Plan to make state retirement fund carbon neutral relies on industry, Wall Street doing the same
Under a new proposal, investments in the state’s $94 billion public employee retirement system could be effectively carbon neutral by 2050
Emissions spew from a large stack at the coal fired Brandon Shores Power Plant, on March 9, 2018 in Baltimore, Maryland. (Mark Wilson/Getty Images)
Oregon’s nearly $94 billion public employee pension system could one day be carbon neutral, according to a new plan from the state Treasury. But getting there depends largely on whether corporation and private investment funds stick to their own commitments to do the same.
State Treasurer Tobias Read unveiled a 97-page plan on Tuesday to reduce the overall investments in companies that emit harmful substances in the Public Employees Retirement System, or PERS, by 60% by 2035 and to get the portfolio to “net-zero” emissions by 2050. This does not mean fully divesting the fund of its fossil fuel holdings, but striking a balance between investments in heavy carbon-emitting industries with industries that are cutting or absorbing emissions or are committing to doing so by 2035, Read told the Oregon Investment Council, which picks PERS investments.
The state developed the plan in partnership with global consultancy McKinsey and Company at a cost of $1.9 million. It includes a tripling of investments in “climate positive” activities, in enterprises that have their own plans to get to net-zero emissions and the creation of a net-zero advisory committee, to be appointed this spring. The committee would meet with Treasury officials to provide feedback progress at least twice a year.
The investment council will weigh in on the proposal before it goes to lawmakers to decide over several sessions whether to provide the resources necessary to implement it.
Read projects an implementation period of four years, beginning in 2024, and that by 2028, there would be shifts away from fossil fuel investments and into more “climate positive” investments.
Environmentalists have called for years to dump fossil fuel holdings from PERS, but Read was reluctant to take big steps to move the plan toward climate friendly investments out of concern about returns. About 75% of all benefits paid out to PERS retirees are made possible by the earnings on Treasury investments, according to the agency. More than 160,000 PERS retirees currently receive an average of $34,000 per year from the fund.
But, Read told the council, the greater risk now is continuing to grow investments in coal, oil and gas utilities and climate-change affected sectors, which have become less predictable and are likely to decline in value as the world rapidly shifts to a renewable energy economy.
Some members of the council expressed concern that the plan relies too heavily on companies, governments and private equity funds meeting the emissions reduction plans they’ve trumpeted but largely missed.
“A lot of this plan is incumbent upon those companies in which we are invested having net zero trajectories themselves, and plans and also achieving them,” Cara Samples, chair of the council, said at the meeting. “We also know that most countries and companies are not actually on track to achieve their plans.”
Read acknowledged the plan’s reliance on industries reaching their emissions goals but said the agency has to start making big moves toward carbon neutrality now.
“It (the plan) will have to adjust as policies change, as technologies emerge, as the world changes,” he said. “It’s incumbent upon future treasurers and councils to adjust to that reality as well. But I believe it is far better for us to get started on this path and to have the work underway so that we’re not letting others further define the options that are available to us.”
End of some private equity funds
The plan would end new investments in private equity funds that intend to put money primarily into fossil fuels, and triple from $2 billion to $6 billion “climate positive” investments in private equity and real assets. Private equity firms, which are non-publicly traded companies, and real assets, such as investments in infrastructure, commodities and natural resources, make up about half of the PERS portfolio. The single largest portion of emission-related investments in the state pension’s portfolio – nearly 10% – comes from investments in fracked gas and oil, according to the report, which are considered real assets.
The other half of the portfolio is largely investments in publicly traded companies. The plan would ensure at least 40% of those investments are held in enterprises that reduce greenhouse emissions or have plans to transition towards net-zero emissions by 2035.
The plan’s focus is on reducing investments linked to emissions emanating from a company’s business, as opposed to indirect emissions from the end use of a product, commodity or the supply chain.
That drew the criticism of Jenifer Schramm, a leader of the nonprofit Divest Oregon, a coalition of 100 such groups that have advocated the treasury move away from investing in fossil fuels for years.
“This is like measuring cancer risk from cigarettes by measuring the cancer risk from growing tobacco and operating cigarette factories, while totally ignoring the cancer risk caused by actually smoking the cigarettes produced by those investments,” she wrote in testimony submitted to the council Tuesday.
McKinsey employees who contributed to the proposal said calculating indirect emissions and factoring them into net-zero decisions would require more resources in the future.
Beyond shifting direct investments in PERS away from heavy emitting industries, the plan would mandate that the Treasury work only with investment managers who are committed to reducing the fund’s exposure to climate change risks; increase data, reporting staff and capacity at the Treasury to more thoroughly understand and track greenhouse gas emissions associated with the fund’s investments; and it would establish the creation of a Net Zero Beneficiary Advisory Committee. That committee would begin meeting with Treasury officials as soon as this summer and offer feedback on the fund’s progress towards net-zero investments.
“I believe it’s my responsibility to move this effort forward, use this next year productively, and provide a solid blueprint for my successor,” Read wrote in the plan. His eight-year term as treasurer officially ends in January 2025, and he is currently running for the Democratic nomination for secretary of state.
First step of many
Environmentalists for years have called on Read to rid the public retirement fund’s portfolio of fossil fuel investments not only to combat climate change but also as a matter of fiduciary responsibility given the risks associated with fossil fuel companies under a rapidly changing energy economy.
“The success of this decarbonization effort requires Treasury’s commitment to transparent reporting, a sense of urgency and responsive policymaking as the effects of climate change on investment portfolios are increasingly understood,” said Andrew Bogrand, communications director for Divest Oregon.
“This is just the beginning,” he said.
Between 2019 and 2021, the Treasury doubled investments in renewable energy from nearly $370 million to $717 million, but these still represent less than 1% of the fund’s overall investments. Though it’s reduced investments in fossil fuels by about $100 million in that same time, they represent a far greater share of the overall PERS portfolio. More than $3.5 billion is invested in fossil fuels, making about 3.7% of the total fund.
Divest Oregon is behind a proposal lawmakers will consider during the current legislative session, which would move state investments away from fossil fuels by targeting coal. The Clean Oregon Assets Legislation, or COAL Act, is sponsored by Rep. Khanh Pham, D-Portland; Sen. Jeff Golden, D-Ashland; and Rep. Mark Gamba, D-Milwaukie. It would direct the Treasury to divest the state retirement system of its holdings in companies that mine and burn coal. Divest Oregon has identified about $1 billion of the fund’s investments in the coal industry.
In the end, Read said such divestment, along with getting the state’s pension fund to net-zero, will depend on future treasurers.
“When we get to 2050, 26 years from now, whatever our best intentions are, even if we all completely agree on this and we’re 100% certain about this plan, it is not going to be what actually transpires. But this plan gives us a chance to be on offense to take control of the things that we can control,” he said.
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