October 12, 2015

Let’s Read the Fine Print in the Calif. Coal Divestment Bill

Last week, we took a few minutes to outline some of the concerns surrounding the effort out in California to force the state’s two major pension and retirement funds — CalSTRS and CalPERS – to drop certain energy-related stocks from their portfolio, notwithstanding previous statements from each speaking out against divestment. But believe it or not, we didn’t get a chance to look at the text of the legislation that was actually signed until this weekend, and what we found is pretty interesting – and not in the way that most reporters have been covering it.

To set the stage, let’s first highlight some of the recent statements representatives of CalSTRS and CalPERS have made about divestment. For instance:

• CalSTRS Chief Investment Officer Chris Ailman: “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.” 4/7/15

• CalPERS Chief Executive Officer Anne Stausboll: “Engagement is the first call of action and is the most effective form of communicating concerns with the companies in which we invest. That is why, when it comes to climate change and its risks, Calpers’ view is that the path to change lies in engaging energy companies, instead of divesting them. If we sell our shares then we lose our ability as shareowners to influence companies to act responsibly.”  3/22/15

• CalSTRS Chief Executive Officer Jack Ehne: “Divestment bears the risk of adversely affecting an investment portfolio and severs any chance to advance positive change through shareholder advocacy.” 8/21/13

Now with that in mind, let’s dive into the actual bill. For starters, as first reported out by the Sacramento Business Journal, the bill only forces the funds to divest from coal if a determination is made that the move falls in line with the fiduciary responsibility of those who run the funds. From the Journal:

“Senate Bill 185 requires the state public employee and teacher pensions to liquidate investments in thermal coal by July 2017. But toward the bottom of the bill is an escape clause: Public pension investors must first determine that any divestment is ‘consistent with the fiduciary responsibilities of the board.’ In other words, if divesting from coal appeared a risky move leading to losses for the public employee retirement accounts, their respective boards would not have to divest.” (emphasis added)

Given that CalSTRS, CalPERS, California professors, and many others have expressed financial concerns over divestment, it’s entirely possible (even likely?) that the funds never actually move forward with divestment out of the financial obligation they have to the folks who contribute to them.

Here’s another interesting thing about the bill: it only targets “thermal” coal companies that generate more than 50 percent of their revenue from the act of mining coal. As Divestment Facts has highlighted in the past, however, most coal companies don’t just mine for coal – they do lots of other things, like sell it and distribute it – which means the actual number of qualifying companies is probably a whole lot smaller than supporters of divestment would like to admit. As Bloomberg explains:

“From Norway’s $900 billion sovereign wealth fund to France’s biggest insurer and the Church of England, investors are starting to turn the screw on coal producers by selling down their holdings. The criteria they use to select candidates for divestment exempts some of the biggest producers, however. That’s because those companies are large, diversified miners and only get a small part of their revenue from coal.”(emphasis added)

According to the Sacramento Business Journal, these companies are limited to just over two dozen companies and an exceedingly small fraction of the overall value of CalPERS and CalSTRS funds:

“Having that said, the law does not target all coal mining companies — just those that derive a majority of revenue from thermal coal. Other coal companies that extract a more diverse array of minerals might not be touched. For CalPERS, the law targets 27 companies that provide the pension fund with a portfolio value of $57 million – a drop in the bucket for a pension fund worth $293 billion. The California State Teachers Retirement System, which has $184 billion in assets, said its current investment in thermal coal holdings is valued at $6.7 million.” (emphasis added)

Interestingly, despite issuing lots of long-form press releases to accompany the other bills he signed before the legislative term ended, Governor Brown chose not to make any mention of the bill when he signed it last week. No press conferences, no statements, no Tweets or Snapchat sessions (!) – nothing to speak of. And he didn’t attempt to tie this legislation to several other climate bills that he claimed in press releases would represent “world-leading energy efficiency and renewable energy goals for California.” And at least in that one area, the governor is right: that divestment bill had nothing at all to do with climate change – nothing, that is, beyond serving as a distraction from the real, collaborative work that needs to be done to address it.