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Lesson No. 1 From Norway: The Fiduciaries Must Act

June 22, 2015
Tom Sanzillo

Decision-makers at most institutional investment funds continue to reject the idea that divestment from fossil fuels—particularly from coal—makes sense. By ignoring substantial value losses in the coal sector, these money managers betray their fiduciary responsibilities to investors.

Norway has shown the obvious way forward. Its recent move to divest from companies that receive 30 percent or more of their revenues from burning or mining coal is a model for others to follow—and those others include relatively small funds like Harvard’s endowment fund as well as gigantic public pension funds like the California Public Employees’ Retirement System and the California State Teachers Retirement System.

It’s time now for Harvard, CalPERS, CalSTRS and company to take a second look at divestment. Here’s why: Coal has lost value at catastrophic levels over the past five years and there is no upside on the horizon.

Our recent report to the Norwegian parliament, in advance of that body’s decision to divest, noted that the Stowe Global Coal Index lost 70 percent of its value from 2010-2015, a time in which global stock indexes gained value at a steady if modest rate. Nothing today indicates a reversal in coal’s slide, and the situation for U.S. coal producers is even worse than global indexes suggests. Most of the largest U.S. coal producers are on financial life support, and U.S. coal-fired power generation is losing value, too, as competition from wind and solar, from low natural gas prices, and from policy decisions shrink its share of energy markets.

Our study shows also that for the next six years prices will remain well below levels required to sustain the coal industry.

COAL COMPANIES WILL CONTINUE TO MINE AND TO SELL COAL. BUT THERE ARE TOO MANY COMPANIES TODAY producing too much coal for too few customers. Profitability will remain weak for the foreseeable future, and the coal industry—as it has been for some time already—will remain a last-in-class performer.

The coal industry itself is unable today to offer investors a viable business rationale for taking a stake in its future. Scores of market analysts have documented the feeble outlook for coal in enough studies and papers to stock a library.

Yet the money managers for most large institutional funds, their staff and the fiduciaries who hold ultimate responsibility avoid conceding that coal is a losing investment proposition. We published a paper last year that showed how the New York State Common Retirement Fund, the largest public pension fund in the U.S. (full disclosure: I worked for the New York State comptroller, the sole trustee of the fund, for almost 13 years) had lost $100 million on coal investments and was likely to lose even more so long as it refused to divest. Fund managers have stayed the course nonetheless, although some members of the Legislature are beginning to ask questions about these losses, and about this silence.

Indeed, what kind of financial advisor or fiduciary squanders investment dollars on a certain failure? Those who adhere to the logic that each fund has a strategy that allows it to absorb these kinds of losses miss the point. Coal is not in a cyclical decline, it is unlikely to come back as a viable investment. We have the last four years of dismal performance and outlook six years forward seeing no growth. Adhering to a business strategy that cannot discriminate between structural decline and market fluctuations is to defend an investment strategy that puts form over substance.

WHAT THE NORWAY DECISION SHOWS IS THAT THE IMPETUS TO DIVEST WILL NOT COME FROM THE PHALANX OF MONEY MANAGERS AND EMPLOYEES who run institutional funds. Most of these individuals are concerned primarily with their careers and with the ample fees provided by institutional funds. Divestment is not on their radar.

In the end, though, profound losses from coal investments and the likelihood of further losses require that those who are ultimately responsible take note and act. ­

In Norway, lawmakers who are the fiduciary rejected the advice of the country’s pension fund managers and ratified a wider divestment from coal than those fund managers had recommended. It should be noted that the fund advisers and staff in Norway are among the best in the world. In doing what it did, the Parliament was recognizing its role as fiduciary. It made its judgment unanimously, and did so because of the vast financial and environmental risks associated with coal investment. The fund’s staff and managers must now divest from coal stocks. They must also demonstrate that the fund can still meet its financial benchmarks. It should not be difficult to find replacement stocks for coal companies that are losing so much of their value.

Money managers—in Norway, the U.S., everywhere—are loath to lead. The published rationale against coal divestment at Harvard, CalPERS, CalSTRS and the New York State Fund all read more or less the same. None of them acknowledge the fundamental point that coal is a losing financial proposition, independent of the many woes the industry faces with pollution and climate-change issues.

Tom Sanzillo is IEEFA’s director of finance.


Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures. He also examines such areas as community and shareholder activism, institutional investment, public subsidies and Puerto Rico’s energy economics.

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