Two Countervailing Forces: Public Pensions and Climate Change

Times are changing, and the American public is realizing its role in contributing to climate change. One of President-elect Biden’s policy issues is climate change, saying that “We’re going to invest $1.7 trillion in securing our future so that by 2050 the United States will be a 100% clean energy economy with net-zero emissions.” 

Biden’s campaign promise could be detrimental to pension plans currently dependent on fossil fuel revenues, potentially leading to shifts in investment trends. If the industry begins to decline as the U.S shifts towards green energy, beneficiaries of fossil fuel pension plans will be impacted. Retired coal miners in West Virginia fear that many of their benefits could be decreased or altogether cut by those in power. 

Climate change also puts investment returns at risk because extreme weather events will hurt a company’s profits. Anne Simpson, a CalPERS manager, says that “We need to think about – how do we manage that risk? How do we mitigate that risk? Don’t just lie there on the railway tracks waiting to be run over,” describing the relationship between her pension plan and climate change. 

There needs to be a resolution between fossil fuels and pension plans, if not, each force will exacerbate the problems of the other. The fossil fuel industry strengthens climate change, eventually leading to greater investment losses. Fiona Stewart, a financial specialist at the World Bank, writes that “if institutional investors do not act, they face a potential portfolio value loss of $10.7 trillion triggered by the effects of rising temperatures.”  

Pension plans are unnecessarily hurting themselves by relying on fossil fuel returns. A Notre Dame report on climate change argues that fossil fuel pension plans ought to invest in environmental, social, and corporate governance (ESG) for greater financial returns. The U.S. has diametrically shifted its opinion on climate change, therefore, pension plans must modernize their investments. 

To ameliorate the effects of climate change on beneficiaries, managers should allow for more investment diversification, clearly outline how  ESG investments fit into their fiduciary duties, build ESG literacy and awareness, and share and adopt best practices from other pension plans. Bodies like the International Organization of Pension Supervisors (IOPS) provide frameworks and support for pension managers seeking to “modernize” their investments. Failing to realize the ailings of the fossil fuel industry will detrimentally impact beneficiaries.