Recently, about 40,000 environmental activists recently descended on Lower Manhattan for what they deemed a global climate strike. Many of the protesters marched with a specific goal in mind: to convince Comptroller Thomas DiNapoli to purge $13 billion in fossil fuel investments from New York State’s $210 billion pension fund.
These protesters aren’t alone. All across the country, environmentalists are urging public pension managers to sell their fossil fuel assets. If pension managers were to embrace divestment, the thinking goes, oil and gas companies’ share prices would plummet. Firms would struggle to raise capital in the future. Thus, they’d shelve expansion plans and keep more fossil fuels in the ground.
But the strategy is short-sighted. Divestment would punish the retirees attached to these funds, without having any significant effect on the energy industry.
State pension funds manage retirement benefits for public employees, such as teachers, firefighters, and police officers. And these plans are heavily invested in the energy industry. Nearly 30% of fossil fuel industry shares are held by pension funds. And almost 20% are owned in individual retirement accounts.
Because they’re high performing, fossil-fuel-related stocks help secure public employees’ retirement plans. An average investment portfolio featuring fossil fuels outperforms a divested portfolio of equal risk by 0.5% per year over the long run, according to economic consultant Compass Lexecon. That might not sound like much, but over several decades it amounts to tens of thousands of dollars per worker.
That’s why divestment would hurt America’s retirees the most. Were they to divest, the nation’s 11 top pension funds would risk losing up to $430 million a year and almost $4.9 trillion over 50 years. Specifically, the California Public Employees’ Retirement System and New York’s five pension funds would risk missing out on nearly $290 million and $120 million per year, respectively.
In response to these losses, pension funds would be forced to cut pensioners’ benefits. In Colorado, divestment could cut every pensioners’ benefits by up to $400.
Even before the divestment craze, public pensions were struggling to fund employees’ retirements. Across the country, state pensions’ future liabilities exceed projected assets by $1 trillion. In the 20 states with the least-funded pension plans — including New Jersey, Illinois, and Kentucky — retirement systems have only half the assets necessary to cover retirees’ benefits.
Divestment wouldn’t even remotely affect energy companies’ behavior. If any state pension divested from energy stocks, different investors would simply take its place. This is why William MacAskill, the president of the Centre for Effective Altruism, recently panned divestment, writing that “The [stock] market price stays the same; the company loses no money and notices no difference.”
Even if divestment did somehow reduce energy companies’ share prices, it wouldn’t curb global demand for fossil fuels. Global energy demand rose 2.3% last year, with fossil fuels providing more than two-thirds of the increase. The outlook for energy is 50% growth by 2050, according to the U.S. Energy Information Administration, with fossil fuels accounting for 70%.
If climate activists truly want to reduce emissions, they ought to support natural gas. This cleaner-burning resource has helped wean Americans off coal, the dirtiest fossil fuel. As a result, American energy emissions are nearing 30-year lows, whereas global emissions have spiked by 50%.
Emissions of methane, one of the most potent greenhouse gases, are trending down thanks to initiatives such as the Environmental Partnership, which is a coalition of 65 energy firms dedicated to reducing methane leaks. Already, methane emissions from natural gas dropped 14% between 1990 and 2017 even as natural gas production climbed 50%.
Comptroller DiNapoli has resisted divestment so far and so should every public pension manager nationwide. Dumping oil and gas stocks wouldn’t remotely affect climate change. It would simply cheat workers out of retirement security.
Robert L. Bradley Jr. is the founder and CEO of the Institute for Energy Research.
