The calm before the testimony!

The calm before the testimony!

On February 19 and local advocates offered strong testimony during the San Francisco Employee Retirement Board special meeting on the moral and financial arguments for divesting from fossil fuels. Our testimony was in part a response to a recent Retirement Board staff report following a unanimous vote by the Board of Supervisors to divest the approximately $616 million that the Retirement Board currently holds in major fossil fuel companies – fossil fuels make up only 3.3 percent of the Board’s total assets.

“While it is frustrating that members of the Retirement Board are not moving faster to protect their members’ pensions from the uncertain financial future of fossil fuels, there is a reason why we have a five year goal for divestment. Less than a year after we started this process, we are already laying the ground work for protecting the Retirement Board’s portfolio from the uncertain future of fossil fuels,” said Brett Fleishman, Senior Analyst. “We thank the Retirement Board for continuing to examine the arguments for divestment and call on them to follow the unanimous direction of the Board of Supervisors to divest from fossil fuels. Nothing less than the health of our planet and the retirement funds of 53,000 hard-working public servants is at stake.”

After hearing testimony, the Retirement Board voted to:

  • Reevaluate how the Board proxy votes on resolutions filed to companies listed among the 200 top fossil fuel companies; and,
  • Review how the Board evaluates environmental, social and governance issues in their portfolio.

The latter outcome is in line with other positive developments in major institutional investment organizations such as CalPERS and is seen by many as a necessary step in establishing future fossil fuel divestment policies.
Additionally, the Board will hold a future meeting to review the fiscal arguments for divesting from fossil fuels. said they look forward to detailing the investment risks emerging from the “carbon bubble” and reviewing the uncertain financial futures of fossil fuel companies due to their market worth relying on carbon reserves underground. In order to hold off a 2 degree Centigrade increase, a tipping point identified by scientists for dramatic climate impacts, 80 percent of the current proven carbon reserves must stay in the ground.

The full text of the testimony we submitted is after the jump, delivered by our very own Senior Analyst, Brett Fleishman. 

“Distinguished Board Members and Director Huish, thank you for hearing my testimony regarding the first steps of this institution in consideration of fossil fuel company engagement and divestment.  By way of introduction, my name is Brett Fleishman and I am the Senior Analyst for

In this testimony, I would like to address the recommendations of the staff (found on pages 10 and 11). I would also like to take this opportunity to provide an update as to other institutions that have divested their holdings from fossil fuels.

Recommendation Section:

In regards to the Retirement Staff’s recommendation to research managers: while I agree that the Board should review existing policy and approach to ESG issues, how managers consider climate risk is so preliminary a level of investigation that I would have hoped the due diligence required for this report would have already detailed such processes. The report is further lacking from the exclusion of the significant body of information on stranded assets and investment risk inherent in fossil fuel holdings. The conversation in the institutional investment community is growing, and evidence is continually being published that these investments contain significant risk to the exclusive benefit of the members and beneficiaries of the San Francisco Retirement System.

As described in the section titled Fiduciary Duty to SFERS Members and Beneficiaries (pg 3), minimizing risk is paramount and primary to the duties of the Board. As noted in the report, implementation of carbon regulation is likely to have a material impact on affected companies. In a statement released by HSBC, future mitigation of carbon emissions beyond 2020 may cut valuations of coal, oil and gas assets by as much as 40 to 60 percent.[1] Globally, share prices of coal producers have decreased over the past two years with declining demand and fears of oversupply and stranded assets. Arch Coal Inc. has dropped 71 percent and Peabody Energy Corp., has dropped 44 percent over the past two years. China Shenhua Energy Co., China’s biggest coal producer, is down 27 percent over the same period. These are all companies on your list and thus factors in your exercise of fiduciary duty.

Compared to the earnings of previous years, Exxon’s 4th quarter production dropped two percent, Chevron by three percent and Shell by a little under five percent.  Within a day of announcing this drop in earnings, $7 billion of shareholder value was lost at Shell, $8 billion at Exxon, and $9 billion at Chevron. A combined $24 billion was lost by those investing in these three fossil fuel companies in a matter of days. Even a slight decline in production is causing big losses for investors.

I will remind the Board that it has been established by MSCI that divestment of fossil fuel holdings demonstrates benign levels of risk and provides comparable investment return, in accordance with Level 3 restrictions.

MSCI, a leading provider of investment decision support tools, looked at the impact of excluding companies owning carbon reserves from one of its index funds, the MSCI All Country World Index (MSCI ACWI). It determined that over a five year period the active return differential was 1.2 percent better for the same index without fossil fuel investments. They also report a similar result over a 10 year period.[2]


While we might fundamentally disagree on the conclusion within the report that resolutions that inhibit management’s flexibility to make decisions on operational matters and strategies are inappropriate and “overly prescriptive,” I do agree that the issue of carbon based assets is unsuitable for engagement.  Given SFERS history of proxy voting, I would encourage the Board to move through to Level 3, and explore risk mitigation options, like divestment.


In regards to the Retirement Staff’s statement at the top of page 5: within the investor community, the early adopters have already begun a significant movement to divest of risky fossil fuel holdings. Storebrand ASA, a leading player in the Nordic pension markets ($74 billion in assets), has divested 24 coal and oil-sands companies since July, including Peabody Energy Corp., stating a desire to cut fossil-fuel industry holdings. Former hedge-fund manager Tom Steyer said he is divesting his portfolio and reinvesting in a fund that does not invest in either tar sands or coal. Jeremy Grantham made the public statement in April last year that GMO made the decision to not carry coal stocks or any investment carrying a material amount of tar sands. 17 large foundations, including The Russell Family Foundation, have recently divested from fossil fuels to focus on clean energy investments.

In summary, the report from the staff is a solid foundation from which to advance the conversation into risk inherent in fossil fuel holdings and investment options that protect the beneficiaries from such carbon based investment risk. Actionable steps might include, a back test of the SFERS holdings without fossil fuels, a risk analysis of the SFERS holdings (i.e. potential devaluation), and an inventory of mitigation and protections strategies (i.e. fossil free/ low carbon investment products).  Thank you for your time and efforts.  »