Alaska’s Permanent Fund is sticking with oil, its board of trustees says.
The $65 billion fund has turned aside a push by a group of Alaskans asking the Fund to divest its holdings in fossil fuel companies, arguing this is a bad investment in a world where energy technologies are changing fast.
“Oil has been pretty good to us,” said Bill Moran, chairman of the Alaska Permanent Fund’s Board of Trustees.
The Alaska fund’s trustees, who met in Anchorage May 23, are worried that anything that smacks of a fossil fuel divestiture policy would be seen as an unfriendly gesture toward the industry at a time when Alaska is courting new investment by companies on the North Slope and the Cook Inlet.
Angela Rodell, the Permanent Fund’s executive director, said, “We are relying on the continued investment of these companies to sustain our oil production and our state’s economy and revenues, and the oil royalties that flow to the Permanent Fund.”
However, in sticking with oil, the Fund’s trustees are bucking the trend among major U.S. and international investment funds who are lessening their exposure to fossil fuels.
Norway built its sovereign wealth fund, now at $1 trillion in value, with oil and gas revenues like Alaska, but Norway is now studying a diversification out of fossil fuel holdings. Other institutional investors in Europe and the U.S. are following Norway’s path.
The trustees did agree to take a look at this trend. They solicited advice from three major U.S. investment firms — BlackRock, Goldman Sachs and Morgan Stanley, on whether to set social, environmental and governance, or ESG, criteria for its investment managers.
In the end, the trustees declined to do so, after hearing from the three on May 23.
This was disappointing to the group lobbying the trustees, not only for oil divestiture but to adopt social and environmental performance criteria that would tilt investments toward emerging industries, like renewable energy, and away from traditional industries seen as declining, such as oil and coal.
“The purpose of our Permanent Fund has always been to prepare Alaskans when fossil fuels are no longer a reliable revenue source,” Ceal Smith, a member of the Alaska Climate Action Network, a citizen group, told the trustees May 23.
“The rapid global energy market shift to renewables, Paris Accord commitments and climate science are clear indicators this is happening,” she said.
Chris Rose, director of the Renewable Energy Alaska Project, a renewable energy advocacy group, told the trustees the world’s energy industries are in a state of flux as renewables, energy conservation and electric vehicles become profitable. Rose stressed that he was speaking for himself, not REAP.
“These (trends) are driving a revolution in the way we transport ourselves. When that happens, approximately 30 percent of the world oil market attributable to passenger vehicles will be in play,” and fossil fuel investments at risk, Rose said.
“As trustees of the Permanent Fund you have a responsibility to be prudent investors. Given the rapid changes the world is seeing today, I believe it is prudent to consider environmental, social and governance investment indicators,” to guide investments, Rose said.
In an interview, Rodell said the board would not adopt fossil fuel divestiture nor a directive to staff to develop social and environmental criteria. “We believe these are now embedded in the investment decisions being made by our managers,” she said, making a specific directive unnecessary.
However, the advice from three of the investment firms in a two-hour presentation to the Alaska fund’s board was to the contrary. BlackRock, Goldman Sachs and Morgan Stanley all told the Fund trustees that their research now shows that firms setting out specific social and environmental policies, and adhering to them, net higher returns.
“We believe companies that effectively manage their environmental, social and governance, or ESG, risk perform better, and the data is increasingly showing that,” said Brian Deese, Global Head of Sustainable Investment at BlackRock.
There is also a growing expectation among investors that companies that are unable to manage ESG risks quickly lose their license to operate. There is a growing number of examples of this,” Deese told the trustees.
He also said data is showing that ESG objectives can be incorporated into investment strategies without loss of financial performance compared with a traditional mix of investments.
John Goldstein, a managing director in Goldman Sachs Asset Management group, told the trustees that, “The logic of ESG strategies is to manage downside risk while capturing upside opportunities,” by being alert to emerging technologies and trends.
“It’s not just climate change and divestiture,” Goldstein said. “Think of this as a strategic approach to risks and opportunities, to be able to recognize companies that adopt best practices. Firms that show environmental leadership tend to perform best.”
In many ways, focusing only on fossil fuel divestiture is a distraction in thinking of a broader strategy, Golstein said. “But it is still clear that the world is changing,” for energy industries,” he said.
Deese, of BlackRock, said his firm has found a connection between companies’ “decarbonization” and bottom-line improvements. Managers realize the carbon footprint is relative to risk, so reducing the footprint over time (typically through energy efficiency) is a signal of performance,” and that companies’ managements, using energy as a measurement, are successful in driving efficiency, he said.
Meanwhile, the Alaska activist group pushing for outright fossil fuel divestiture argue that the Permanent Fund’s holdings in fossil fuel-related industries, estimated at several billion dollars, is losing value.
Rick Steiner, a retired University of Alaska environmental science professor, said an analysis by his group, the Alaska Divestiture Coalition, shows fossil fuel holdings declining 3 percent in value over period when overall financial markets have doubled in value.
“These investments have lost the Permanent Fund hundreds of millions of dollars in unrealized gains that could have accrued through more profitable investments,” Steiner wrote in a letter to the Alaska trustees.
However, Permanent Fund communications director Paulyn Swanson said this analysis is not so simple.
In a letter replying to Steiner, Swanson said the Fund has difficulty in calculating exposure and performance of “fossil fuel” holdings as this is not a defined industry sector.
“The closest we can come to this is to provide exposure and performance in the ‘energy’ sector, but that category is not a good proxy for what our specific fossil fuel holdings are in our portfolio,” Swanson said.
Still, the staff of the Permanent Fund are working on a way to measure performance, and exposure, of investments that can be identified as having a link to fossil fuels.