Pension funds are a tool to secure the future of millions of workers. However, what if your pension money is destroying your and your children’s future. The very investment that was meant to protect you is now destroying the very air you breathe and the water you drink.
Currently we are seeing a growing concern about the pension fund investments in dirty energy or fossil fuels. Here, in this blog we will take a closer look at why disinvestment is a great strategy for the future.
Why Are People Pushing for Divestment?
Before we understand now this particular Dirty Energy Disinvestment is happening, it is important to have a look a the reason for why people are pushing for disinvestment:
Financial Performance Is Lagging
Currently, all over the world Pension funds are holding trillions in assets. For pension funds the fossil fuel companies seem to be reliable and profitable investments. However, this particular trend is changing as of now.
As per a recent study, it was found out that if six of the American Pension Funds did not have invested in fossil fuels then they might have gained an additional profit of $22 Billion.
If we look at the S&P 500 index we would find that the heritage of the fossil fuel sector has fallen drastically. The market share has fallen from 28% in the 1980s to just 5% in today’s time. These numbers clearly show us the shifting preference of the market.
Climate Risks Are Financial Risks
Another reason that is pushing the disinvestment is now that climate change is not perceived as just an environmental issue but it haal become a financial one too. Businesses are finding that the investment in fossil fuels is becoming more and more risky.
Owing to the tight regulations, litigation threats and the decreasing demands people are avoiding investing in the fossil fuel sector. For companies involved in drilling and polluting, there is both a direct and reputational risk to them.
Pensioners Shouldn’t Profit from Pollution
Apart from the financial point of view, many people argue that it is morally right to digest. Retirees don’t want their hard earned money funding those industries that contribute the most to climate change.
Global campaigns, such as those led by 350.org, Fossil Free, and Greenpeace, have put immense pressure on pension trustees and asset managers to act responsibly. Apart from that individual pensioners are also taking proactive steps.
Recently, two UK pensioners, took their scheme’s directors to in regards to the climate concerns. Now this particular move has opened the gate for more legal accountability.
How Are Pension Funds Actually Divesting?
Now that we have the basic picture of the whole thing it is time we take a look at how pension funds are actually divesting from dirty energy.
Coal Disinvestment
Majority of the pension funds are starting to disinvest from coal, as it is considered one of the dirtiest and most polluting fuels. For example, California’s CalPERS and CalSTRS have already started to divest from the coal companies.
They have specifically chosen such companies who are generating over 50% of their revenue from coal. Similarly, the New York State’s pensions fund reviewed their investments and divested from 22 coal firms in 2020.
Oil and Gas Disinvestment
European nations are at forefront when it comes to the disinvestment in fossil fuels. Recently we have seen that the Dutch pension giant ABP, announced that they will soon move out of the oil and gas companies, this particular move will lead to disinvestment of over €15 billion out of fossil fuels.
Similarly, Germany’s Union Investment also took a similar step and dropped ExxonMobil and EOG Resources for failing to meet Scope 3 emission targets.
In 2024, New York City also announced that it will now stop investing in any new fossil fuel infrastructure, this includes both private equity and real estate. Now this clearly means that the state will no longer invest in the pipelines, LNG terminals, or gas-fired power plants.
Australia’s second-largest pension fund, the Australian Retirement Trust, also banned investment in companies earning more than 10% of their revenue from thermal coal.
Not Everyone is Disinvesting
While we are seeing a lot of proactive measures from the companies. There are certain arguments against the disinvestment that reduces its appeal. It is the fiduciary or legal duty of the pension fund managers to find the best financial opportunity for their members. Now , critics argued that this could directly conflict with pulling out of the profitable dirty energy industries.
However, this particular thought of school will soon change as various researches have shown that portfolios that lack fossil fuels are actually performing better with their counterparts.
There is another issue that is restricting this particular disinvestment process, which is the cost associated with this whole venture. While big pension funds can take care of any loss that might occur, smaller funds will have a hard time managing the cost involved in dumping fossil fuel assets.
Now, the cost can include penalties for selling early, administrative challenges, and losing access to stable returns from existing investments.
Is Engagement a Better Strategy?
While some argue for complete disinvestment, there is a thought of schools that don’t prefer hard exit. There is a term called active ownership.
Now this basically means staying invested and using the shareholders power to push the business for better climate action. However, some critics argue that it is too slow and this particular climate crisis needs more urgent action.
