This past April, the $39.6 billion Texas Employees Retirement System, Austin, got into hot water with Texas state government officials. Its transgression? It supported a series of shareholder resolutions aimed at reducing risks to the financial health of its beneficiaries stemming from climate change.
Texas pension trustees must be allowed to do their jobs free of political interference. To accede to this interference, a fiduciary breach, is nothing short of illegal and must be opposed by current and future pensioners.
The shareholder proposals that prompted the government’s outcry concerned bank financing for future fossil fuel infrastructure. Each bank that received a proposal has committed to following a credible pathway to net-zero emissions, which does not allow for new fossil fuel infrastructure above and beyond what has already been permitted. And yet, all of the banks that received shareholder proposals again, continue to finance new fossil extraction projects, with no plan to phase them out, in direct opposition to their commitments. The resolutions asked for policies that would allow the banks to explicitly meet their net-zero commitments, and nothing more.
Banks that finance fossil fuel expansion present serious risks to their investors. First is the financial risk of “stranded assets.” As governments around the world tamp down fossil fuel demand and invest in renewable power, future fossil infrastructure that exceeds net-zero requirements will go unneeded. These stranded assets won’t produce the financial returns that were originally projected, diminishing the ability of the companies that took out the loans to pay them back. That’s a financial problem for the banks that made the loans. The stranded mortgage assets that created the global financial crisis, and almost took down the banking system, amounted to about $4 trillion. The stranded fossil infrastructure projected to result from banks continuing with business as usual will total 2 to 3 times that number.
Another risk to bank shareholders will result from central bank regulation that penalizes fossil fuel loans on the banks’ balance sheets. This will raise the banks’ cost of capital and make them uncompetitive against their global peers that have less fossil loan exposure. Even if that regulation never happens in the U.S., all of these banks have extensive global operations.
A third source of risk comes from the scrutiny banks will face by trumpeting their net-zero commitments without any credible way of achieving them. Such “greenwashing” can invite reputational repercussions from customers and bank employees. In addition, we have seen that regulators such as the Securities and Exchange Commission do not take kindly to companies that misrepresent their sustainability claims, nor do activist investors.
Pension trustees must fulfill fiduciary duties to their beneficiaries. One of the principal fiduciary duties is the duty of loyalty. This means that a fiduciary may only act in the best interests of its beneficiaries, not of Texas oil and gas businesses. Another major fiduciary duty is the duty of care. Part of this duty involves shielding beneficiaries from undue risks, such as the risks that result from climate change and societal responses to it. In supporting the resolutions, the ERS trustees were simply exercising their duty of care. Another aspect of fiduciary duty, the duty of impartiality, requires trustees to balance the needs of today’s retirees with those who will receive benefits far into the future, when catastrophic climate change will not only risk impairing the values of fossil fuel companies and their financiers, but of the financial markets, and retirement funds, as a whole.
Pension trustees must be allowed to protect the retirement savings of their beneficiaries free of political interference. The statesman Henry Clay said, “Government is a trust, and the officers of the government are trustees; and both the trust and the trustees are created for the benefit of the people.” One can only hope that the state of Texas officials who improperly influenced the fiduciaries of their retirement system will someday take these words to heart.
Paul Rissman is a member of the Sierra Club Foundation board of directors; co-founder of Rights CoLab, a global platform working to advance human rights; and former executive vice president of AllianceBernstein LP. He is based in Berkshire County, Mass. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I’s editorial team.