By Richard J. Codey and Tom Sanzillo*
Senators Bob Smith and Linda Greenstein have introduced the Fossil Fuel Divestment Bill, which would divest the state pension fund from fossil fuels. The bill has been gaining support rapidly. But the New Jersey Treasury Department, which administers pension money, has opposed the bill, saying it prefers stepped-up conversations about climate change and company finances between the pension funds and oil and gas companies.
For the last 10 years, the oil and gas sector has performed dead last in the world stock market
The proposed legislation provides the right financial solution. The pension fund is required to invest money prudently to secure the pensions of New Jersey’s public workforce. Oil and gas companies once led the world economy and contributed mightily to pension fund returns. Today, however, and for the last 10 years, the oil and gas sector has performed dead last in the world stock market.
In the 1980′s, the oil and gas sector accounted for 28% of the S&P 500. Today it represents just 2.5% and is the smallest sector in the investment index. Industry profits have tanked and the outlook is negative ‒ and this was true before the pandemic. By contrast, fossil-free portfolios have performed as well, and even better, than those with oil and gas stocks.
The question is not whether to divest. The question should be: Why is the New Jersey Fund still invested in this sector that has failed for the last decade and faces a bleak future?
It is unfortunate that the Department of Treasury has implied that divestment from fossil fuels would produce lower returns for the fund. More important, it is contrary to their duty to maximize returns and is borderline reckless.
The 10-year return for the energy sector in the S&P 500 is negative 3.5% compared to the 12.2% return from the S&P 500. Simply put, for the last decade, the economy as a whole has grown while the fossil fuel sector has lagged, and lagged badly.
The New Jersey pension funds already suffer under the weight of historically poor performance. They were recently cited as among the least well-positioned funds to weather a pandemic-like financial shock.
A five-alarm wake-up call has been issued about the climate-related problems facing NJ residents.
The proposed legislation provides the right climate solution. A recent report from New Jersey’s Department of Environmental Protection is a five-alarm wake-up call about the climate-related problems facing state residents. Since 1990, companies like ExxonMobil have rejected shareholder proposals on climate change and other environmental issues. In 1990, when the New York City pension funds tried to engage Exxon and most of the oil and gas industry on climate-related risks, they were recalcitrant. They remain so today. They have a demonstrated track record of cynical responses to the kind of good-faith overtures that the state Department of Treasury anticipates having with its stepped-up conversations.
The Treasury Department is wasting precious resources by engaging with an industry that has a 30-year history of denying shareholder pleas. Instead of contributing to solving the climate crisis, the fossil fuel industry has failed to take responsibility and funded a disinformation campaign.
Presently, the industry is a weak performer with a negative financial outlook and constitutes the smallest holding of most standard indexes. The New Jersey Legislature must take charge to address the state’s climate crisis and the failing financial performance of fossil fuel investments by supporting divestment.
A sound investment policy would divest from the oil and gas sector on both financial and climate grounds. A sound investment policy would, as the proposed legislation does, allow the pension fund to reinvest in oil and gas companies if and when they change course.
The legislative process requires debate and discussion. This works best when based on facts. The climate issue and the financial complexities surrounding it require action and leadership. The financial case for continued fossil fuel investment is non-existent. What remains is a discussion of how the fund should protect itself from investment in this declining industry and how the Legislature should protect the public from the worrisome impacts of climate change.
Senate Bill S330, the Fossil Fuel Divestment Bill, should be passed and implemented as soon as possible.
*Sen. Richard J. Codey, who has served in the state Senate since 1982, represents the 27th Legislative District, which includes parts of Essex and Morris counties. He also served as the 53rd governor of New Jersey from 2004 to 2006 and as president of the Senate from 2002 to 2010.
Tom Sanzillo is director of finance at the Institute for Energy Economics and Financial Analysis and has 30 years of experience in public and private finance, including as a first deputy comptroller of New York State.
This op-ed appeared in the Newark Star-Ledger (NJ.com) on September 28, 2020.