With the climate crisis heating up the planet, the public is growing increasingly concerned about the implications of rising global temperatures. Growing alongside the public’s climate concerns are demands that cities, states, and other localities to divest their pension funds from the fossil fuel industry, calling into question whether oil and gas are still sound longterm investments for pension beneficiaries.
Pension funds are a way for workers to collect income after they retire. Under most plans, employers and employees make contributions to a pension fund, with employers paying the largest share. Those assets are then allocated into an investment portfolio of stocks and bonds, which employees draw from after they retire.
Retirees then receive payments based on a “defined benefit plan” which formulates the amount paid to employees based on factors such as their average salary in the last few years of their tenure and the number of years working for the same employer.
Pension funds are most common in the public sector. With the exception of those tied to labor union contracts, private-sector pension plans have seen a decline over the last few decades. In the early 1990s, defined benefit pensions covered 35 percent of private-sector employees, compared with just 17 percent today according to the U.S. Bureau of Labor Statistics.
“Most private-sector pensions have either already been phased out … or they’re being phased out,” Kenneth Ardon, an economist at Salem State University told The Globe Post. “Public employees in the state, local, and federal governments are much more likely to have a pension.”
Ardon explained this disparity is due to concerns over profits and liability for pension funds in the private sector while public-sector unions have greater leverage to pressure the government to keep their pensions.
Divestment Movement
Historically, money managers have included oil and gas industry stocks in the investment portfolios of pension funds.
But over the last decade, environmental organizations like 350.org and Oil Change International have called for pension funds, churches, universities, private equity funds, and other institutions to divest from the fossil fuel industry. Some recent developments indicate those calls may be gaining traction among the broader public.
350.org spokesperson Lindsay Meiman told The Globe Post that 350.org helped to conceive the fossil fuel divestment campaign between 2011 and 2012 in order to spur institutions to take action on climate change. The anti-apartheid movement in South Africa was a major inspiration for the campaign, which began on a few U.S. campuses and has steadily grown in the years since.
“When we look at who are some of the people most impacted by the climate crisis, it’s indigenous peoples, black and brown communities, poor people and working people who spend a lot of their lives working to put food on the table and support their families,” Meiman said.
“Some of those people, including public workers, are able to put money into pension funds, and when we look at how we need to support working people in the transition away from fossil fuels, that’s a really crucial piece.”
‘Done’
350.org reported institutional investors from, cities, churches, and universities among other institutions had committed to divesting over $11 trillion from fossil fuels in September last year. According to Meiman, nearly 1,200 institutions have committed to divestment from coal, oil, and gas to at least some degree.
“We’re now seeing a massive amount of money actually on the move away from these companies,” Meiman said. “In addition to the need to protect people’s money … there are actually reports that have shown how pension funds have lost out on returns from refusing to divest.”
In November, a study from media and analysis firm Corporate Knights found a number of pension funds in Colorado and California collectively lost over $19 billion in retirement saving for public workers due to oil and gas industry investments.
In another sign that the divestment movement is gaining clout, Jim Cramer, the host of Squawk Box on CNBC, declared fossil fuel stocks are “done” as Chevron and Exxon Mobil stocks took a hit last month.
“We’re starting to see divestment all over the world,” Cramer said. “We’re starting to see … big pension funds saying ‘listen, we’re not going to own [fossil fuel stocks] anymore.’”
Oil stocks are in the death knell phase, says @jimcramer. "The world is turning on them…new kinds of money managers who frankly want to appease younger people who believe you can't ever make a fossil fuel company sustainable." pic.twitter.com/PV63RSudrf
— Squawk Box (@SquawkCNBC) January 31, 2020
Uncertain Future
A major challenge for pension funds, however, is that many of them are underfunded. So if an institution decides to divest from oil and gas stocks, they’ll need to make new investments with good long term returns to keep those pension funds solvent and payments flowing to pension beneficiaries.
“The fact that we have pension retirees that have been promised something by our government and are not going to get it is the first and foremost concern,” Kyle Welch, an accountancy professor at George Washington University, told The Globe Post.
“If this is a real cause that’s close to your heart, get your pension funded first and then figure out how you can help get these firms to be more invested in renewables.”
Ardon and Welch also cautioned that pension divestment may not have a substantial impact on the fossil fuel industry due to the massive amounts of capital circulating through the markets.
“Pension funds can be very large, but if they’re selling there’s probably someone else buying,” Ardon said. “It also depends how many of them do it. Is it just a couple of small cities and towns or is this nationwide?”
While it’s not yet clear how big of an impact pension divestment might ultimately have on the fossil fuel industry, divestment is certainly gaining traction in a number of major cities around the world.
Pittsburgh’s pension board is exploring divestment and other cities like London and New York have already started the process of divesting their pension funds from fossil fuels while calling on other cities to do the same.
At the same time, the state of New York is also considering divesting its pension fund, the third-largest of any state in the country, from the coal industry.
