As California considers dropping fossil fuels from major pension funds, new report calls out ‘misinformation’ on costs

“California cannot be a climate justice leader if we continue to invest in the companies that are polluting our environment.”


A newly published report by Fossil Free California finds California’s pension fund managers are circulating divestment “misinformation” by exaggerating the costs involved in shedding their fossil fuel investments in documents prepared for state lawmakers.

California lawmakers are currently considering Senate Bill 1173 (SB-1173), California’s Fossil Fuel Divestment Act, which would require the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS), to stop investing in fossil fuels before the decade is out. The move would impact billions of dollars currently invested in oil, gas, or coal on behalf of California’s teachers, firefighters, and other public employees.

The report titled “Hyperbole in the Hearings” found that the pension “funds have wildly exaggerated losses from past divestments” like those involving tobacco, firearms, and some forms of coal. It concludes that CalPERS and CalSTRS estimates for costs associated with fossil fuel divestment are also exaggerated.

Extraordinary sums of money, invested on behalf of California’s public employees and teachers, are on the line. The two pension funds have estimated holdings of $7.4 billion and $4.1 billion respectively in fossil fuel investments that would need to be divested if the law went into effect. 

SB-1173 is under consideration as the worst drought in 1,200 years continues to parch the American southwest this May and Californians are once again warily eyeing stunningly low reservoir levels. Federal officials have already diverted water from the Colorado River to ensure that the Glen Canyon Dam can generate hydroelectric power for millions, water restrictions will soon go into effect in parts of Los Angeles, and it’s been so dry that in some areas, experts are predicting lower-than-normal wildfire activity because it’s been too arid for the grass that usually fuels wildfires to grow.

“This is a crisis unlike anything that we’ve seen before,” Deven Upadhyay, CEO for the Metropolitan Water District of Southern California, told the Washington Post.

The drought and heat have been made far worse by climate change and the burning of fossil fuels. And as the hazards of climate change become increasingly disruptive, in California and around the world, there’s been a growing push for investors to stop funding fossil fuel companies and to walk away from oil, gas, and coal.

Before it’s enacted, SB-1173 has to survive what California lawmakers call “suspense,” where the fiscal impacts of the law are considered — and it’s become known in the state as the place where bills “are killed without public debate.” That’s because debate between lawmakers during the suspense process is done behind closed doors and there’s no public vote when a bill is killed “on the suspense file.”

In late April, CalPERS and CalSTRS submitted estimates for the costs of fossil fuel divestment for consideration during suspense — claiming that shedding a combined $11.5 billion in fossil fuel company holdings would cost them millions of dollars, with CalPERS estimating the transaction costs between $75 to $100 million and CalSTRS estimating up to $11.6 million.

“Any good investment advisor should be able to craft a strategy with minimal transaction fees.”

– Tom Sanzillo

Fossil Free California challenges those numbers, arguing that transaction costs should be minimal. “In reality, the trading cost of divesting (selling shares) should not add a huge amount to trading costs that are already in the budget,” the new report concludes. “Fund managers buy and sell shares all the time, and these costs are already covered in the ordinary course of business.”

“The $75-$100 million in transaction costs is crazy,” said Tom Sanzillo, director of financial analysis for the Institute for Energy Economics and Financial Analysis, who did not author the new report but reviewed a draft. “Again there is no methodological explanation.”

Sanzillo, who supervised New York’s state pension fund as it increased from $97 billion to $150 billion over four years, noted that divestment, from an administrative perspective, “should not cost much if anything.” He added that the rise of ESG funds — which emphasize environmental, social, and governance issues — and the number of other asset managers divesting from fossil fuels means that “any good investment advisor should be able to craft a strategy with minimal transaction fees. If they cannot, there are advisors who can.”

The report also alleges that pension funds have overstated the costs of previous divestments from controversial industries like the tobacco industry (which CalPERS voted to divest from in 2000) and from thermal coal (divested under a 2015 state law). Officials from CalPERS and CalSTRS recently said that those earlier divestments cost pensioners $8 or $9 billion. But Fossil Free California’s report notes that those estimates appear to be based on their financial performance up to June 30, 2016 — nearly five years ago.

The “Hyperbole in the Hearings” report cites an analysis by consulting firm Wilshire and Associates which found that “for the period up to June 30 2020, all active CalPERS divestment programs have delivered positive performance.”

To some degree, that’s a debate made more difficult by the absence of official figures, the report authors added. “It’s regrettable that no real-world audit of past divestment costs has taken place: the Legislature is thus at the mercy of the Funds’ estimates,” Fossil Free California wrote.

CalPERS declined to comment on the report. 

Both pension funds have previously argued that they prefer to engage with fossil fuel companies as investors, rather than walk away. In April, the CalPERS board of directors voted to oppose SB-1173 and another divestment bill related to Russian and Belarusian firms. Divestment would mean that “we will not have a seat at the table, and our seat will be taken by investors that may not have the same interest in long-term sustainability as CalPERS,” Danny Brown, chief of CalPERS’ legislative affairs division, said at that meeting.

“CalSTRS’ mission is to ensure a secure retirement for California’s nearly 1 million working and retired public school educators,”  Rebecca Forée, a spokesperson for CalSTRS said in an email. The Teachers’ Retirement Board, which administers the fund, has said it opposes SB-1173. “CalSTRS’ approach is more holistic and includes measuring emissions, engaging directly with companies, working to expand government policies, and investing in solutions.”

“The Teachers’ Retirement Board committed CalSTRS to a net zero investment portfolio by 2050 or sooner to guard against the worst impacts of climate change, preserve a livable planet and enhance the long-term value of our investments,” Forée added. “Based on the Board’s direction and their net zero pledge, we are focused on developing a Net Zero Action Plan. As part of the plan, CalSTRS is investing $20 billion in climate-oriented solutions, and these investments are accelerating as we identify new opportunities.”

While they might disagree about the specific numbers, CalSTRS and Fossil Free California have appeared to agree that divesting from one fossil fuel, thermal coal, has been the pension fund’s best performing divestment. During a March 9, 2022, hearing, CalSTRS CIO Chris Ailman testified that while he believes “every divestment has cost us money … thermal coal divestment has come the closest to breaking even.”

“The true cost of divestment is the failure to divest — staying invested in fossil fuels has been, and is, a financial risk.”

– “Hyperbole in the Hearings”

Arguments for divesting from fossil fuels have been bolstered by the sector’s recent struggles. The past five years have been full of extraordinary upheaval not only for coal companies but also for oil and gas companies — and investors have traveled a very rocky road during that time. Oil prices have swung wildly, infamously touching negative numbers in the early days of the Covid-19 pandemic before surging to over $100 a barrel today. Fossil fuels’ role in causing the climate crisis has certainly not escaped the eye of many investors, who have become increasingly skeptical about the long-term prospects for the 20th century’s energy giants.

Take, for example, what’s happened to ExxonMobil over the past five years. CalPERS annual investment report shows that as the pension fund’s fiscal year drew to a close in 2016, it held over 13 million shares of ExxonMobil stock, with a market value of over $93 a share. Today, ExxonMobil’s stock is valued at around $85 a share — after dipping into the $30 range twice, in the spring and fall of 2020. Between those two dips, the long-time blue-chip company was dropped from the Dow Jones Industrial Average. And even as oil prices have surged again, Exxon’s stock prices remain below the over-$100 heights its shares reached in 2013 and 2014.

Meanwhile, the Dow has soared from around 18,000 points in 2016 to over 32,000 points today, meaning that while Exxon’s value was falling, much of the rest of the stock market was surging.

And Exxon is hardly alone. Reuters called the 2010s a “lost decade for shares of U.S. energy companies overall,” citing bankruptcies and overspending on shale, and noting that during that time, “the energy sector’s total earnings have declined 14.8%, while all other major sectors have seen growth of at least 28%.”

That kind of financial underperformance adds to the pressure on CalPERS and CalSTRS to divest — as do the financial risks associated with the impacts of a rapidly changing climate. 

“Evidence shows that CalPERS’ and CalSTRS’ assertions that every divestment has cost them money are wildly exaggerated,” the report concludes. “What they don’t say is that the Funds have already lost tens of billions from value destruction in the entire Energy sector.”

“The true cost of divestment is the failure to divest — staying invested in fossil fuels has been, and is, a financial risk.”

And of course, as the drumbeat of climate change-related catastrophes grows ever faster, the hazards involved for California’s pension funds and their members aren’t just financial. 

“The data is clear: Fossil fuels are a risky financial investment, and they are furthering the climate crisis,” state senator Lena A. Gonzalez, who introduced SB-1173, wrote in an April op-ed in the Sacramento Bee. “From oil spills to land contamination and air pollution, it’s low-income Black and brown communities that suffer the most. In my district, Southeast Los Angeles and Long Beach suffer from high air pollution, public health burdens and social and economic disadvantages.”

“California cannot be a climate justice leader,” she added, “if we continue to invest in the companies that are polluting our environment.”


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