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Fossil Fuel Divestment: CalSTRS Divests From Coal Assets

April 19, 2016

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Last February, the California State Teachers’ Retirement System (CalSTRS) board voted to sell their investments from four U.S. companies that produce coal for use in energy relation. The decision to liquidate its holdings comes after the state of California passed a new law in October 2015 urging them to divest.

The four U.S. companies affected by CalSTRS’ decision are:

  • Cloud Peak Energy
  • Hallador Energy Company
  • Peabody Energy Corporation
  • Westmoreland Coal Company

The coal company investments made up about $40 million of the funds overall $186 billion portfolio. CalSTRS has already started selling its holdings in the U.S. companies. Under the new law, CalSTRS has until July 2017 to make decisions regarding non-U.S. thermal coal-based companies, and the fund has already initiated that process as well. The law cites coal’s contributions to climate change as a main impetus for urging the divestments, and references thermal coal (used for energy) rather than metallurgic coal (used for producing iron and other metals).

CalSTRS’ Decision-Making Process

CalSTRS’ coal divestment process was initiated in April of 2015. Sharon Hendricks, Chair of CalSTRS’ Investment Committee, explains, “We determined that given the financial state of the industry, the movement of the regulatory landscape and coal’s impact on the environment, its presence reflects a loss of value.”  

CalSTRS’ decision-making process involves an assessment of ESG (environmental, social, and governance) factors. The fund utilizes 21 different Risk Factors, which specifically includes environmental risks linked to climate change. It also has a formal divestment policy, which emphasizes direct, in-person engagement with shareholders, managers, and boards of affected companies

CalSTRS makes it clear in their policies that no actions towards divestment will occur unless efforts at engagement are exhausted. “Efforts at engagement” includes shareholder resolutions, media campaigns, and other efforts. Thus, institutional investors do not take divestment lightly, and many preliminary steps are taken to ensure that decisions are thoroughly researched and discussed.

Differing Views On Divestment

For many, divestment is seen as a strategy to achieve non-financial goals on sustainability issues, such as pollution and climate change. In this regard, the state of California is often at the forefront of such efforts, with many institutions, such as Stanford University, divesting from coal sources as early as 2014. Pro-divestment groups claim that such decisions raise awareness of the issues at hand, and provide momentum for activist movements. For many, divestment presents a tangible accomplishment that gives substance to otherwise abstract ideological outlooks.

On the other hand, some question the benefits of divestment. For instance, many feel that:

  • Divestment often has no real financial impact on the performance of the companies, so it may not be effective as a “boycott” type strategy
  • Other alternatives, such as engagement and shareholder pressure, can achieve more direct results than divestment
  • Divestment harms beneficiaries due to the loss of potential profits

Regardless of the different outlooks, divestment needs to fall within the bounds of state and federal laws, and all actions must ensure that the fiduciary duties to the beneficiaries are being met and given top priority.

Other Divestment News in California

As the world’s largest educator-only pension fund, CalSTRS’ coal divestment decision has the potential to signal changes for other funds as well. On the whole, California funds tend to be highly focused on such decisions. For instance, in other California divestment news:

Thus, it is clear that divestment (especially fossil fuel divestment) is a major decision that is influenced heavily by both financial considerations as well as other factors such as ESG risk metrics. In the future, we expect to see more and more institutional investors considering divestment in light of these metrics.

Environmental, social and governance issues are a major point of discussion for investors and shareholders. It is becoming increasingly important to understand how these factors interact with and affect long-term investment projects. If you have any questions or concerns regarding divestment or other similar legal issues, contact us today at Kessler Topaz. Our team of attorneys works closely with institutional investors to identify key marketplace events, assess claims, and assist with litigation when necessary.