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May 21, 2019

Divestment Legislation Comes to the Senate

In a press release that sounded more like it was written by 350.org instead of a U.S. Senator’s office, Oregon Democrat Jeff Merkley announced the introduction of a bill on Capitol Hill that would present fossil fuel divestment as an option to federal workers.

Sen. Merkley introduced the bill last year as well, but it didn’t progress.

In short, the bill allows federal employees to opt-out of fossil fuel stocks for retirement savings. Dubbed ‘Retirement Investments for a Sustainable Economy (RISE) Act of 2019,’ the bill creates a ‘Climate Choice Investment’ option for the Thrift Savings Plan (TSP), a 401(k) commensurate.

According to the newly proposed bill, “The Climate Choice Stock Index Fund shall be invested in a portfolio that is designed…to ensure that no investment in the portfolio is an investment with respect to a fossil fuel entity.’’ Of course, such a wide net could include any number of institutions – technology firms running on fossil fuels, cars manufactured using and running on fossil fuels, utility companies – the list goes on. In short, there’s no way to reap the full benefits of investing in the American economy without some exposure to the energy sector.

It’s clear that Sen. Merkley relied on a few, already debunked, activist talking points in order to justify the need for this bill.

For starters, in the press release announcing the RISE bill, Sen. Merkley lauds the divestment movement for its ‘effectiveness’ and ‘expanse,’ citing New York City and Ireland as two success stories of the campaign.

“In recent years, the fossil fuel divestment movement has rapidly expanded around the world. In January 2018, New York City officials set a goal of divesting New York’s $189 billion in pension funds from fossil fuel companies within five years. In July 2018, Ireland became the world’s first country to fully divest from fossil fuels. Globally, over 1,000 institutions have divested nearly $6.25 trillion from fossil fuels, and approximately 60,000 individuals have divested over $5 billion.”

 In reality, New York City is nowhere close to divestment while Mayor Bill de Blasio and Comptroller Scott Stringer are facing resistance from several of the city’s five separate pension funds who have independent authority over the decision to divest.

As for Ireland —  last year the lower house of Parliament passed a bill that requires the country’s sovereign fund to move out of fossil fuels “as soon as practicable.”  But it’s clear that Ireland is more concerned with symbolic moves rather than effective action when it comes to climate give the fact that Ireland’s climate rating stands at 48th out of 56 countries worldwide with a “very low” performance in the Greenhouse Gas Emissions category.

Last but not least, the trillion-dollar, billion-dollar figures cited as divestment estimates have been debunked almost as many times as they’re inflated.

The press release featured quotes from representatives of the Sierra Club and Divest Invest, who of course positioned divestment as a smart choice claiming it, “isn’t just a moral choice, it’s a prudent financial decision consistent with fiduciary duty.”

But we know that not to be the case.

Numerous studies and academics have found that divestment campaigns produce no discernible impact on share prices or company valuations, or on any environmental practices or technology. If TSP investing employees sell their fossil fuel shares at a bargain rate, other investors will still buy the stocks, and energy companies will not see any change.

Studies have also shown that portfolios with fossil fuels outperform those without and tempering holdings to political climates exposes retirement plans to more risk than benefit.  Just last year, for instance, Professor Daniel Fischel of the University of Chicago Law School released a study of the nation’s top pension funds and found that divesting could severely penalize pension returns – to the tune of $324-431 million combined losses per year and $3.7-4.9 trillion combined losses over a 50-year timeframe. From Prof. Fischel:

“Our research shows that large pension funds stand to lose a substantial amount of value if they decide to adopt a divestment policy. The energy sector plays an important role in diversifying a given portfolio, so eliminating that exposure means higher risk and reduced returns to the tune of millions if not trillions of dollars over an extended timeframe. These types of costs leave pensions to make a hard choice: reduce pensioner benefits or increase contributions from taxpayers to the fund.”

While the nuance in this case involves TSP as a 401(k) counterpart instead of a pension, the same principle of diversification loss applies.

Sen. Merkley claims that RISE will give “millions of federal employees the power to ensure their retirement funds are invested in a less risky and more sustainable, socially responsible portfolio.”

However, this claim is also contrary to the facts.

The RISE bill uses the term ‘fossil fuel entity’ when describing the new exclusionary choice – meaning any entity —‘‘with proven carbon reserves” or “that explores for, extracts, processes, refines, or transmits coal, oil, gas, oil shale, or  tar sands.’’ Yet by definition, these ‘entities’ are the same companies providing clean burning natural gas and investing in new technologies for a sustainable future. Thus, instead of taking a moral stand, federal employees and retirees would just be punishing select companies that serve the public good and excluding themselves from investing in the future of energy.

Fossil fuel companies have the wherewithal to make massive investments in clean technology and to pragmatically decarbonize their assets. As a matter of fact, investments by the fossil fuel industry in carbon reducing technology are now outpacing those of venture investment into clean technology.

Bottom line: RISE raises nothing but costs and issues.

Sen. Jeff Merkley’s RISE bill attempts to convince federal employees and retirees that their interests would best be served by divesting their individual 401(k)-like plans. However, the facts simply don’t support these claims. The facts show divestment to be expensive, taxing on the pockets of those whom TSPs, 401(k)s and pensions are supposed to support, and ineffective in addressing climate change or sustainable energy solutions.

Ultimately, the facts show that a ‘Climate Choice Investment’ could end up costing federal workers instead of boosting returns as advertised.