New analysis of the Vermont pension funds and other large funds shows high costs of not divesting from fossil fuels
MONTPELIER -- Investments in fossil fuel companies have severely hurt the financial performance of pensions for Vermont’s teachers, state and municipal employees, according to a new investment tool created to assess carbon risk. Today, 350Vermont, Vermont Chapter of the Sierra Club, and Clean Yield Asset Management announced the results of a new tool applied to the $4.02 billion combined pension fund managed by the Vermont Pension Investment Committee (VPIC) for over 40,000 retirees and active workers. The tool revealed that VPIC’s investments in the top 200 oil, gas, and coal companies cost Vermont pension holders more than $77 million1 in reduced returns over the past three years.
“We have urged VPIC to divest from the fossil fuel industry on moral and financial grounds for the last three years,” said Maeve McBride from 350Vermont. “Now we have proof that divestment would have financially benefited pension holders.
The new analytical tool, Decarbonizer, was developed by Corporate Knights, together with 350.org and South Pole Group. Decarbonizer is an interactive tool that shows how divesting from carbon-heavy companies in a portfolio could affect its financial performance. The Vermont pension fund was analyzed along with 13 other prominent funds, including the Gates Foundation and the Canada Pension Plan, totaling $1 trillion in assets. The analysis estimated the potential financial impact had the funds shifted their investments in October 2012 from the most carbon heavy coal and oil companies2, as well as coal-intensive utilities3 to companies that derive at least 20% of their revenues from environmental markets or new energy4. The 14 funds experienced a scale of losses over the past three years exceeding $22 billion.
“This study points out the flawed arguments that VPIC has made for continuing to invest in fossil fuel companies, namely the unfounded assertion that divesting would reduce returns of the funds and hurt beneficiaries. Over the past three years just the opposite has been true, to the tune of more than $77 million,” stated Eric Becker of Clean Yield Asset Management. “Further, the tool shows that had VPIC divested from the top 200 oil, gas, and coal companies, the risk profile of the portfolio would have been virtually unchanged.”
In July, VPIC heard expert testimony on the improved performance of fossil fuel free investing, yet they voted unanimously to reject fossil fuel divestment, in whole or in part, because it was inconsistent with VPIC’s Environmental, Social, and Governance (ESG) policy. The Vermont General Assembly is considering both binding legislation that would require VPIC to divest out of the top 200 carbon polluters over five years, as well as a Joint Resolution urging VPIC to do so.
“We now know that maintaining investments in climate change’s worst offenders isn’t just bad environmental policy, it’s bad financial policy,” said Nate Hausman, the Vermont Chapter of the Sierra Club’s Energy Committee Chair. “Divesting our state’s pension fund from fossil fuels will pay dividends to Vermont’s pension holders and to future generations of Vermonters alike. As a state, it’s high time we put our money where our mouth is on climate action.”
“The impact of climate change will be a major investment theme in the next decade and investors who are at the forefront of addressing risks, such as stranded assets in their portfolio construction and security selection process, should be the beneficiaries of stronger long-term risk adjusted performance,” said Christopher Ito, Chief Executive Officer of Fossil Free Indexes.
While this analysis focused on the past three years, dating to the launch of the fossil fuel divestment movement, other analyses over a ten year period byMSCI andFossil Free Indexes also found fossil free portfolios outperformed.
“As a beneficiary of the Vermont pension, I want my pension invested in a sustainable future, not in reckless and corrupt companies that are wrecking the planet,” said K.C. Whiteley, a retired state employee. “Most beneficiaries have no idea that we’ve each lost roughly $1800 of our retirement savings in the last three years because of these risky fossil fuel investments.”
The period of analysis coincides with a tough market for oil and commodity prices, and it is possible that over the next few years, some oil stocks and even coal utilities could partially recover. However, when considering the long-term, many investors recognize the increasingly tenuous business case for remaining heavily invested in carbon intensive industries, as outlined by the Governor of the Bank of England Mark Carney. In failing to divest, institutions risk under-exposure to $3 trillion of public equities positioned to benefit from a more resource efficient and expanding low carbon economy.
About 350Vermont: 350Vermont is a statewide organization in Vermont working to build a grassroots movement to reverse climate change. 350Vermont’s mission is to catalyze the cultural and systemic transformation needed to reverse climate change and return to 350 ppm of carbon in the atmosphere. Although we are an affiliated group of 350.org with a similar mission, 350VT is an independent organization, with local campaigns to divest the state pension fund, advocate for a carbon pollution tax, and stop any expansion of fossil fuel infrastructure.
About Vermont Chapter of Sierra Club: The Vermont Chapter of the Sierra Club is a volunteer-led affiliate of the national Sierra Club. The Sierra Club is America's largest and most influential grassroots environmental organization, with more than 2.1 million members and supporters nationwide and 9,000-plus members and supporters in Vermont. The Sierra Club works to safeguard the health of our communities, protect wildlife, and preserve our remaining wild places through grassroots activism, public education, lobbying, and litigation.
About Clean Yield Asset Management: Clean Yield Asset Management is a registered investment advisory firm based in Norwich, Vermont. Clean Yield manages socially and environmentally screened investment portfolios, including fossil fuel free portfolios, for individuals and families. It has approximately $280 million in assets under management.
About Corporate Knights: Corporate Knights is a media and research company, which publishes the award-winning business and society magazineCorporate Knights, and produces corporate rankings, research reports and financial product ratings based on corporate sustainability performance. Its best-known rankings include the Best 50 Corporate Citizens in Canada, Global 100 Most Sustainable Corporations, and Newsweek Green Rankings powered by Corporate Knights.
About the Clean Capitalist Decarbonizer: Created by Corporate Knights and powered by carbon data fromSouth Pole Group, the Clean Capitalist Decarbonizer is a free interactive tool designed to shed light on the financial implications of divesting high carbon companies in favour of those providing environmental solutions. The Clean Capitalist database covers 7,000 securities (comprising more than 85% of global market capitalization), including all primary public equity securities with a market cap over $2 billion and/or listed on major national and global indices. An advanced version of the Clean Capitalist tool for the investment community will be launched at the upcoming Paris Climate Conference.
About South Pole Group: Zurich-based South Pole Group began as a project-driven company focused on developing and selling high-quality carbon credits. Today, it is the world's leading provider of climate solutions. No other firm in the world has developed as many successful emission reduction projects. No other company offers as rich a suite of services and solutions. South Pole Group helps public and private sector organisations develop climate proven policies and strategies. Areas of expertise cover every key sustainability-related area of climate change, including but not limited to: forests & land use, water, sustainable cities & buildings, as well as renewable energy and energy efficiency. For more information, visitwww.thesouthpolegroup.com or follow the company@southpolegroup.
Nadia Kähkönen, Communications Manager, South Pole Group
Ph: +66 2 678 8977, email: [email protected]
1A press release from Corporate Knights states that that VPIC’s investments in the top 200 oil, gas, and coal companies and utilities relying more than 30% on coal, cost Vermont pension holders more than $79 million in reduced returns over the past three years. 350VT & our partners chose to use the more conservative figure of $77 Million to more closely match the divestment and reinvestment approach called for in legislation currently under consideration in the State House.
2 The list of Carbon Underground 200, originally pioneered by Carbon Tracker, was provided by Fossil Free Indexes, and consists of the top 100 public coal companies globally and the top 100 public oil and gas companies globally, ranked by the potential carbon emissions content of their reported reserves.
3 The list of utilities which generate more than 30 percent of electricity from coal was provided by South Pole Group.
4 Companies providing environmental solutions derive at least 20% of their revenues from environmental markets or new energy as verified by FTSE Environmental Markets or Bloomberg New Energy Finance. The collective market capitalization of the companies providing environmental solutions totalled $3 trillion as of September 30, 2015.
Some examples of investors leading the way: PFZW, the $183 billion Dutch pension fund has pledged to halve its carbon footprint by 2020 while increasing its investments in climate solutions fourfold. AXA, the French insurer with $1.6 trillion in assets under management, is selling off its stakes in mining companies and electric utilities deriving over 50% of their turnover from coal, while tripling its green investments. It is also notable that the French government recently amended legislation to require institutional investors to report their carbon footprints as well as how they are contributing to the international goal of limiting climate change. Bob Litterman, a former head of risk management at Goldman Sachs, is shorting carbon for higher returns. The Litterman-inspiredWWF stranded assets total return swap is long S&P 500 and short “stranded” assets. It has returned more than 40 per cent for the World Wide Fund for Nature since January 2014. 23 investor signatories to theMontreal Carbon Pledge andPortfolio Decarbonization Coalition with assets totalling $1.2 trillion have pledged to reduce their portfolio carbon footprints by as much as 50%-80% without sacrificing financial returns, including the Swedish pension fund AP4 and French pension funds ERAFP and FRR.
Based on the difference of investing the estimated value of a fund’s public equities holdings (on Sept 30, 2012) in two simulated portfolios (Clean and Uncleaned), rebalanced quarterly over a three year time period to September 30, 2015. All evaluated funds were offered an opportunity to review the analysis in advance of its release. View individual fund case studies and full methodology here.