New analysis of the Vermont pension funds and other large funds shows high costs of not divesting from fossil fuels

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 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.