How Boring Old Pension Funds Might Curb Global Warming

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If civilization still exists a century from now, Earth ought to throw a parade for pension funds. For all their fiscally conservative stodginess, the people tasked with safeguarding your nest egg are forcing the financial world to pay attention to climate change.

Last week, some retirement funds and church endowments, along with BlackRock, the world’s largest investment bank, approved a proposal that Occidental Petroleum begin researching and reporting its climate-related vulnerabilities. Shareholders of other petroleum companies have petitioned for climate risk disclosure before, but no one’s ever pushed through a vote. These aren’t save-the-planet activist shareholders, either. They’re investment companies whose business is ensuring they have enough money to pay out future financial obligations.

Occidental Petroleum is one of the nation’s largest oil companies. Not surprisingly, it opposed the proposal. But the vote needn’t have happened. BlackRock1, and other investors, had been asking the company for more than a year to voluntarily disclose its risk. Occidental demurred, saying it already considered the long term risks climate change poses to its business. The rigor of those reports dissatisfied many investors. So they passed a measure calling on the company to, among other things, issue annual reports (starting in 2018) on how things like the Paris agreement—which seeks to limit global warming to 2˚C—will impact its its business.

The investment community—despite its cold-as-money reputation—wields significant planet-saving power, says Sangwon Suh, a professor of environmental science and management at UC Santa Barbara. “This is an example of what I call the Trojan strategy, which is where socially-responsible investors can actually make a change in the company’s decision making,” he says. In a December, 2016, op-ed for the Huffington Post, Suh wrote that this “Trojan strategy” was probably the most effective. By contrast, divestment is a strategy where climate-conscious investors pull their money out of environmentally subpar companies. Suh points out that this just makes those shares available for other, morally-ambiguous investors.

But BlackRock, with $5.4 trillion in global assets, is not predominantly concerned with social responsibility. It’s worried about protecting its clients’ assets. Retirement funds—like those that predominantly made up the bloc of shareholders that voted in favor of the Occidental climate risk disclosure—manage smaller funds, but have similar responsibilities. A 2015 white paper outlining climate risks to investment portfolios made BlackRock’s stance clear: “You may or may not believe man-made climate change is real or dismiss the science behind it. No matter. Climate change has arrived as an investment issue.”

Rising seas and higher temperatures might not directly impact an oil company, but government regulations could. In late 2015, nearly 200 governments made a pact to act against climate change when they signed the Paris agreement. During the 2016 campaign, Donald Trump promised to cancel or renegotiate this country’s commitment. As president, however, he’s repeatedly postponed doing anything, probably because fulfilling his promise could place the US at a diplomatic disadvantage. Key trading partners like China, Canada, and the European Union remain committed to their Paris goals.

But from an investing standpoint, those commitments aren’t absolutes. The EU could disintegrate, China’s economy could go crawling back to coal, and Canada could ditch progressive Justin Trudeau in favor of someone hell-bent on slurping Alberta’s tar sands dry. And the US could renege on Paris, inspiring others to do the same. Point is: How are these retirement funds and investors so sure climate will be a risk?

Well, BlackRock and other fund managers read direct climate signals from various economic sectors—say, property insurance, which is seeing rising premiums due to the uptick in severe storms. They also get feedback from a growing number of clients interested in sustainable investing.

Finally, climate policy isn’t a monolith—Paris might not encompass the whole world, but many countries with strong, resilient economies will carry on with their pledges. Let’s say, for instance, Norway places a moratorium on oil drilling. Any oil buried below that nation (and its territorial waters) is stranded. “There’s a small risk of this actually happening, but a huge impact if it actually does happen,” says Suh. “And investment companies look at total risk, which is chance times impact.”

Gigantic investors like BlackRock wield great leverage over a lot of different companies. But even BlackRock’s 7.8 percent share in Occidental Petroleum wouldn’t have been enough to force the company to disclose climate risk on its own. The major push came from smaller funds, like the California Public Employees’ Retirement System and the Texas Teachers’ Retirement System. These are tiny players compared to BlackRock’s $5.4 trillion stake in Occidental—CalPERS holds a mere $203 billion in assets, and Texas Teachers just $133 billion. But combined, these and the other pension and endowment managers held enough shares to push the vote nearly to the brink. Occidental hasn’t disclosed the actual votes, but a similar climate risk vote at last year’s shareholders meeting narrowly failed. Reports are that BlackRock’s weight pushed it through this year.

Of course, not every shareholder that voted in favor did so out of purely financial reasons. The Nathan Cummings Foundation—which co-introduced this year’s resolution—proudly proclaims its activist bent. And CalPERS is known to have progressive values. Even BlackRock isn’t totally cold to ideology. A spokesperson explained that the values of its clients—who are increasingly interested in sustainable investment—goes into its financial calculus. “But none of these groups are doing this solely to save the environment or the world,” says Suh. “Their primary concern is whether or not their money is at risk.”

And they aren’t alone. More than 1,500 institutional investors are members of the UN-supported Principles for Responsible Investment, which lists accounting for climate risk among its six tenets. “Together, they represent more than $60 trillion in combined assets,” says Suh. Maybe retirement saving isn’t so boring after all.

1 UPDATE 05/18/17 7:30pm ET — Corrected from BlackWater, which is a private military company (now named Academi).

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