The Financial Case for CalPERS and CalSTRS to Get Out of Coal

[This commentary first appeared in today’s Sacramento Bee]

Getting CalPERS and CalSTRS to do the right thing and pull back from risky coal investments will require the type of political initiative being shown by California lawmakers who are pushing for just such a move.

Senate Bill 185, which would require the state employees’ and teachers’ retirement systems to sell their stakes in any company that garners more than half its revenue from coal mining, has passed the Senate. Members of the Assembly would do right by their CalPERS and CalSTRS constituents to follow suit.

The coal industry will complain that divestiture advocates are picking on coal for environmental reasons. Coal is a dirty source of energy, it is a hazard to public health, and coal-fired power plants are one of the causes of climate change.

Our chief arguments against investing in coal, however, are financial.

U.S. coal stocks have lost almost all their value over the past five years, and there is little upside today in owning them. It is an increasingly risky sector, as more and more coal plants are closing in the U.S. and China’s appetite for coal imports is diminishing. Most of the largest American coal producers are on financial life support. Coal-fired power generation is losing value, too, in the face of competition from wind- and solar-powered energy and natural gas.

Beyond its weak financials, the coal industry has been utterly unwilling to engage in a meaningful dialogue on how it could rebound – and why investors should believe they aren’t dumping good money after bad. Instead, the industry has insisted that its many woes are someone else’s fault.

INDEED, THE INDUSTRY SEEMS TO HAVE DUG ITS HEELS IN AGAINST NEW ENERGY MARKET FORCES THAT ARE GAINING GLOBAL AND UNSTOPPABLE MOMENTUM. Executives will not discuss the likelihood of carbon regulation, they deny flaws in their business models and they selfishly battle public-health policy that would curb pollution and address climate change.

There’s no sound investment rationale for staying with coal, and any investor with any fiduciary responsibility to its clients or members should step back from it. The sooner they do so the better.

Our research helped lead to the recent decision by the Norwegian parliament to direct that country’s public pension fund to curtail its investment in companies whose business depends on coal for more than 30 percent of revenues. Where Norway leads, California and others can follow.

The impetus to divest, however, will most likely not come from the phalanx of CalPERS and CalSTRS money managers. In the end, coal investment losses over the past few years and the likelihood of further losses require that California pension-fund fiduciaries – the state’s elected leaders – take action.

Sanzillo is IEEFA’s director of finance.