Is CalPERS still the Responsible Fiduciary?

A new CalPERS proposal I will “more than double climate-focused investment to $100 billion by 2030” and “consider selling shares in companies with poor energy transition plans.” The rationale for implementing this strategy is, apparently, that the investment giant already knows how to deal with the complex problem of global climate change, and that companies that do not address climate change will have a worse financial performance.

Both claims are demonstrably false.

Tesla exemplifies the risks and rewards of investing in a “climate conscious” company – its main product is supposed to ultimately mitigate greenhouse gas emissions. And investors who bought Tesla stock five years ago earned a return of 852 percent as of Nov. 3, 2023. However, the same investor could have earned a return of nearly 1,700 percent if he sold the stock two years ago.

Since then, investors in Tesla have lost about 46 percent of their value, compared to a much smaller loss of 7 percent for the S&P 500. If you reflect on CalPERS’ investment thesis, investing in the oil and gas company ExxonMobil would have earned an investor more than 65 percent during that period.

These historical returns demonstrate that there is no simple relationship between a company’s approach to climate-related issues and returns. Undoubtedly, investing in alternative energy companies can have astronomical returns. However, poorly planned investments can also lead to catastrophic losses. The same goes for traditional energy companies.

Perhaps even more troubling from a climate perspective is pension fund hubris. CalPERS managers clearly believe they know what each company’s optimal climate plan should be, which is a narrow, one-size-fits-all approach. Such a belief is disturbing.

As Ralph Waldo Emerson might say, socially, “the more experiments you do, the better.” A far more effective way to address global climate change is to encourage a variety of corporate climate plans that differently balance the costs and benefits of particular strategies. In other words, apply the basic investment concept of “risk diversification” to the issue of climate change.

Take the net zero corporate model promoted by Science-based goals as an example. If all companies adopted this standard, as CalPERS might encourage, then the “top priority for companies” would be to cut their emissions in half by 2030 – in seven short years.

Without considering feasibility or cost, achieving this goal is undoubtedly good. However, there are serious concerns about the feasibility, let alone the huge costs, that would be involved in achieving these emission reductions.

As the US Department of Energy has stated, “offshore wind is a critical piece of the just transition to net zero emissions in the United States.” Problematic, as noted by BP’s renewable energy boss, “the US offshore wind industry is ‘fundamentally damaged’, forcing BP and its partner Equinor to sign over $840 million worth of its projects off the coast of New York. The offshore wind industry is also suffering supply shortages and cost overruns that threaten the viability of the energy source.

In other words, a strategy to cut emissions in half in seven years might make good corporate talking points, but it’s simply not feasible. Worse, the goal has become a distraction, wasting resources and opportunities that could better serve customers.

And the missed opportunities to reduce emissions are real. In fact, emissions have been falling for many years, largely due to a “switch from higher-carbon mineral production to natural gas production,” BE. Therefore, to the extent that the goal of halving emissions in seven years discourages continued investment in natural gas, which it has, progress in reducing emissions is hindered.

From an investor’s perspective, failure to meet stated targets creates a potential valuation risk – after all, if a stock is expected to command a premium from widespread adoption acceptable climate action plan, it stands to reason that the stock will be penalized when those plans collapse.

These complexities are a clear caveat for CalPERS. Tackling global climate change is difficult and expensive. Success requires an environment that encourages many ideas and experiments to flourish. The mandates from CalPERS undermine such an environment to the detriment of investors, the economy and the environment.