January 29, 2016

Commissioner Jones’ Call for Coal Divestment is Just the Latest Gesture

On Monday, California’s Insurance Commissioner Dave Jones requested that insurance companies in the state divest from thermal coal. Although he has been applauded as “the first state insurance regulator in the United States to call on insurance companies to divest,” Jones’ request is laden with problems.

For starters, leading economists, academics and portfolio managers across California have all adamantly rejected divestment as nothing more than a publicity stunt, with no tangible effect on the fossil fuel industry or climate change, over the last year.

• This past summer, the University of California’s Regent called divestment “symbolism without real impact”.
• Less than a week later, the University’s Chief Investment Officer made it clear in an op-ed that UC would continue to invest responsibly, adding that “Blanket divestment from fossil fuels grabs headlines but doesn’t actively address climate change.”
• And, as DivestmentFacts.com reported, CalSTRS Chief Investment Officer Chris Ailman made his position on divestment clear stating: “I’ve been involved in five divestments for our fund. All five of them we’ve lost money, and all five of them have not brought about social change.”
• Professor Cornell Bradford of CalTech released a study that quantified the institutional financial losses incurred within a divested portfolio. Among the findings it concluded that if Harvard, NYU, Columbia, MIT and Yale were to divest their endowments, they would collectively stand to lose $195 million every year.
• Frank Wolak, the director of the Program on Energy and Sustainable Development at Stanford, has also highlighted the environmental costs of divestment. He states: “Divestment comes at the expense of meaningful action. It will do nothing to reduce global greenhouse emissions. It will not prevent these companies from raising capital.”

As for Commissioner Jones’ announcement itself, it appears to be lacking in substance. According to the think tank R Street Institute, it falls flat for two reasons.

First, that the value of capital investments made by the fossil fuel industry are broadly known and thus already priced into the equity valuations of coal, oil and gas company stocks. Insurance companies have therefore already taken into account medium and long term changes to the market of the stocks they own.

Second, the institute states that escalating regulatory pressure on fossil fuel companies does not necessarily entail a commensurate increase in risk in the short term. Indeed, the fact that coal still makes up almost 40 percent of U.S. electricity generation – not to mention the vast majority of the power consumed in developing world – would suggest that the risk of stranded assets that the Commissioner references is abstract.

Another specialist, Robert Hartwig, President of the Insurance Information Institute, has also called Jones’ sudden move towards divestment “a slippery slope” from an economic point of view, stating:

“There is no end to the different sectors of the economy that you could single out…Each and every insurer makes its own investment decisions, but all of them have portfolios that are extremely well diversified and, generally speaking, there is going to be an energy component in the portfolio of virtually every insurer.”

Hartwig’s point further calls into question whether Commissioner Jones is fulfilling his responsibility to ensure the “health and economic security of individuals, families, and businesses are protected.” As R Street Institute has pointed out, singling out one type of stock is not only a “slippery slope” but is arbitrary and highly subjective in scope. Why should the “carbon economy” be the only sector to be highlighted as one that entails an element of risk?

Jones’ in fact has a long history of making similarly politicized demands. Since taking office in 2011 he has persistently called for the National Association of Insurance Commissioners to require that industry note the steps it “has taken to engage key constituencies on the topic of climate change,” implying that companies must actively lobby on environmental issues.

Ultimately just as that demand was rejected, there is no guarantee that this motion will meet with any more success. At this stage it is nothing more than a request, and the Association of California Insurance Companies still has to review and approve the motion before for any real action will be taken. In such a light, the announcement appears to be just the latest in a long line of political gesturing – garnering headlines and little else.