Oregon could be on brink of decarbonizing state investments

After years of pressure from climate activists and others, Oregon Treasurer Tobias Read has put forth a plan to divest state investments from fossil fuel interests. He presented a plan to reduce greenhouse gas emission impacts of pension funds to net zero by 2050 to the Oregon Investment Council this month. The plan includes a target of an interim 60% reduction by 2035. Oregon and other states have faced challenges to make significant changes while also fulfilling the mandated mission to maximize retirement investments for pensioners. Currently, the Oregon Public Employees Retirement Fund serves more than 405,000 people and is worth more than $90 billion. Read joins us to share more about the details of the plan.

Note: 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. After years of pressure from climate activists and others, Oregon Treasurer Tobias Read released his plan last week to reduce the greenhouse gas emission impacts of pension funds to net zero by 2050. The plan is now being considered by the Oregon Investment Council, which oversees the management of about $90 billion of funds for more than 400,000 retired public employees. Oregon and other states have faced challenges in making meaningful progress in decarbonizing their investments while also fulfilling their legal missions to maximize returns for pensioners. Tobias Read joins us now to talk about his plan. Welcome back to Think Out Loud.

Tobias Read: Thanks Dave. Good to be with you.

Miller: Let’s start with the basics. What are you asking the Oregon Investment Council to do?

Read: I’m asking them to have a look at this plan of which we are really proud. What we set out to do is to really reduce the investment risks that climate change presents to our ability to generate returns in order to pay the benefits to public employees who have served us – the public health nurses, the teachers, the firefighters – who have earned their pensions. Our ability to meet those obligations is a direct reflection of our investment returns and climate change threatens those investment returns. So we built a plan that goes as fast as we can to eliminate that risk, or at least minimize it, without jeopardizing our ability to pay those benefits. And the Investment Council now has it in front of them. And we want to make sure that we’re getting an external view of the work that we’ve done over the last year. We’re really, really proud of this work and excited about the next steps.

Miller: What does it mean for investments to “achieve net zero greenhouse gas emissions?”

Read: Well, ultimately, what we’re going to see is less investments in fossil fuels, less exposure to those risks and more exposure to the things that are reducing climate risk [like] clean energy, renewable technology. And the ability to do that while not jeopardizing those returns is what we’re after.

Miller: But in answer to that question, you said less, but what does net zero mean?

Read: It would be unrealistic to say we’re going to have no carbon emissions, but we’re seeking a position where those emissions are in balance with the planet’s ability to absorb them. They’re going to be there in some form and on some level, but we’re getting lower and getting to net zero so they’re balanced out by the climate solutions that we’re adding to the portfolio.

Miller: How big a role can carbon offsets play in your plan?

Read: We’re focused on reducing actual emissions and investing in clean energy and renewable technology and the things that will make other technologies possible, those enabling solutions. The offsets are not really part of the construction that we’ve come up with here to get to net zero. We’re focused on real world impact. That’s one of the real pillars of this plan.

Miller: If net zero greenhouse gas emissions is the goal, where are we right now? Where are we starting from?

Read: Well, it’s a complicated answer because it plays out differently in different parts of the portfolio. But we started with a really intense effort to establish a baseline. And we’ve looked at that in different ways in terms of absolute investments, but the more common and more useful way of measuring that is emissions intensity, and a way of saying that is tons of carbon per million dollars invested. It varies quite a lot across different parts of our investments, but as an overall average, across the portfolio, we’re about 60 tons per million dollars invested and we want to continue to move that down as fast as we can in a responsible way.

Miller: There was, to me, was a really eye-catching chart in a long presentation that you prepared for the Oregon Investment Council. It showed that in a little under two years – from December of 2019 to September of 2021 – the public employee retirement funds estimated exposure to fossil fuels went from (more numbers here, I apologize, but they’re important) 4.44% of the portfolio to 3.66%. The percentage decrease in that exposure is really significant. It’s an 18% decrease. How did you do that?

Read: Well, it’s important to remember the time frame. So that number is interesting, but what we’ve seen over the last several years is that the exposure hovers somewhere between three and five percent and that varies, of course, according to what’s happening in the markets. What we’re more interested in here is where we’re going to be over the long term. That reduction, I think, is going to be balanced and countered by hopefully an increase in exposure to renewable technologies.We’ve been trying to make that transition for years. This plan is the next step. It’s part of a multiyear effort that we’ve been on for a long time to address the investment risks of climate change and this plan is going to continue to move us in that direction.

Miller: But the reason I’m focused on this is it seems really significant. If you could have an almost 20% decrease in estimated exposure to fossil fuels in less than two years, then why do you need another 25 years to go down to say 80% more?

Read: Well, I would not put too much on that specific time because markets move. I would say that that large change that you’re pointing to is not the result of a specific action in that time. It happens to coincide with our long standing commitment to try to address those risks.

Miller: In other words, sorry to interrupt but this to be just an important point. You’re saying that was not the result of a concerted decarbonization effort, an existing effort. It was just the way the market went at that time?

Read: Not a discrete effort in that it was something new. It’s the continuation of our broad effort and it accelerated, I think, in that period of time due to some market conditions and probably some other decisions that we made about specific strategies or specific managers or those sorts of things. I’d have to dig into it to be more specific, but that’s why it’s not, I think, that’s significant in and of itself. I think it fits into the rest of what we’re trying to do here and making sure that we are going back to our principles. Another way of thinking about this is to not get too hung up on the definitions of what a fossil fuel company is. So for example, this is a risk throughout the economy. Think about Amazon as an example. Nobody probably would characterize them as a fossil fuel company, but they have a huge footprint and think about all the planes and trucks and everything they’re doing to transport things around the world.

Miller: Data centers which suck up enormous amounts of energy.

Read: Sure. Exactly. Another great example. So, we want to think about that risk across the economy. And I’m less concerned about that specific 4.4% that you pointed out and more interested in what we can do to use our leverage as an institutional investor to push for overall emissions decreases across the economy.

Miller: The term that comes up over and over when we talk about this issue and Oregon Investment Council and what they’re going to be looking at is fiduciary responsibility. Remind us, please, what that phrase means.

Read: It means that we have to put the other interests ahead of our own – the interests of our pensioners, our beneficiaries. You mentioned it at the top. It’s 400,000 plus people who have devoted their careers to us and part of their compensation was the retirement benefits that they’ve earned. So we have the legal, constitutional obligation to put these dollars to that purpose. It’s not optional. It is an ethical and legal responsibility. So it’s a trust fund. These dollars sometimes are erroneously referred to as public dollars. They’re not public dollars, they belong to those public employees who have earned them and we have to act in their interest.

The good news is that for the rest of the planet, our investment interest, our fiduciary interest aligns with trying to reduce the investment risk that climate change represents. But we’re in this conversation because there has been a clear failure in the policy process elsewhere in the world. Congress has not done enough; international institutions have not done enough and we want them to do more.

The investment world will respond to that. I mean, this plan looks a lot different and a lot more achievable now than it would have had we constructed it prior to the passage of the Inflation Reduction Act, which has obviously changed the calculation for a lot of technologies and a lot of investments. So this plan is going to evolve, it’s going to respond to what happens in the world, but it puts us on an offensive path and a place that allows us to protect the pension fund and the beneficiaries.

Miller: Let’s say that this plan is approved and it is enacted, what would happen if investment returns were way lower as a result? I mean, how would that hole be patched?

Read: Well, it’s not any different than what happens right now because we are making decisions in the long run interest of beneficiaries. We look at investment returns over long periods of time – 20 and 30 years – and there are certainly periods of time when our investment returns do not match the assumed rate or the expected rate. And there are times when they’re well ahead of them as well.  Even in the last few years, you can see examples of that. So, what we’re after is a long run rate of return that puts us on a path to success and not addressing the risk of climate change, I think, is very risky. And so I think it is absolutely part of my responsibility as a Treasurer to put us on a path that reduces that risk and protects the beneficiaries.

Miller: Three New York City pension funds were sued last year by plaintiffs who say that the divestment of about $4 billion from fossil fuel companies went against the funds’ fiduciary duties, the duties that we’re talking about that exist all over the country. If this plan is approved, what kind of legal pushback are you expecting? What have you been preparing for in advance?

Read: Well, one of the things that is really important is the way that we have constructed this plan. It is very rigorous, it uses all of the best practices and data. The perfect place to start that question about fiduciary responsibility is are you acting with rigor? Are you putting a good, solid basis behind your decisions? And that’s what we’re aimed at here. This is not political, it is financial. It is putting those the interests of beneficiaries at the top. We could be sued for doing anything, including nothing. And I think that is as much a risk. A beneficiary could say you’re not taking this investment risk into account. So in the end, the best thing – and the only thing – for us to do is our best effort at making sure that beneficiaries are at the heart of every decision that we make. and that is my responsibility.

Miller: If I understand correctly, the legal argument of the NYC plaintiffs is that their pension funds took money out of fossil fuel companies in 2021. Then Russia’s invasion of Ukraine sent oil and gas stock prices soaring. So they could theoretically say – or are saying – that index funds of, or energy stocks, they’re up 40% or so over X period and sustainable funds are up not nearly that much and so we lost this money because you made this political decision. But my understanding is that the pension fund planners are going to say, ‘well, no, we’re looking in the long term and in the long term’ as Tobias Read, as you’ve just said, these equities don’t make sense, they have their own risks. No judge can look ten years in the future and say this is what this equity stock or this mutual fund is going to do. If they could do that, there would be no system, no financial system like we have now. It just makes me wonder how a legal system can even approach these questions.

Read: Well, I’m not a lawyer. I appreciate your point about the fallibility and imperfect knowledge that we all have about the future. What gives me confidence is the engagement that we’ve had with our beneficiaries. We’ve been talking to them individually and collectively. In fact, we engaged in a pretty significant survey and came back with the really strong sense that our beneficiaries want us to be cognizant of this risk and at the same time be generating the returns that we need to pay the retirement benefits that they have earned. So we are aligned. I think we’re on very solid ground legally and I think we are well aligned with our beneficiaries and that gives me confidence about how we’ve constructed this very thoughtful plan.

Miller: Do you have a sense now for the time frame for OIC’s decision making?

Read: Yes, I think we’re going to take the bulk of this – and I should not speak for the chair because I’m a voting member – but we have an external chair who does an excellent job. And I think the council is likely to be deliberate over the next several months to consider the investment implications of this plan. We’ve been focused on the emissions implications with a good sense of the investment implications, but an external view of that is going to be really important. In the meantime, we are not waiting. We’re not just standing still on that. There are a number of steps that we can take on right now including an intensive review of carbon-intensive sectors, getting prepared, adding potentially capacity inside the treasury, and improving our own levels of preparedness for this plan.

Miller: Let’s say that the plan is approved. How durable could it be? I mean, could it be changed under a new treasurer and a new slate of appointed members of this investment council?

Read: Well, policies change with elections, certainly. There will be a new treasurer. There’ll be a future new governor someday. There’ll be a new secretary of state, all of those sorts of things. But what we know is that the investment risks of climate change are not going anywhere anytime soon. And my goal is to have a plan and it is durable. As you said, that has the buy-in from beneficiaries, the Investment Council, legislators. And I think if a future treasurer decided that she or he did not take the investment risks of climate change seriously, all those other folks would have something to say about that.

Miller: Tobias Read. Thanks very much.

Read: Thank you.

Miller: Tobias Read is the state treasurer for Oregon.

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