April 29, 2015

Report: Fossil Fuel Investments Beneficial for State Pension Funds

Oil and gas investments provide numerous benefits for college and university endowments, including funding for scholarships and financial aid, expanding academic programs, and maintaining facilities. A new study conducted by economic advisory firm Sonecon and released by the American Petroleum Institute (API) indicates that fossil fuel investments are also financially beneficial for those enrolled in state pension funds across the country.

The report, which examined the impact of pension fund oil and gas investment returns from 2005 to 2013, concluded that investments in those stocks “significantly outperformed the other assets held by those funds.” Oil and natural gas investments averaged cumulative returns of 130 percent over the eight-year period, while the same funds’ other holdings only averaged 68 percent. The seventeen states investigated represent a range of investment in oil and gas assets. In South Carolina, the two largest pension plans held an average of $300 million, or 1.6 percent of their total holdings. In New York, on the other hand, the two largest funds had average oil and natural gas asset holdings of $11.3 billion, or 5.0 percent of their total holdings.

API Vice President of Regulatory and Economic Policy Kyle Isakower applauded the findings in a conference call with reporters Tuesday:

“We already know that a healthy domestic oil and natural gas industry is good news for jobs and government revenue, and we now know that it also provides stability to the nest eggs that millions of Americans are counting on for a secure retirement…. “”Millions of Americans with a 401k, mutual fund, or pension also rely on the income and capital growth these companies provide for their retirement.”

California Public Employees’ Retirement System (Calpers) CEO Anne Stausboll also recently commented on the importance of retaining oil and gas investments:

“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.”

The robust performance of oil and gas stocks is particularly significant when it comes to maintaining a diverse investment portfolio. A study released by IPAA earlier this year, authored by former University of Chicago law school dean Daniel Fischel, actually found that universities that choose to divest their endowments of fossil fuel companies risk losing out on significant returns that would have otherwise been generated by funds that were properly diversified. According to Fischel’s analysis, fossil-free portfolios produced returns over a 50-year period roughly 70 basis points lower than optimized portfolios. Apply those numbers to the roughly $456 billion contained in U.S. university endowment accounts, than those with oil and gas stocks, and the potential exists for returns to be reduced by nearly $3.2 billion annually. “A reduction in wealth of this magnitude could have a substantial impact on the ability of universities to achieve their goals, such as the research, scholarships and services that universities are able to offer,” Fischel said about the study.

Furthermore, an independent survey of professionals in the capital markets community concluded that only 8 percent of respondents believe that divesting from fossil fuel stocks on an otherwise optimal and diversified portfolio would have a positive impact on returns. Meanwhile, 62 percent believe the impact on returns would be negative, and 74 percent said that surrendering the long-term benefits of diversification would be the most significant costs of fossil fuel divestment.

For millions of Americans who receive public employee pensions, oil and gas investments are crucial to ensuring retirement security.