Will Oregon divest from fossil fuels?

Climate justice activists are urging people and institutions to divest from fossil fuel companies. The organization 350PDX recently held an event with Oregon’s state treasurer, Tobias Read, to encourage him to divest the state’s pension fund dollars from fossil fuels. We talk with Read about what it would take for the state to do that.

The following transcript was created by a computer and edited by a volunteer.

Dave Miller: This is Think Out Loud on OPB, I’m Dave Miller. According to the most recent quarterly report, the state of Oregon manages more than 121 billion dollars. It’s in everything from pension, school, and insurance funds, to short and medium term operating accounts. The money is invested in a little bit of everything as well: mutual funds, bonds, real estate, private equity. Some of the money is invested in fossil fuel companies. For years now, environmental activists have been arguing that the state should divest from, or take its money out of, those investments. Those calls have only gotten louder as climate change has accelerated, and as other institutional investors have made splashy divestment pledges. New York State, for example, announced in December, that it’s going to drop many fossil fuel stocks over the next five years, and completely divest by 2040. So what about Oregon?

Tobias Read is Oregon’s State Treasurer. He joins us to talk about investment and divestment right now. Welcome back.

Tobias Read: Hi, Dave! Thanks.

Miller: How much state money is invested in companies that are in the business of extracting or selling or burning fossil fuels?

Read: It’s a very hard question to ask, and I hope you’ll forgive me when I say, do you mean as of right now or as of right now? But in order to answer that, I think it’s worth stepping back--

Miller: Wait, what?

Read: Because we’re changing all the time! We have, as you correctly noted, a large portfolio, and it’s worth setting the context a little bit. I’ll explain why I give you a flip answer there, because we are investing a large number of dollars, but they are, for the most part, in the pension fund. They’re not public dollars. They’re owned by current and future retirees. Our exclusive loyalty, our legal obligation, is to those beneficiaries, to generate the returns that allows the state to make good on the promises it has made to those folks, and allow them to receive the checks they used to pay the rent, buy their groceries and those sorts of things.

We are invested for the long term, and we are looking for good deals wherever we can find them. The way that we are able to do that is by reducing costs, as well as looking for the right kinds of risks and the right kinds of opportunities. So we do that in large part by engaging in what’s known as passive investing, using indexes, using quantitative things. And that means that we are sometimes exposed to geographies or companies that we don’t like as much as others. Over time, what we’re trying to do is continue to add to our capacity to measure and to integrate environmental, social and governance risks. In the long run, our trajectory is probably going to be going to be reducing our exposure to those things, but this can change at any moment because of what’s happening out in the world, because of the indexes, because of the things that are happening in the market.

It’s also important, at the end, to point out some significant advantages of being an active owner. You saw, even last week, a really significant change at Exxon when three board members were elected over the objection of Exxonmobil’s management, their objections being because those candidates, probably described as dissidents, believe that Exxonmobil needs to take an active role in adjusting to climate change.

Miller: You’re getting into a lot of important issues that I want to get to as we go, but I want to take these one by one, so we can actually get some clarity, hopefully, as we go.

I understand you’re saying you have this legal obligation, that you have to get as good returns as you can for pension holders. But I’m still stuck on the question of how much money is actually invested in fossil fuel companies, or companies whose businesses are truly connected to the fossil fuel extraction or selling world, right now. Even if it’s, say, an index fund, can’t you say one piece of this fund that is supposed to mimic the S&P 500 is this gas company? And so we’ve got a .02% stake in that. You add that to this holding we have, which is connected to coal, so we can say we have this much money in fossil fuels. Can you not do that?

Miller: No, we can’t because, as you pointed out in your introduction, it’s not just public equities, it’s also private equity, it’s also bonds. Our job, as you also pointed out, is in the short term fund, which allows state agencies, local governments to make payroll on a regular basis. So we’re selling and buying bonds literally every day. So it changes, and I understand the desire to have a single answer to that, but it literally changes. And on top of that, there are companies that are partially connected to fossil fuels, and others that are exclusively [fossil fuels]. We could get to that number, but we have to be really specific about what the definition is.

The larger point is, we want to make sure that we have a good handle on those risks, independent of what that number is at any given time. We want to make sure that we’re moving in the direction that puts the portfolio on solid ground, and does a better job of having those risks [be] part of our decision making. I’m honored to be State Treasurer, but I’m a human. I’m a parent. I have concerns about what the state and the world is going to look like in the future. And I want to make sure that we are using our influence as an investor to move the world down the road when it comes to integrating climate change and getting on a better path.

Miller: But how can you do that if you don’t know what the starting point is? I mean I get that it’s complicated, and you’ve made that point pretty clearly, especially if it’s a day by day trading of some kind of bond. But do you not have even a broad sense of the level of investment, tens of millions, or hundreds of hundreds of millions, that is directly tied to fossil fuel investments? And if you don’t have that sense, then how could you even know where to begin, if you have this hope to start to draw down?

Read: Because what we’re doing, Dave, is taking a deliberate and intentional look at those risks broadly, and looking at our influence. If we were to sell all of our stakes in Exxonmobil, to go back to that example, we wouldn’t get to vote on the boards of directors, we wouldn’t get to have the influence on the direction of that company. So, we want to be using all the tools that are available to us as an institutional investor to be an influence in a positive direction. The absolute numbers are less important than how we’re using the tools that are available to us, and I think that is the focus of our work.

Miller: What do you think a state like New York State doesn’t understand that you do, or vice versa? If a much bigger state, with a much bigger pension fund, can make this plan to go in stages to divest from fossil-fuel companies, I guess why can’t Oregon?

Read: I think we do have that same intention. In fact, as you referenced in your explanation of New York, their commitment is by 2040. I think if we were to fast forward to 2040 and look at the respective portfolios, you’re gonna see Oregon’s and New York’s look very, very similar.

Miller: So people understand, the timeline 2040 is the number I mentioned, but there’s actually more near term goals that do seem more important here. Tar sands companies and companies that do fracking and big oil companies, those are more likely to happen in the next five years. Some of the more tangentially related fossil fuel companies, those are the longer term horizons. So there is a nearer term goal as well, it’s worth pointing out.

Read: So I think we’re going to look very similar in the trajectory over time. I think what’s important for us is that that commitment remains consistent, that we are looking to use our influence to integrate the factors into our decision making processes. We care about this, and we’re doing important work to make sure that we are consistent with our fiduciary obligations to the hundreds of thousands of Oregonians who are beneficiaries, and positioning the portfolio to avoid the real risk that climate change represents not only to our daily lives, but to a portfolio and, also to seek the opportunities that it presents.

Miller: You mentioned the Exxonmobil example, and this is led by this hedge fund, they successfully got, at first it was two, now it seems like it’s three of the four activist board directors elected, against the executives of Exxonmobil’s wishes. They got them elected to this 12 person board of directors. And I’ve read they actually had support from some big institutional investors like CalPERS, the California pension system, and leaders from the New York pension system as well. What are you expecting these three members of this 12 seat board of directors will be able to do?

Read: Well, they run the company, so they can require the company to take dramatically different approaches. I think it’s not hard to imagine them requiring some additional engaging in scenario planning, additional attention to alternatives. You’ve seen at some other fossil fuel companies ties of executive compensation to the reduction of emissions. At its most ambitious, you might imagine a really dramatic pivoting of the direction of the company. What they’re trying to do is provide energy. So maybe there are other ways to do that. It’s pretty dramatic to think about what they could do.

But fundamentally, these are folks who recognize the reality and the significance of climate change and to have them in a position of leadership is transformational. And I think it is worth remembering that every one of us who cast those votes, institutional, large investors, even individual shareholders, can make that happen. So combine that with the court ruling for Shell, a variety of other developments, this could be a real turning point for the way that investors can have an influence. But it’s only because we are owners, and that we are able to cast those votes, that we can have that influence.

Miller: So how did Oregon shareholders vote in terms of this border directors vote?

Read: We supported those now successful board members. I think that could be called dissidents beforehand, but we supported them.

Miller: How does that work? Who’s in charge of shareholder activism decisions on behalf of the State of Oregon?

Read: The way you ask that question is interesting. So, I’m the chief investment officer for the state, in the Constitution, and there are literally thousands and thousands of those votes that come up, so I can’t track each of them individually. We work with a consultant who makes recommendations, but we went through a pretty significant process to determine with them, a little bit like heading to an ice cream store and deciding which flavor you want, and made it really clear that we have a desire to conform to a to an environmental, social, and governance factor overlay, known as ESG. So we get recommendations that say, “Here’s what we recommend based on your preferences,” and I can depart from those when I believe it’s justified. In this case, we did not need to depart from those recommendations. We were happy to support the candidates who were ultimately successful.

Miller: Just so I understand and have clarity, in the end, you get to make the final determination, but there’s a whole system in place to advise you on these decisions?

Read: That’s right.

Miller: If you’re just tuning in, we’re talking right now with Tobias Read, the Oregon State Treasurer. We’re talking about fossil fuel divestment, the trend among many institutional investors to take their money out of fossil fuel companies, and we’re getting a sense for Oregon’s approach to these investments.

I want to turn to the bigger picture here. We have talked about fossil fuel divestment a number of times over the years on this show, in the context of the state, or the City of Portland, or the University of Oregon’s Endowment, and I feel like I’ve seen a big shift just in six or seven or eight years. For a long time, the biggest argument against divesting was that it would lead to lower returns. And so, it betrayed the fiduciary responsibility of pension money managers.

Now though, I have often seen the opposite, that people in favor of divesting are saying that companies in the fossil fuel business are bad investments, that they haven’t been performing well, even before the terrible pandemic year, when people for a while were driving less. Even before that, the argument goes that for years now they’ve been underperforming. They’re just not good investments, certainly for the long term and maybe even for the medium or short term. Do you think that they’re right?

Read: I think they’re absolutely worth considering. It’s easy to look at investment returns in retrospect. Of course, if we could do that, we would all look really brilliant. Our obligation is to our beneficiaries, those retirees over the very long term. It’s complicated. It’s challenging to make changes on a rapid basis in our big strategies. I don’t think it’s responsible to set an arbitrary line. We have to make sure that we are exercising the required consideration and care. But there’s absolutely reason to think that, over the long run, we’re gonna be moving away from those fossil fuel exposures.

We have seen that in recent years. In fact, our exposures to fossil fuels have gone down in the last couple of years, nearly dollar for dollar with our exposure to renewables. So I think you have to take all of those pieces of analysis in, and do your best to project what they’re going to look like going forward. But it has to come in the sequence that you and the folks you were quoting said. It’s what’s going to allow us to avoid risk and to generate returns for retirees.

Miller: But when you just said that Oregon’s investments in fossil fuels have gone down in recent years, and investment in renewable energy has gone up, that’s exactly the kind of data point I was interested in getting clarity on at the beginning. So there is some accounting for total investments in fossil fuels and if not, how else would you know that it’s gone down?

Read: Yes there is, there is accounting, but what I understood you to be asking before was what is it right now? I’m giving a broader trend over the last couple of years, those exposures have gone down. But that’s a trajectory. That’s not at any one moment in time. So it’s easier to talk about those in longer terms than points in time.

Miller: And is it fair to say that overall it’s gone down because the investments have been seen as less favorable, as opposed to going down because these companies are directly contributing to the degradation of the natural world, and the ecosystem as we have known it as human beings?

Read: Look, when I have my fiduciary hat off, when I am a father, an Oregonian, I am strongly in favor of smart regulations and policies that address the real impact of climate change. When I have my fiduciary hat on, I have to be concerned about generating returns for beneficiaries, and that’s the motivation for the investment decisions we make. But they align in that respect, that a company that is not prepared for how to be successful in a climate constrained world is not the sort of place we want to be invested in. So, um, so they’re aligned, but I have different roles at different times.

Miller: You know, one of the things that seems like an irreducible aspect of this as I’m hearing you talking, and as I’ve been reading other articles is that our national economy, the global economy is so inextricably tied to fossil fuel companies in various ways, that it is very hard or impossible to cut ourselves off from those investments very quickly, if we’re if we are legally focused on the bottom line, even if those investments are threatening our very way of life. Do you agree with that?

Read: There is undoubtedly complexity in how these things intersect. And it is also a question of, what counts as fossil fuel exposure? Everyone is connected to fossil fuel exposure to some degree, even if it’s using products that were transported at some point. This is one of the reasons that we’ve hired a climate consultant specifically, to help us think about the risks that are inherent in our portfolio, and what scenarios and routes are available to us going forward.

We are doing significant work and we are amongst the leaders with our peers about how to use the power of institutional investing, particularly in concert and coalition, to try to move companies in the right direction. It is consistent with our obligation to retirees, is consistent with how we’re going to do that well over time and position the portfolio to not only avoid the risk, but hopefully to profit from advances as renewables and alternatives continue to develop

Miller: Because I have mentioned the New York State example a couple times, since it’s a huge state that made the decision to start divesting, from what I’ve read there, their version of the treasurer, the comptroller, was saying until recently things similar to what you’re saying: that keeping your money in these stocks is a way to actually have a seat at the table and and to be a shareholder activist. And from what I’ve read, he was pushed into divesting partly because New York State lawmakers had a veto proof majority and were pushing for a bill that would have mandated divesting. Could Oregon lawmakers do the same thing and force your hand?

Read: Well, two things. One, comptroller DiNapoli is what’s known as a sole fiduciary, so he gets to make those decisions entirely on his own. I don’t get that. I don’t have that obligation or that advantage, depending on your perspective. I work with the Oregon Investment Council, which is a number of other people that are appointed by the governor, confirmed by the Senate. It’s sort of like the legislative branch of our Treasury world. The legislature could direct the investment counsel to pursue a policy like that. But I think if they did, it would be really important to do that with extreme thoughtfulness, to be careful to minimize the cost of that transition, and to do everything possible to avoid unintended consequences. We’ve already discussed all the complexities that are part of that.

We would need to have some serious conversations with beneficiaries so that there was buy-in from those beneficiaries. As strongly as we all might feel about this, there are hundreds of thousands of Oregonians whose opinions and retirements are at stake here as well. And it would probably require a significant investment of cash from the Legislature to implement and to compensate for the cost that we might engage that we might take on by that decision over the short term.

Miller: Tobias Read, thanks very much for joining us. I appreciate your time.

Read: Thanks, Dave.

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