really not a big deal when current investors will put that much more in, and then some.

“But the state would be foolish to pass this bill, as is at least, since these companies make money, are still growing, and most importantly, are putting more resources into green energy. I mean, if this passes, a headline could realistically read ‘Governor Newsom signs bill hurting wind power industry’ or something like that. The people behind this bill missed so much.”

SB 252 is due to be heard next in the Senate Appropriations Committee.

I had a great day today watching my favorite ESG pinata, Tesla, get slammed hard in the stock market:

Poor Elon Musk, he really didn't have a great day:

Back to Tesla below but first, let me quickly share with you everything that's wrong with this bill to force CalPERS and CalSTRS to divest from fossil fuel investments:

  • First and foremost, it shows how weak the governance model is at US public pension funds. In Canada, our large public pensions are managed at arm's length from the government precisely to ensure there is no political interference in pension investments. I'm sure Senator Lena Gonzalez (D-Long Beach, featured at top of this post) has her heart in the right place but she should stay the hell away from public pension funds.
  • Importantly, divesting out of fossil fuels carries important costs, costs that neither CalPERS or CalSTRS can afford right now given their funded status is 81% and 73% respectively. With a looming global recession, it makes sense to underweight the oil & gas sector but divest out of it, that's just plain dumb.
  • Divestment solves nothing, it only offloads the risk to another private fund that doesn't care about ESG. If you really care about the environment, you want CalPERS and CalSTRS to stay invested in oil & gas shares and to engage with Big Oil.
  • Big Oil companies like Exxon, BP, Chevron are big investor in renewable energy. They're part of the transition economy we so desperately need to attain net zero by 2050. McKinsey did a whole comment on how oil & gas companies can be successful in renewable energy. The two aren't mutually exclusive, they are part of the solution for a better, more sustainable future.
  • California's policies are left-leaning and that goes for the environment and for their criminal justice system. Catch and release has been an abject failure in California, with criminals revolving in and out of the system. helping to explain why the crime rate is so high. Forcing pensions to divest out of oil & gas is equally criminal and the cost will be borne by the members of these plans.
  • In Canada, apart from CDPQ, no other large public pension fund has divested out of oil & gas, preferring engagement with the oil & gas sector to monitor their progress in terms of achieving net zero by 2050. 
  • In fact, CPPIB is 'squarely on strategy', acquiring a big stake in California oil and gas producer fits ESG plan as part of its commitment to energy transition.

Earlier this week, I discussed CDPQ's 2022 Sustainable Investing Report noting this:

I've said it before and I'll say it again, CDPQ is a global leader in sustainable investing and it has nothing to do with the fact that it fully exited out of oil & gas sector last year or the fact that it has "one of the world’s largest portfolios of assets in renewable energy generation."

Let that sink in for a second. It has NOTHING to do with its (in my opinion wrong) decision to divest out of oil & gas and NOTHING to do with the fact that CDPQ is one of the world's top investors in renewable energy assets.

Huh? How can this be?

To really appreciate why CDPQ is a global trend setter in sustainable investing you really have to delve deeply in its climate strategy it unveiled almost two years ago.

Every time CDPQ does something big in sustainable investing, others follow suit.

They say imitation is the most sincere form of flattery, and when it comes to CDPQ's sustainable investing and responsible investing strategy, other large Canadian and global pensions typically try to incorporate many bits and pieces into their own strategy (except for divesting out of oil & gas as they prefer engagement and focusing on transition investing).

I also noted that Charles Emond was interviewed on Zone Economie (in French) explaining their decision to exit oil & gas during a good year (2022) and how they're investing more in renewable assets that have performed better over last five years.

This is all fine and dandy but investing in private renewable assets carries its own risks, namely liquidity risk and valuation risk.

And there's no doubt about it, some renewable energy stocks like First Solar (FSLR) continue to defy logic and keep forging higher, outperforming many other stocks over the last five years:

 

 

The problem is that there's a lt of embedded beta risk in these stocks an they can tank fast.

That's what we saw with Tesla's shares today.

So please California, leave your politics aside when it comes to your public pensions, meddling in them will only weaken them over the long run.

Let professional pension managers manage these assets and liabilities very carefully, that's what they're paid to do and unlike politicians, they're accountable for the long-term performance of these plans.

Below, Cathie Wood, Ark Invest CEO, joins 'Closing Bell: Overtime' to discuss her top holding in Ark Innovation Tesla after the company's shares tumble after reporting its earnings. Wood has a $2,000 price target for Tesla inn 2027.

With all due respect, she's smoking hopium, I maintain a price target of $30 a share by Q1 2024 and think the intelligent bet on Tesla is to invest in the AXS Tesla Bear ETF (TSLQ) over the next year. 

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