California’s two biggest public pension funds could have made about $17 billion more if they had dumped their fossil fuel investments a decade ago, climate advocacy group argues in a study it’s publishing Tuesday.

Fossil Free California, a group that has pressed CalSTRS and CalPERS to eliminate their fossil fuel holdings, plans to use the study results to ratchet up pressure on the funds to divest from oil and gas companies, starting with CalSTRS’ Wednesday board meeting, said Sandy Emerson, the group’s treasurer.

Pressure is building from other directions, too. Gov. Gavin Newsom recently signed an executive order asking the funds to consider steering investments away from greenhouse gas emissions, and a new law will soon require California to define “climate-related financial risk.”

State Treasurer Fiona Ma, who sits on the board of both the state pension funds, has expressed her support for fossil fuel divestment.

“We’ve been making the moral argument, we’ve been making financial arguments, and I think people in government are starting to see things our way,” Emerson said.

If CalSTRS, worth $237 billion, or CalPERS, worth $380 billion, were to divest from fossil fuels, they would be the first state pension funds in the U.S. to do so. The University of California recently announced it would divest from fossil fuels for economic reasons in its endowment and its pension fund, worth a combined $83 billion.

The funds generally have resisted divestment proposals, saying they should be focused on investment returns rather than politics. They argue that engaging with the companies as shareholders is a more effective way of preparing for the future than divestment.

They are part of a group of 370 institutions around the world, known as Climate Action 100+, that are focused on supporting the Paris Agreement’s goals of reining in rising global temperatures. Together the funds are worth an estimated $35 trillion.

Underfunded pension plans

Both California pension systems are underfunded. CalPERS has about 70 percent of what it would need to pay all its current and future obligations. CalSTRS has about 64 percent of what it would need.

The funds have faced activism from retirees and business-backed organizations who argue they’re missing opportunities to make money by focusing on environmental and social investment strategies. In 2017, the business backed American Council for Capital Formation, for instance, published a report that blamed those programs for lackluster returns.

The new report from Fossil Free California came to nearly to the opposite conclusion in its analysis of the funds’ quarterly investment returns reported from June 2009 through June 2019.

Corporate Knights, a Toronto-based group promoting renewable energy investments, calculated what the funds’ returns would have been had they distributed their fossil fuel investments across the spectrum of the rest of their public equities over those years.

In 2009, 17.6 percent of CalPERS’ investments were in fossil fuel companies, according to the analysis. For CalSTRS, it was 16.3 percent.

Had CalPERS instead invested that money proportionally across its indexes, it would have generated an additional $11.9 billion over the 10-year stretch, according to the study. CalSTRS would have generated an additional $5.5 billion, according to the results.

The analysis defined fossil fuel companies as those with more than 10 percent of revenues coming from fossil fuel activity, including extraction, burning, transportation and refining, said Toby Heaps, Corporate Knights’ founder.

The analysis compared the fossil-free scenario to the actual investment returns on a quarter-by-quarter basis, for each of the 40 quarters over the 10-year term, Heaps said.

Are fossil fuels safe investments?

Heaps said the study’s results should help public pension funds move on from long-held assumptions that fossil fuel industries are safe investment bets.

“It’s a shrinking sector, it’s a sunset sector, but it made a lot of money for a lot of people over 100 years,” he said. “People operate on that assumption that it’s going to bounce back.”

The California Public Employees’ Retirement System in a written statement said it is committed to engaging with businesses on climate change and risk, but criticized the report from the advocacy group.

“Cherry picking selective time periods to analyze investments and then making broad, sweeping conclusions about how those investments will perform in the future does little to inform the discussion or address the issue of climate risk,” CalPERS spokesman Wayne Davis said.

The California State State Teachers’ Retirement System similarly said it would influence corporate practices as an investor.

“By engaging with policymakers and companies, and analyzing a broad range of research and data, CalSTRS will manage climate risk and find the best investments that help deliver climate solutions. These practices will also deliver the returns we need to pay promised benefits,” CalSTRS said.

This story was originally published November 5, 2019 at 5:45 AM with the headline "Should California pension funds quit oil and gas? Report says they can earn more if they do."