Is CalPERS Still A Responsible Fiduciary?

A new CalPERS proposal would “more than double its climate-focused investments to $100 billion by 2030” and “consider selling stocks in companies with poor plans for the energy transition.” The underlying logic for implementing this strategy is, apparently, that the investment giant already knows how to address the complex problem of global climate change and that companies that do not address climate change are going to perform worse financially.

Both assertions are demonstrably false.

Tesla exemplifies the risks and rewards from investing in a “climate aware” company – its primary product is supposed to mitigate greenhouse gas emissions after all. And investors who bought Tesla stock five years ago earned an 852 percent return as of November 3, 2023. However, the same investor could have earned a nearly 1,700 percent return had they sold the stock two years ago.

Since that time, investors in Tesla have lost around 46 percent of their value, compared to a much smaller loss of 7 percent for the S&P 500. Troubling for CalPERS’ investment thesis, investing in the oil and gas company ExxonMobil would have earned an investor over 65 percent during this period.

These historical returns demonstrate that there is not a simple relationship between a company’s approach to climate-related issues and returns. Undoubtedly, investments in alternative energy companies can experience astronomical returns. But poorly timed investments can also lead to devastating losses. The same is true for traditional energy companies.

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

As Ralph Waldo Emerson might say, from a societal perspective, “the more experiments you make the better.” A much more effective way to address global climate change is to encourage a diverse array of corporate climate plans that balance the costs and benefits of specific strategies differently. In other words, apply the basic investment concept of “diversifying risks” to the climate change issue.

Take the corporate net-zero standard promoted by Science Based Targets as an example. If all companies adopted this standard, as CalPERS might encourage, then the “overarching priority for companies” would be to halve their emissions by 2030 – in seven short years.

Without considering the feasibility or costs, meeting this goal is undoubtedly good. However, there are serious feasibility concerns let alone the tremendous costs reaching these emission reductions would entail.

As the U.S. Department of Energy has stated, “offshore wind is a critical piece of the equitable transition to net-zero emissions in the United States.” Problematically, as noted by BP’s renewables boss, “the U.S. offshore wind industry is ‘fundamentally broken’,” which has caused BP and its partner Equinor to write down $840 million of the value of its projects off the coast of New York. The offshore wind industry is also plagued with supply shortages and cost overruns that threaten the viability of the energy source.

In other words, a strategy to halve emissions in seven years may make good corporate talking points but is simply unachievable. Worse, the goal has become a distraction wasting resources and opportunities that could have better served customers.

And the lost opportunities to reduce emissions are real. In fact, emissions have been declining for many years mostly due to the “switch from higher-carbon fossil generation to natural gas generation,” according to the EIA. Therefore, to the extent that the goal to halve emissions in seven years discourages continued investment in natural gas, which it has, progress on reducing emissions is hampered.

From an investor perspective, the inability to reach the stated goals creates a potential valuation risk – after all, if a stock is expected to receive a premium from adopting the widely accepted climate plan of action, it stands to reason that the stock will be punished when those plans fall apart.

These complexities are a clear warning to CalPERS. Addressing global climate change is difficult and costly. Success requires an environment that encourages many ideas and experiments to flourish. Mandates from CalPERS undermines such an environment to the detriment of investors, the economy, and the environment.