A new study by Prof. Daniel Fischel of the University of Chicago Law School, and co-authors Christopher Fiore and Todd Kendall of economic consulting firm Compass Lexecon, finds that both the Colorado Public Employees’ Retirement Association (PERA) and the New York State Common Retirement Fund stand to lose millions every year if they were to fully divest from fossil fuels.
In response to increased pressure on Colorado and New York politicians to support divestment, the report—which follows up on their earlier study of pensions in other states—examines the potential impact of a narrow divestment policy that includes oil, natural gas and coal, as well as a broad policy that also includes utility stocks, to determine the financial implications of such an investment strategy. To do so, Prof. Fischel and his team used all available data on current holdings to calculate returns on those holdings over the past 50 years. This data was compared to an otherwise identical risk-adjusted portfolio absent of fossil fuel-related stocks.
“New York and Colorado have both come under political pressure to give up pension investments in fossil fuels, but at what cost? Our research shows that large pension funds stand to lose a substantial amount of value if they decide to adopt a divestment policy,” said Prof. Fischel. “The energy sector plays an important role in diversifying a given portfolio, so eliminating that exposure means higher risk and reduced returns to the tune of millions if not trillions of dollars over an extended timeframe. These types of costs leave pensions to make a hard choice: reduce pensioner benefits or increase contributions from taxpayers to the fund.”
Accordingly, when adjusted for risk, Colorado’s annual cost of divestment could range from $36 million for narrow divestment to $50 million for broad divestment. Over a 50-year timeframe, that cost skyrockets to between $470 billion under the narrow policy and $646 billion, or a 10.12 percent loss, under the broad policy. These loses are equivalent to cutting individual pension payments to Colorado beneficiaries by $300 to $400annually or cutting annual benefit payments to roughly 1,000 Coloradoans.
For New York’s $190 billion pension, the expected annual cost of divestment ranged from $136 million for narrow divestment to $198 million under the broad strategy. To put these numbers into perspective, the average pension for retirees in the Employee’s Retirement System (ERS) was $23,026 in FY 2017. A $198 million loss due to divestment equals the yearly pension payments for 8,598 ERS retirees. Over 50 years, the costs of divestment for New York State add up to $1.1 trillion under the narrow approach and $1.5 trillionunder the broad approach. To make up for the substantial shortfall caused by divestment, the State will either have to lower pension payouts or seek new revenue from taxpayers.
“Research continues to show that divestment is all cost and no environmental gain,” said Jeff Eshelman, Independent Petroleum Association of America (IPAA) senior vice president of operations and public affairs. “Activists continue to force divestment policies upon pension funds, but the numbers show it’s becoming increasingly difficult to justify their stance. Both Colorado and New York State rely on fossil fuels for the vast majority of their energy needs. Divestment ignores this reality and puts the financial future of pensioners and taxpayers at risk, all to make an empty political statement.”
The report comes following previous academic research commissioned by IPAA on the subject of fossil fuel divestment. Visit DivestmentFacts.com to learn more.
