Divesting from fossil fuels is unlikely to bring about the social changes activists are campaigning for, according to Chris Ailman, chief investment officer at the $243 billion California State Teachers’ Retirement System.
Speaking on a virtual panel alongside CPP Investments president and chief executive Mark Machin at the Bloomberg Green Festival on Monday, Ailman said divesting is “just a buy-sell decision”.
“It really comes down to a decision about whether you think divestment is going to bring about social change. For us divestment has to be an investment decision,” he said.
“Divesting is just a buy-sell decision, and that’s what the activists have to realise. They’ve told us they hope that divestment will bring about social change because these companies will lose political influence. The reality is, if we sell our shares, somebody else will buy them, and in fact, an investor who does not care about climate change.”
Ailman pointed out the necessity of recognising that “the vast majority” of oil companies are not publicly held, and therefore change has to come at the government level.
“We can tilt our portfolio in or out of particular areas, but it’s not going to materially change that area. And that comes from 25 years of experience being in divesting of certain industries, it has not brought about any social change.”
Divestment activists have become a common sight during CalSTRS’ public comment sessions. Ailman said activist group Fossil Free California is present at “every meeting”.
In a report from 2019, CalSTRS said fossil fuel divestment would have a “negative impact on the health of the fund, while severely limiting our ability to shape corporate behaviour for long-term sustainable growth.”
A spokesman told sister title Buyouts earlier this year: “CalSTRS gives all individuals wishing to provide public comment the opportunity to do so at our board meetings, and we welcome and fully consider their comments.”
Energy transition needs capital
Machin added that a lot of companies that are heavily reliant on carbon-based fuels today and want to transition need capital to do so.
“If you starve the industry completely of capital, they’re not going to be able to transition as quickly and as effectively, so I think investing in some of these companies, if they are committed to transition, it makes sense.”
Both Ailman and Machin said there will be a residual need for some carbon-based fuels for a significant time to come; major breakthroughs are needed in, for instance, battery technology.
“If you’re going to have carbon-based fuels, then perhaps you want them from companies and places that really do try and have the best possible ESG standards in place,” Machin said. “So, they are thinking about the local communities, they are thinking about their governance, they’re managed well, the region is managed well, and they’re thinking about the impacts of climate change.”
Machin said the C$434 billion ($329 billion; €278 billion) CPP Investments has close to C$7 billion invested in renewables today, with “appetite for a lot more”.
“It’s going to be investment return-driven,” he said. “While the trend is moving in that direction, and there’s a huge amount of capital investing in renewables, we’ve got to find the ones that actually have really good risk adjusted return.”
For its part, CalSTRS has “billions” invested in renewables, primarily through infrastructure investments. However, Ailman said too much of the discussion today is around “hydrocarbons: yes or no?”.
“You can’t legitimately just cut off Texas and tell them to stop working and shut down their economy, that just won’t happen politically,” he said, adding there needs to be a transition from one energy source to another.
“The first has to be electricity. The second needs to actually be in the agriculture space. And so, for us, those are investment opportunities that we’re trying to look at.”
Ailman added many of the opportunities today are outside the US: “We’re looking for scale, where the pension plans can team up together and do very large infrastructure investments to foster better energy sources.”
Machin said every major investment CPP Investments makes must go through an environmental, social and governance screen, and specifically a climate change screen, to understand the risks and whether the investor is being paid for them.
“I don’t think companies today can survive and thrive and grow unless they are thinking about how they’re engaging with their customers, how they’re engaging with their communities, what their long-term governance setup is. So, from all of these perspectives, it’s really fundamentally important.”
In order to avoid ‘greenwashing’ by companies or managers, CPP Investments prefers to receive quantitative data rather than “just statements of wish or policy”, Machin said. The pension plan has zeroed in on Sustainability Accounting Standards Board and the Task Force for Climate-related Financial Disclosures as measurement frameworks it considers “best in class standards”, and pushes companies to align with those.
“If everybody’s reporting in different ways, then the numbers become less useful for us as we consolidate up all the thousands of securities we own and try and understand the risks we have.”
Ailman added that when it comes to ESG, “talk is cheap”.
“We know that in the investment industry loud and clear, words really are meaningless. The bottom line, though, is that disclosure. That’s what we’re really looking at is, show us in actions.”