Acting state Department of Environmental Protection Commissioner Shawn LaTourette addressed the New Jersey Climate Change Alliance last week. He described the state’s resiliency strategy and response to climate change, with the 2019 Energy Master Plan, 2020 Scientific Report on Climate Change, and New Jersey’s Global Warming Response Act 80×50 Report laying the foundation for agencies and decision-makers to transition to a carbon neutral future. It seems the exception is our state pension fund managers.
New Jersey’s State Investment Council (SIC) relies on the expertise of the Division of Investment managers. The SIC 2019 Investment Plan presented in May 2019 includes a “Fossil Fuel-Free Investment Discussion” that investigated the future profitability of fossil-fuel investment. A combination of global population growth and exonymic expansion of emerging markets peak demand for fossil fuels is projected in 2040. The report observes the past cyclic trends of the energy and advised that fossil fuel will remain profitable. Based on these recommendations, SIC adopted a passive (buy-and-hold) strategy for the energy sector.
As logical as the rationale appears, the performance of the state pension’s fossil-fuel investment is disastrous. The energy sector portion of its U.S. equity portfolio lost 16% of its value in fiscal year 2019 and 38% in fiscal year 2020. ExxonMobil and Chevron were among the top five detractors. Investments in fixed income portfolio, high-yield performance was adversely impacted by its exposure to the energy sector. Similarly, the financials, private equity portfolio, and real assets portfolios were adversely impacted by the energy sector. The strategy needs to be reexamined.
Evolving business models and renewable technology are disrupting the energy market. The peak fossil-fuel demand predictions vary, from the world has passed “peak oil” demand to peak fossil-fuel demand by the early 2030s. Renewable energy is competitive worldwide as countries seek to fulfill Paris Agreement commitments. This shift in the energy market portends continued weakening of fossil-fuel profitability.
Pension fossil-fuel divestment is feasible. University of California (total pension fund: $126 billion) became fossil free in May after divesting $1 billion of fossil-fuel investments. In December, New York State Comptroller Thomas P. DiNapoli adopted a goal to transition that state’s pension portfolio (pension fund: $226 billion) to net-zero greenhouse-gas emissions by 2040. His money managers will complete within four years a review of investments in each energy subsector using minimum standards to assess transition readiness and climate-related investment risk. The thermal coal review is completed, and 22 of the 27 coal companies were divested. The oil sands review will finish in February, followed by shale oil and natural gas. University of California and New York pension managers assume fiduciary responsibility and believe divestment from fossil fuels protects the future assets of public retirees.
Sen. Bob Smith and Assemblyman John McKeon introduced legislation to divest from the 200 largest publicly traded fossil-fuel companies, as established by the carbon content of the company’s coal, oil or gas reserves (S-330/A-2196). The New Jersey pension fund (total pension fund: $74 billion) includes investments in 27 coal firms and 65 oil and gas firms. The initial investment of $1.6 billion is valued at $1 billion as of June 30, 2020, a loss of a half-billion dollars. Even the debate of this bill would send a clear signal for the State Investment Council to prepare for a low-carbon future.