Pension funds in liberal states are conservative on climate change

By Avery Ellfeldt | 05/29/2024 06:32 AM EDT

From California to Vermont, state pension funds are holding on to investments in oil companies, with “active investing” preferred over divestment.

New York State Comptroller Tom DiNapoli is divesting pension funds from oil companies.

New York State Comptroller Tom DiNapoli is keeping $560 million in Exxon Mobil shares after saying in February he was divesting a state fund from fossil fuel companies. Hans Pennink/AP

One of the nation’s most powerful public pension funds drew attention earlier this year for divesting from fossil fuels — sort of.

The New York State Common Retirement Fund said in February it would yank millions of dollars out of eight oil and gas companies that it says have failed to prepare for climate change, putting the fund’s finances at stake.

But there was a caveat. The $260 billion fund would sell some, but not all of its assets in the companies to ensure the move wouldn’t eat into investment returns. So while the fund did divest $25 million from Exxon Mobil, for instance, it still holds nearly $580 million in the oil giant’s shares.


The partial divestment illustrates the growing pressure public pension funds are under to address the threat that climate change poses to their investments — without sacrificing profits.

State pension funds from New York and Maine to California and Colorado are monitoring climate risks in their portfolios, pushing companies to decarbonize and, in some cases, pulling dollars out of major polluters altogether.

But the funds have faced obstacles, including experts who warn that selling funds solely for climate reasons is financially dangerous and jeopardizes fund managers’ primary duty to safeguard and maximize trillions of dollars in retirement savings.

“There’s broad acknowledgment that climate risk is an emerging risk to pension fund investments,” said Fatima Yousofi, a senior officer with The Pew Charitable Trusts’ state fiscal policy team. “How that’s factored in, though, seems to be the big battle.”

Public pension funds are immensely powerful. Nationwide, the funds provide benefits to more than 20 million people, according to the National Association of State Retirement Administrators. In December 2023 their total assets were nearly $6 trillion,

The funds have faced pressure for decades to use their financial power to address issues ranging from apartheid in South Africa to tobacco addiction and climate change by divesting from certain companies.

“Those blue states, those environmental states, are putting more positive weight on ESG,” or environment, social and governance issues, said Matthew Kahn, an environmental economist at the University of Southern California. “But even there, they’re under pressure to solely focus on” returns.

Consider Maine.

The state in 2021 became the first to enact legislationthat requires state agencies — the Treasurer’s Office and the Maine Public Employees Retirement System — to divest from all fossil fuel holdings by 2026.

But early estimates by retirement system consultants said the legislation could cause $565 million in immediate losses due to transaction costs from selling fossil fuel holdings.

Vermont veered down the same path in 2023 when lawmakers proposed — but ultimately shelved — legislation that would require fossil fuel divestment before 2030 by three state pension funds.

The Vermont Pension Investment Commission found the measure could reduce long-term returns and force workers to pay $55 million more each year to the state teachers’ and employees’ retirement plans.

In Republican-led states, officials have taken the opposite approach and banned state funds from considering climate change or doing business with asset managers that have ESG-related policies.

Analyses by retirement systems in those states and outside experts have found that those policies could backfire by raising costs and reducing returns. 

“Having mandates to divest can have tremendous transaction and administration costs,” said Yousofi of Pew. “Pension funds should be looking at these issues, they should be looking at climate risks, and they should be considering and factoring it into their decision-making.”

California straddles the line

The California Public Employees Retirement System, the nation’s largest public pension fund with $495 billion in assets and 2 million members, recently showed the limits of climate action it would take. CalPERS made a strong statement last week against Exxon Mobil, announcing it would vote to oust the company’s board of directors at an annual shareholder meeting Wednesday.

But CalPERS opposed a bill introduced last year in the California Legislature that would force it to sell investments by 2031 in 200 major fossil fuel companies based on their greenhouse gas emissions. S.B. 252 also would prohibit the pension from purchasing any of those stocks effective this year.

CalPERSopposes both the legislation and divestment more broadly. The fund says blanket fossil fuel divestment would have little to no effect on companies’ operations or emissions, and could eat into workers’ retirement savings.

“Active investing, through engagement and advocacy, is more effective than one-size-fits-all divestment,” CalPERS spokesperson John Myers said in an email.

CalPERS said in November it would pour $100 billion into “climate solutions” such as the renewable energy sector, carbon capture and storage technology companies and natural disaster warning systems by 2030. The fund plans to sell or limit its holdings in companies that do not have credible plans to reduce their planet-warming emissions.

On May 20, CalPERS announced it would vote against all 12 Exxon directors over the company’s attempt to prevent shareholders from pushing the oil giant to act on key issues, climate among them.

The effort has support from Illinois State Treasurer Michael Frerichsand the New York State Common Retirement Fund, which said it would vote against 10 of 12 board members — mostly for its “failure to demonstrate” a willingness to address climate change.

Some Republican policymakers have accused the blue-state pension funds of playing politics. In a May 22 column on the conservative news site 1819 News, Alabama State Auditor Andrew Sorrell accused officials backing the Exxon opposition campaign of “abusing their control over public pensions” at investors’ expense.

CalPERS has also faced scrutiny for its work with the environmental nonprofit Ceres and Climate Action 100+, a coalition of investors working advocating for decarbonization at major emitters.

CalPERS in 2023 turned over thousands of pages of climate-related documents to the Republican-led House Judiciary Committee in response to a 2022 letter that accused the fund of working “like a cartel” to push companies in a greener direction.

Scrutiny aside, there is some evidence that engaging with companies on climate, as opposed to divesting from them, is the more effective strategy.

A paper in January by researchers with the University of Southern California and the University of Utah examined public pensions’ capacity to influence corporate climate behavior.

The researchers found that companies reduced their emissions when blue-state pension funds increased their stock ownership. The emissions cuts likely were due to the funds taking “active engagement” on climate change.

“It would be bad for decarbonization for green pension plans to divest from these companies,” said USC’s Kahn, who co-authored the paper.

Most pension funds have avoided divestment, focusing instead on assessing climate risks and pressuring major polluters to move in a greener direction when necessary.

Colorado passed a law in 2023 requiring the state’s retirement system to report information about climate risks and strategies every year.

The Colorado Public Employees’ Retirement Association opposes divestment because it is costly and would limit its ability to maximize returns, according to the organization’s website.

“Their fiduciary duty requires them to look at all risks,” said Kirsten Spalding, a vice president at the environmental nonprofit Ceres. Treating climate as both a risk and opportunity is the main way “almost all pension funds engage around climate,” Spalding said.