Public investment funds from US states that said last month the Biden administration was privately pressuring financial institutions to stop supporting the fossil fuel industry have pulled back their own exposure in recent years.
State treasurers from 13 states that rely heavily on coal, oil and natural gas production to support their economies sent a letter to special envoy for climate change John Kerry accusing the Biden administration of seeking “extralegal commitments” from financial institutions to “refuse to lend to or invest in” fossil fuel companies.
The treasurers from states including Arkansas, Ohio, Pennsylvania and West Virginia wrote that the administration’s efforts are “part of a misguided strategy to eliminate the fossil fuel industry” in the US. “We strongly oppose command-and-control economic policies that attempt to bend the free market to the political will of government officials,” the letter stated.
But a New Private Markets review of exposure to the US energy sector by public pension funds from a number of these states found decreasing exposure to the fossil fuel industry that pre-dates the Biden administration taking office in January.
It’s also important to note that it’s common for institutional investments in the energy sector to ebb and flow depending on market conditions, especially following a turbulent year in 2020.
For example, in 2016, 4.6 percent of the total portfolio managed by Pennsylvania Public School Employees’ Retirement System was invested in oil and natural gas master limited partnerships. Eight out of 10 of the top largest equity holdings for Penn PSERS was MLPs. In 2020, the pension fund, which now manages $59 billion, held only 2.1 percent exposure to MLPs and only three MLPs were in its top 10 holdings.
At West Virginia’s Consolidated Public Retirement Board, which manages over $16 billion, energy securities as a percentage of the fund’s entire portfolio fell from 6.1 percent in 2017 to 0.54 percent last year. Similarly, at the $31.8 billion Public Employees Retirement System of Mississippi, energy exposure as a percent of its total public and private equity portfolios fell from 6.17 percent in 2016 to 2.56 percent in 2020.
While the private equity industry faces less “climate scrutiny” from government regulators, Dazzle Bhujwala, director of investor networks at the sustainability group Ceres, told New Private Markets that economic forces may be helping make the choice easier for LPs and GPs.
“With structural shifts in the fossil fuel industry underway, as well as dwindling exit options, it is clearly time for the private equity industry to consider repositioning portfolios away from such investments and deploy capital in companies that hedge toward climate solutions,” Bhujwala said.
“However, some investors may not divest from fossil fuel exposure completely because, by doing so, they lose out on the opportunity to work with companies where engaging, not exiting, is the best way to find solutions moving forward.”
State treasurers for the states cited in this report did not immediately respond to emails requesting comment.