Public pension funds could be on the hook for trillions of dollars if they move to divestment from troves of fossil fuel assets, according to a report published Wednesday.
Selling off oil and gas investments would cost 11 of the largest and wealthiest public pension funds in the world nearly $5 trillion over 50 years due, in part, to a lack of diversity, according to a report sanctioned by energy lobby group Independent Petroleum Association of America (IPAA)
The report’s authors — Daniel Fischel of the University of Chicago and Todd Kendall of the economic consulting firm Compass Lexecon — analyzed the effect divesting would have on the California Public Employees’ Retirement System (CalPERS), as well as municipal funds in New York and San Francisco.
“Given the unique role of the energy sector in the economy, investors who chose to remove traditional energy from their investments reduce the diversification of their portfolios and thereby suffer reduced returns and greater risk,” Fischel, who has conducted similar reports in the past, said in a press statement announcing the group’s findings.
A study from Arizona State University conducted last year, for instance, found that managing divestments cost endowment funds at universities as much as $7.4 billion in value over a 20-year period. Fischel and Kendall’s report dovetails with ASU’s study, according to Fischel, who said the lack of diversity is “further compounded when considering the additional costs of transactional fees.”
“Divestment may seem noble,” he added, “but it has real financial implications for pension funds, many of which are already struggling to provide reliable investment returns to beneficiaries.”
Fischel used all available data on the current holdings of each fund to estimate the returns on the same or similar investments throughout the past half century. His research then stripped the stocks of all oil assets activists have targeted. It considers lost diversification benefits due to purging coal and natural gas companies, among other tradition energy sources, as well as broader divestment including utility companies
CalPERS would get hit the hardest the report shows, with reductions in returns ranging from $2.3 to $3.1 trillion over 50 years, and up to $290 million annually. The New York City Employee Retirement System would also get slammed. Researchers estimate it would bleed between $502 and $692 billion in lower returns over the next half century. The annual impact is between $41 and $60 million.
IPAA argues that divesting fossil fuels would force the country’s largest pension funds to scramble for alternative ways to fill the vacuum.
“As a consequence of these mounting costs, pensions would either have to cut payments or seek other funding sources to make up the shortfall,” said Jeff Eshelman, senior vice president public affairs at IPAA.
Recent surveys find that divestment is unpopular among retirees, most of whom care more about maximizing investments than waging a political war against oil companies.
Business advisory firm FTI Consulting, for one, conducted a report in 2016 showing that 64 percent of pensioners want their pension fund manager “maximizing returns” on the money they’ve invested. The survey polled 791 retired public employees age 55 and older and noted further that retirees prefer having their investments go toward improving the environment.
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