California and Colorado’s public pension funds together lost out on over $19 billion over the past decade by investing in fossil fuel stocks, according to a report released on Tuesday.

The three public pension funds analyzed are currently worth a combined $663 billion. However, if they’d divested from fossil companies in 2009 while keeping their other investments at the same proportions, they could have amassed a combined additional $19 billion in ten years, the report published by Corporate Knights, a Canadian media, research and financial firm, concludes.

Two of the pension funds, CalPERS and CalSTRS, invest on behalf of roughly 2.8 million California public employees, including school teachers, firefighters and municipal workers, while the third, PERA, invests on behalf of 600,000 Colorado public employees.

The fossil fuel-linked losses work out to $2,900 per member in Colorado, $5,572 per member of CalSTRS, and $6,072 per CalPERS member, the report adds.

“We knew CalPERS’ fossil fuel investments did environmental damage to us all,” said Wynne Furth, a former city attorney in Palo Alto and a CalPERS retiree. “It turns out the damage was fiscal too – CalPERS took an $11.9 billion portfolio hit by persisting in dead-end investments in fossil fuels.”

The report attributed an additional $5.5 billion in losses to CalSTRS and $1.77 billion to PERA.

Divesting for Profit

The findings highlight how the poor financial performance of fossil fuel companies over the past decade stands to shift how debates over fossil fuel divestment are framed.

Historically, divestment debates have often been described as pitting those who support making decisions based on ethical considerations against those who support decision-making that prioritizes financial returns.

But over the past decade, the fossil energy sector has seen repeated waves of bankruptcies and many oil and gas companies have struggled to generate free cash flow from their shale drilling and fracking activities.

The longer-term prospects for fossil energy companies are marred by structural issues, including risks to their business models from efforts to slow global warming pollution, risks associated with the impacts of an already changing climate, liabilities from aging oil fields and abandoned infrastructure, and competition from renewable energy, which is falling so quickly in cost that a September report by the Rocky Mountain Institute concluded that 90% of today’s proposed natural gas power plants could be obsolete by 2035.

Last week, Murray Energy, the largest private coal mining company in the US, filed for bankruptcy protection. In August, the Wall Street Journal counted 26 oil and gas companies that have gone bankrupt this year and warned that more bankruptcies may be on the horizon in the industry as debts come due. In the first quarter of 2019, 90 percent of shale oil companies failed to produce positive cash flow, anaylsts at Rystad Energy found.

“These findings should put an end to the myth that divestment from the fossil fuel industry harms the financial well-being of our public pension funds,” Fiona Ma, California’s state treasurer and a supporter of fossil fuel divestment, said in a statement. “Quite the opposite is true – STRS would have earned $5.5B more in profits if we had divested ten years ago. California’s public school teachers deserve to have their investments removed from this financially underperforming sector before it causes even more harm.”

It’s little secret that the fossil fuel industry has underperformed compared to other industries in recent years.

“What’s clear is that the energy sector in general has been a terrible financial performer and a terrible stock market performer for investing, so anything that strips your exposure to fossil fuels over the past decade is going to improve your performance,” said Clark Williams-Derry, an analyst at the Institute for Energy Economics and Financial Analysis, who was not involved in producing today’s report.

“There’s reason to believe that the energy sector is going to continue to fall,” he added, citing continued risk of bankruptcy and poor cash flow performance among oil and gas exploration and production firms. “I think it’s fairly clear that there’s substantial political and technological market risk moving forward for the sector and that may suggest you could see more of the same going forward, and not what you often see, a reversion to the mean or even over-performance by a sector that’s been beaten down.”

For the last 5 years @CalSTRS has insisted on “engaging” with fossil fuel companies to reduce their carbon emissions. Too bad because the fund would be $5.5 billion ahead today had it #divested from fossil fuels 10 years ago! @WeAreCTA https://t.co/VktCky6lzx

— Jane Vosburg (@sianmarged) November 5, 2019

Tallying Losses

The pension funds have historically maintained sizable investments in fossil fuel companies. In 2009, fossil fuel firms made up 17.6 percent of CalPERS’ investments, according to Corporate Knights, and 16.3 percent of CalSTRS’ holdings.

The Corporate Knights estimates for CalPERS, the largest of the three pension funds, were based on three scenarios — one where in 2009, CalPERS divested from all its stocks in the energy sector as well as all investments in companies where half of revenues or more come from “extracting, refining, burning or transporting” fossil fuels; a second where that same year they also shed companies where ten percent or more of revenues come from handling fossil fuels; and a third where no action at all was taken and CalPERS’ portfolio remained “as disclosed in securities filings.”

The report starts its timeclock on July 1, 2009 and runs through June 30, 2019. In the divestment scenarios, any money not invested in fossil fuel companies was proportionately “invested” into the remaining stocks in CalPERS’ portfolio — so no new stocks were added to CalPERS’ hypothetical holdings and the relative size of the pension fund’s non-energy investments remained the same.

The more fossil fuel stocks CalPERS shed, the better their investments would have performed over the past decade, Corporate Knights found.

In the first case, where CalPERS dropped the 50%+ fossil fuel revenue companies, the pension plan would have earned $9.4 billion more than it actually did from 2009 to 2019. In the second case, with more strict limits on fossil fuels, CalPERS would have earned $11.9 billion more than its real-life returns — bringing their total earnings to $101.5 billion.

Each CalPERS member would have made an extra $4,806 under the first model and $6,072 under the stricter model, the report adds.

That’s mostly because fossil fuel investments have generated dismal results over the past decade, while much of the rest of the market has grown. “CalPERS publicly disclosed holdings of fossil fuel stocks show a general decline in value over the past ten years due to general erosion in the relative value of fossil fuel stocks as compared to the rest of the market,” the report’s authors wrote.

CalPERS’ most profitable investments were in the transportation infrastructure sector, it adds, while tobacco, oil, power, mining and energy equipment and services companies made up five out of its ten least profitable sectors. The report also notes that the S&P 500 index performed slightly better than CalPERS over the decade, generating 294.16% returns compared to CalPERS 268.7% returns – but if CalPERS had divested, it would have beat the S&P, creating returns of 300.8% to 309.09%.

A 2018 study by Compass Lexecon, conducted for the Independent Petroleum Association of America, reached the opposite conclusion, warning of that divestment could cost Colorado’s PERA $36 million to $50 million a year. That study looked back at 50 years of energy stock performance and based its projections on those figures. (An earlier study by the same organization reaching similar results was critiqued by the Denver Post: “Would looking back at the 50-year performance of a buggy company in 1890 have given a good measure of the future value of that company?,” the Post wrote in 2015.)

In 2016, a similar study by Corporate Knights tallied $5.3 billion in lost earnings from New York state’s public employee pension fund from fossil fuel investments. “The simple fact is that the world price of crude oil has crashed, natural gas prices are very low and coal prices have fallen,” Severin Borenstein, a UC Berkeley economics professor, told The Guardian when that report was published. “Any investments in fossil fuels when that happens are going to lose money.”

As of press time, CalPERS had not responded to questions from DeSmog. A spokesperson for the fund criticized the study, according to the Sacramento Bee. “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 spokesperson Wayne Davis told The Sacramento Bee.

Divestment campaigners also called attention to the impacts of fossil fuel funding on the growing climate crisis.

“There is no more time for shareholder engagement with the fossil fuel industry that is digging and burning us past climate tipping points of no return,” said Clara Vondrich, Director of Divest Invest. “It’s time to divest. What side of history are you on?”