This briefing note was produced by Oil Sands Divestment, to download or view it in a PDF format click here.
The British Columbia Investment Management Investment Corporation (BCI) invests most BC public sector pension funds – in total about $153 billion. The BC Public Sector Pension Plans Act mandates that BCI has a fiduciary duty to invest in the best financial interests of the plan members. Here’s a quote from the 2020 BCI Annual Report: “We are legally and contractually required to invest our clients’ funds in their best financial interest – it is our fiduciary responsibility… BCI invests in assets that provide reliable cash flows and will appreciate over the long term.”
Is BCI getting the best possible return for its clients?
The answer is probably no.
There is overwhelming evidence that continuing to invest in fossil fuels, which are increasingly volatile, risky, and a stranded asset, is a money loser over the long term, even if in exceptional and rare circumstances (such as war and conflict) fossil fuel companies make short-term profits. By continuing to hold fossil fuel stocks BCI is likely not meeting its fiduciary responsibility. Additionally, there is plenty of evidence showing that it’s quite easy to divest from fossil fuels, in fact, a Dutch pension fund did it in six weeks[1]. Continued investment in oil, gas and coal is fueling the climate crisis, leading to more heat domes, floods, and forest fires, which is incredibly risky and threatens our long-term future, including your pensions.
Here’s the evidence. A back-test on BCI’s public equity holdings was conducted in the from end March 2010 to end March 2021 using S&P Capital IQ database to measure the impact that divestment of all energy stocks would have on the cumulative fund return. The 11 year cumulative return of BCI was 250%; without energy stocks this would have been 297%[2].
This means that by not divesting from fossil fuels in 2010 BCI may have lost $17,876 per plan member [3].
If this concerns you, learn more and join the campaign. You can do anything from writing an email or letter or talking to fellow pension fund holders.
Evidence from Pension Fund Analysis:
Credible in-depth analysis of a number of pension funds found the same thing – holdings in fossil fuels are losing beneficiaries money:
- Since 2011, Sortons la Caisse du Carbone analyzed the performance of the largest 50 oil and gas companies in which the Caisse de dépôt et placement du Québec (CDPQ – the manager of the Quebec public pension fund, which is now divesting from fossil fuels). From 2011 to 2021 the Carbon 50s losses amounted to -25.6%, while other stock indices have grown between 100 and 150%[4] .
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- If the State of Maryland had divested from 162 fossil fuel companies beginning in 2010, for every $1,000 invested by the pension fund the returns would be $150 greater today[5].
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- CalPERS (California Public Employees’ Retirement System) would have generated an estimated additional US$11.9 billion had the fund divested its fossil fuel stocks in favour of the rest of the portfolio, between 2009 and 2019. This amounts to US$6,072 lost for each member[6].
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In case we needed more evidence, there’s a wealth of it from other reviews of pension fund performance:
- Two major financial management firms, BlackRock and Meketa, have separately concluded that investment funds have experienced no negative financial impacts from divesting from fossil fuels. In fact, they found evidence of modest improvement in fund return[7].
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- In 2019 the energy sector placed last in the Standard & Poor’s 500 index, posting a 7.3% gain, while the index as a whole rose 29%, despite a major rise in oil prices[8].
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- A 2020 study from Imperial College London and the International Energy Agency shows investments in renewable energy massively outperformed fossil fuels in the previous five years, including 178.2% for renewables vs -20.7% for fossil fuels in German and France, 200.3% vs 97.2% in the U.S., and 74.5% vs 8.8% in the U.K[9].
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- C40 Cities concludes that none of the eight city pension funds that divested from fossil fuels suffered a negative impact on portfolio performance, while some, such as Berlin and Stockholm, saw better performance from their fossil-fuel free investments[10].
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- Genus Capital analysis of seven years of its fossil-free investment data found that divesting from fossil fuels has a positive effect on returns, mediates volatility, and increases portfolio resiliency. Investors using Genus’ Fossil Free CanGlobe Equity Fund generated a 12.82% annualized return, outperforming the returns of its benchmark (10.95%) and the overall Canadian stock market index (6.68%)[11].
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- A 2017 study led by the Grantham Institute showed that removing fossil fuel companies from the S&P 500 and tracking the index between 1989 and 2017 had essentially no impact on returns, and could even have positive value[12].
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- An April 2021 report from Carbon Tracker analyzed the stock market fortunes of fossil fuel companies and compared them with electric utilities and renewables/cleantech companies as well as the general equity market (the MSCI All Country World Index, or ACWI, is used as a benchmark). An investor who bought into all fossil fuel and related equity issuances from 2012-2020 would have seen their investment underperform the ACWI by 52%. Investors in renewable energy have received a good return, according to the study, with the MSCI Global Alternative Energy index outperforming the market (ACWI) by 54% and with most of that return coming in 2020 — making it one of the best performing sectors of the decade[13].
These findings are also backed up by plenty of recent research from reviews of thousands of stocks over decades.
Evidence from Independent Research:
- “Portfolios that divest from fossil fuels and utilities and invest in clean energy perform better than those with fossil fuels and utilities. We also find that risk-averse investors would be willing to pay a fee to make this switch, even when trading costs are included”[14].
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- “We find that the investment performance of portfolios that exclude fossil fuel production companies does not significantly differ in terms of risk and return from unrestricted portfolios. This finding holds even under market conditions that would benefit the fossil fuel industry. We conclude that divesting from fossil fuel production does not result in financial harm to investors…..”[15].
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- “From a managerial point of view, we suggest that fossil fuel divestment is in line with fiduciary duty ….. we conclude that fossil fuel divestment can be conducted without harming financial returns and the ethical divestment strategy contributes to higher financial returns….”[16].
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- “The financial case for fossil fuel divestment is strong. Over the past three and five years, respectively, global stock indexes without fossil fuel holdings have outperformed otherwise identical indexes that include fossil fuel companies. Fossil fuel companies once led the economy and world stock markets. They now lag”[17].
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- “We compare financial performance of investment portfolios with and without fossil fuel company stocks over the period 1927–2016. …. we find that fossil fuel divestment does not seem to impair portfolio performance. These findings can be explained by the fact that, so far, fossil fuel company stocks do not outperform other stocks on a risk-adjusted basis and provide relatively limited diversification benefits”[18].
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[2]Smart Prosperity Institute et al (2021) Canadian Pensions Dashboard for Responsible Investing. A Navigational Tool to Increase Ambition for a Sustainable, Inclusive Future. And information from Corporate Knights. https://institute.smartprosperity.ca/sites/default/files/Pensions-Dashboard.pdf
[3]Based on a loss of almost $16 billion, and 690,000 plan members as of March 31 2021.
[5] FFI Solutions (2021) Portfolio Diagnostics Report. Carbon Exposure and Sustainability Analysis. https://chesapeakeclimate.org/wp-content/uploads/2022/02/FFI_Solutions_Report_MD-MSRPS-2021_Diagnostics.pdf
[6] California Public Employees’ Retirement System (CalPERS) pays high cost for holding on to fossil fuel stocks: A Corporate Knights Analysis. www.corporateknights.com
[11]https://www.globenewswire.com/news-release/2020/10/29/2117161/0/en/New-report-spotlights-divestment-as-a-sound-investment-strategy-for-increased-resilience-and-annualized-returns.html
[12]https://www.lse.ac.uk/granthaminstitute/news/the-mythical-peril-of-divesting-from-fossil-fuels/
[14] Henriques, I. and P. Sadorsky (2018) “Investor implications of divesting from fossil fuels.” Global Finance Journal 38 30–44
[15]Plantinga, A. and B. Scholtens (2021) “The financial impact of fossil fuel divestment.” Climate Policy 21 (1), 107-119.
[16]Hunt, C. and O. Weber (2019) “Fossil Fuel Divestment Strategies: Financial and Carbon-Related Consequences.” Organization & Environment 32(1) 41– 61
[17] IEEFA (2-18) The Financial Case for Fossil Fuel Divestment. Institute for Energy Economics and Financial Analysis.
[18] Trinks et al (2018) “Fossil Fuel Divestment and Portfolio Performance.” Ecological Economics 146, 740-748.