Turns out the Permanent Fund has been divesting of fossil fuels since 2011

For several years a small group of activists have banged on the doors at the Alaska Permanent Fund asking the Fund’s trustees to divest or at least reduce holdings in fossil fuel industries.

Fossil fuels like oil and coal are a bad long-term investment for the $65 billion Permanent Fund, says Rick Steiner, a retired University of Alaska professor.

The world is in the midst of an energy transformation, shifting away from traditional fossil fuels like oil and coal and toward renewable energies like solar and wind, as well as cleaner-burning natural gas, Steiner said.

Trustees of the Fund discussed the matter briefly at their May 24 meeting in Anchorage and decided not to adopt a divestiture policy, at least partly to not to send an unfriendly signal to oil and gas companies who are still investing in Alaska.

It turns out, however, that the Permanent Fund’s managers have been quietly, and gradually, reducing the Fund’s exposure to fossil fuels since 2011. It’s not clear that the trustees were aware of this at the time of the May 24 meeting.

In 2011 the Fund had $3 billion of its portfolio, then valued at $40.1 billion, in fossil fuel industries. By 2017 that exposure had been reduced to $1.63 billion in a Fund that had meanwhile grown to $59.7 billion. (The Fund is now valued at $65 billion).

The information was provided to Steiner on May 25 in a letter from William Moran, chair of the Board of Trustees, and Angela Rodell, CEO of the Permanent Fund.

“As fiduciaries of the Fund, whether investing internally or through a delegation to an external manager, APFC (the Permanent Fund) has a duty to consider the financial risk and reward of various investments and to not use non-financial investment criteria such as social or environmental impacts when making investment decisions,” Moran and Rodell told Steiner in the letter.

“That said, while our internal and external managers use a number of criteria in picking the stocks and bonds to invest in, whether an individual public company has a long-term business strategy that will render it profitable not just today but into the future is plainly important consideration for the Fund’s public markets portfolio,” the letter said.

“A public company whose strategy is not poised to evolve as the market it operates in changes will inevitably become less profitable and the investment criteria that we rely upon will organically result in such investments being culled from the portfolio,” Moran and Rodell wrote.

Basically, the letter indicated that the Fund’s managers agree with Steiner and others in the divestiture group even if they argue an explicit policy is not needed.

As data provided to Steiner indicated, “this trend (of divestiture) already exists in the Fund’s exposure to public companies whose primary business is the extraction and development of hydrocarbons…This indicates that both our internal and external managers believe these companies do not contribute the same value today as they did in 2011 and have made the necessary adjustments as part of their comprehensive investment strategy.”

Moran and Rodell said the May 24 meeting mainly reaffirmed the trustees’ intent to retain an investment process based on financial returns, not social or environmental goals, and that the Fund should continue to have at least a portion of its investments in companies primarily focused on fossil fuel extraction.

However, this may constitute a diminishing share of the Fund. But while, “the current trend suggests the Fund may not be invested in such companies five to 10 years from now, we intend to let our process drive that decision rather than abruptly divesting from such companies today,” the letter said.

For the Permanent Fund, however, the issue is complicated because it can be difficult to identify and classify companies as “fossil fuels.” The broader definition of “energy” companies is easier to identify.

What muddles things further is that many large, well-known oil and gas companies like Shell and BP are becoming more diverse, with a growing share of their own company investments in renewable energy, for example.

Fossil fuel divestiture, pushed by climate change and environmental activists, is a major driving force behind the “Environmental-Social-Governance” movement now becoming a force in the investments management field.

ExxonMobil, one company that remains steadfast in its focus on oil and gas and related industries is experiencing tumult at annual shareholder meetings, as are other companies.

The activists have succeeded in driving investment away from companies in coal and oil sands development and have now set their sights on the much larger, more diverse oil and gas industry, Paul Tice, an adjunct professor of finance at New York University’s Sloan School of Business, wrote in a May 30 column in the Wall Street Journal.

However, this could be a tough nut to crack because this industry is such a significant part of world financial markets, and managers of investment funds need portfolio flexibility and performance, Tice wrote.

Meanwhile, it’s not clear how much of the Alaska Permanent Fund’s $2.3 billion reduction in fossil fuel holdings is due to lower returns or decisions to sell assets. The calculation in the May 25 letter from Moran and Rodell was in value, so it is undoubtedly both.

It is worth noting that the largest drop in value, $2.9 billion to $1.74 billion, occurred between 2014 and 2017, a period in which crude oil prices collapsed from over $100 per barrel to as low as $30 per barrel. That would be expected to have an effect on share values of oil and gas companies.

Steiner and his colleagues have calculated that the reduction may be about half and half, or half lower asset values and half sales of shares. The two are related, too, because falling values will motivate Fund managers to sell.

Still, what is striking, they said, is that the reduction occurred while the overall Permanent Fund gained substantially, from $40 billion to almost $60 billion.