Divestment of State Pension Funds (S.42) - April 27, 2023

The House Government Operations Committee returned to S.42 on Thursday. Katie Green (Deputy Chief Investment Officer, Vermont Pension Investment Commission). She shared that the Vermont Pension Investment Commission (VPIC) established an Environmental, Social, and Governmental (ESG) committee. Green noted that climate change is a "significant threat," adding that it's "not just fossil fuel" but also automobile industry, land use, and water quality. She was adamant that VPIC was accountable and transparent, which is why they created the ESG committee to report up to the commission. 

Moningstar has called VPIC's transparency is "exemplary." When the commission votes on an issue, they also include an explanation for each vote. When she and others meet with companies, they meet with scientists and other knowledgeable personnel with company and they bring their own experts to help guide the conversation. 

The world is focused on the same goal, she claimed, achieving net-zero by 2050. Fossil fuels will still be in our portfolio (presumably before this bill passes), she shared, but they will have offsets to achieve net zero.

Green reviewed the current VPIC climate change analysis, which included VPIC governance, the ESG Committee responsibilities, VPIC's sustainability reports, and efficient and effective engagement with portfolio companies that will move the needle toward the global goals

In 2020, Vermont passed the Global Warming Solutions Act requiring the state to reduce greenhouse gas (GHG) emissions to 26% below 2005 levels by 2025. The next set of requirements are based on 1990 levels with reductions of 40% by 2030 and 80% below by 2050.

At the federal level, the US passed the Inflation Reduction act (2022) and the Infrastructure Investment and Jobs act. These measures aim to invest nearly $480B into infrastructure upgrades and climate change mitigation spending.

Green reached her punchline, "the world needs significant capital expenditure to achieve net-zero... companies need capital from institutions like VPIC to go further and faster to reach net-zero targets." In order to provide this capital, VPIC and other investors must hold companies transitioning to net-zero in their portfolio, she claimed. She added that "responsible investors" hold portfolio companies accountable through engagement.

NOTE: The implication here is that NOT divesting gives gives VPIC more leverage to effect change.

"Climate Action 100+" is a coalition of 700 investors with $68T in asset, including VPIC, that track the progress of 166 companies who collectively account for 80% of global industrial GHG emissions. In the last five years, among this group:

  • 75% have made net-zero commitments, in contrast to 5 companies at the coalition launch in late 2017.
  • 92% have board-level oversight of some climate change risks, increasing accountability.
  • 91% reported financials aligned to carbon-reduction, providing consistent and transparent climate-related reporting

She noted in her presentation that over 40% of the worlds 2,000 largest companies have already committed to net-zero emissions.

The interim steps can be achieved through a variety of investment solutions:

  • Invest in low-carbon technology.
  • Retire inefficient infrastructure.
  • Acquire sustainable energy sources.
  • VPIC engagement on carbon-reduction strategies, an evolving dialogue over time.

VPIC has also shifted their discussions to focus on methane emissions, which are 80 times as potent as carbon dioxide over a 20-year period. Methane emissions multiply climate risk and represent a value-wasted product (natural gas). Low-cost reductions to minimize methane emissions could account for nearly 15% of total GHG reductions to keep the world on a 2-degree path.

Green closed by stating that divestment is expensive and would result in "increased costs associated with higher fees and performance losses" related to an inability to allocate to "top-tier private market strategies" because they do not explicitly prohibit fossil fuels in their investment policies.

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