From forest fires to record-setting heat waves to extreme flooding, the Pacific Northwest has been hit hard by climate change over the last couple of years. If the world fails to take drastic action, entire regions of the globe could become nearly unlivable by the end of the century. And yet, as of the end of Dec 2020, Seattle’s pension board was complicit in all that climate destruction with its $61.6 million in fossil fuel stocks.
Over the past decade, climate justice activists have been looking to divestment as a way to halt ongoing fossil fuel extraction. A number of cities and state governments across the country have decided to divest their pension funds from fossil fuel companies, including New York State, San Francisco, and Los Angeles.
Seattle has a green reputation, with the city council taking actions such as voting to divest from Wells Fargo in 2017 and endorsing the Green New Deal in 2019. Former Mayor Jenny Durkan even attended the COP26 climate summit last year. A notable exception to this climate boosterism is the city’s worker pension fund.
The Seattle City Employees’ Retirement System (SCERS) manages $3.9 billion in investments, holding them in trust for nearly 20,000 current and former city employees and their family members.
Politicians and organizations who care about climate change justice have been calling on SCERS to start divesting its fossil fuel equity since 2013. Among Seattle politicians, divestment is pretty popular; supporters include current and former Seattle City Councilmembers Lisa Herbold, Mike O'Brien, and Teresa Mosqueda, as well as former mayors Mike McGinn, Ed Murray and Jenny Durkan. Despite the wishes of these elected officials, they have relatively little influence on the governance of the pension fund, which is handled by the SCERS Board of Administration, whose members are mainly selected by current and retired city employees and city departments.
In 2017, organizers with 350 Seattle, a climate advocacy organization, launched a campaign to try to get the SCERS board to divest. According to Alec Connon, a climate organizer who helped spearhead the campaign at the time, close to 800 city employees and retirees signed a petition calling on the pension fund to divest. Nevertheless, Connon said SCERS leadership failed to act on the issue.
In response to community pressure, SCERS has adopted an Environmental, Social and Governance Policy based on using its leverage as a stockholder to advance climate change mitigation and other social priorities. However, the pension fund has ruled out any form of targeted divestment, arguing that such an action would violate fiduciary responsibilities by incurring management and transaction costs, as well as decreasing portfolio diversity and thus increasing risk.
In an email to The Stranger, SCERS Executive Director Jeff Davis said that the pension fund has conducted six reviews between 2013 and 2017 which found that divestment would be “financially imprudent.” Instead of divestment, SCERS has turned to a positive action strategy, including “shareholder advocacy, sustainability investments, and integrating climate risk into our investment process,” said Davis.
However, this view on divestment is not shared by many experts outside of SCERS. In an email, UW School of Business Visiting Professor Charlie Donovan said that fossil fuels have underperformed clean energy for over a decade, and that “the assumption that divesting from fossil fuels will necessarily reduce investment return is incorrect.” A 2017 analysis contracted by 350 Seattle claimed that SCERS has lost $53 million in potential gains by maintaining investments in underperforming fossil fuel company equity.
While SCERS claims that its passive management strategy would preclude investment due to higher management costs, Donovan also disagreed with this assessment, saying that there are a range of index funds that “allow investors to pursue fossil-fuel exclusion via passive strategies.”
A growing body of evidence suggests that fossil fuels could continue to underperform and become riskier as more governments around the world impose restrictions on the industry to mitigate its carbon pollution. According to Riddhi Mehta-Neugebauer, a doctoral candidate in Political Science at UW who studies financial markets and fossil fuel divestment, the argument that divesting from fossil fuels would violate fiduciary responsibility is no longer convincing. “There is a global effort to transition away from fossil fuels,” said Mehta-Neugebauer. “And SCERS's reluctance to see the writing on the wall is only going to negatively impact their returns.”
Mehta-Neugebauer is also critical of how SCERS interprets its shareholder advocacy strategy as being mutually exclusive with divestment. “I think in the public markets, divestment makes sense,” she said. However, Mehta-Neugebauer added that within private markets, due to potential penalties for divesting private equity, shareholder activism with the ultimate goal of decommissioning fossil fuel assets could make more sense. SCERS has not disclosed how much private fossil fuel equity it holds, with the earlier $61.6 million figure referring solely to publicly-traded equity.
Connon has a slightly different opinion on the shareholder advocacy strategy, claiming that fossil fuel company stockholders engaging in a positive action strategy constitutes greenwashing. “The fundamental business of the fossil fuel industry is to dig up and burn fossil fuels,” said Connon. That said, he added that shareholder engagement does have a role to play in convincing enabling sectors, such as finance and banking, to stop funding fossil fuel projects.
While most of SCERS leadership opposes divestment, Councilmember Mosqueda, who chairs the city council’s Finance Committee and thus chairs the pension fund’s board, has tried to convince the rest of the board to commit to fossil fuel divestment. Over the past year, Mosqueda has invited pension fund managers from San Francisco, New York, Los Angeles and Philadelphia to present to the board on how their city’s pension funds have begun divesting from fossil fuels. Mosqueda emphasized that while divestment might seem drastic or radical, the process is actually long and nuanced. “If you look at any of these other cities, they haven't whole-cloth eliminated investments into entire sections overnight,” Mosqueda said. “It's a very iterative process.”
According to Mosqueda, the SCERS Board has been having “really good discussions” about the fossil fuel divestment. However, as of now, there is no timeline or even a commitment from SCERS that it will indeed divest.
As political interest in mitigating climate change grows and as fossil fuel companies become increasingly unprofitable, SCERS may be convinced to begin divesting from fossil fuels. But current SCERS leadership remains ardently opposed to divestment, even as its position becomes increasingly obsolete.