BRIEFINGS

 MN Divestment Coalition Briefing to the MN State Board of Investment
February, 2025

Our briefing this month is focused on the financial realities of fossil fuel investing. Financial reasons for holding fossil fuel industry investments are short sighted and unwarranted. They are poor investments. Divestment from a fiduciary perspective is wise risk management.

Risk of Stranded Assets

Momentum to divest from fossil fuels is accelerating as investments in lower cost renewable energy sources (wind, solar, hydro and geothermal) are gaining ground. Long term (legacy) investments in fossil fuels will diminish in value, as happened with coal. 

If fossil fuel investments are not liquidated in the near future, investors will be holding stranded assets of little or no value including investments in: refineries, oil and gas wells, pipelines, and drilling platforms with remaining oil and gas reserves remaining untapped. 

Divestment from fossil fuels is widespread and increasingly mainstream. As of December 2023 more than 1600 institutions, like pension funds, governments and universities that hold more than $40.6 trillion in assets have divested from fossil fuels. 

The UPSide of Investing in Renewable Energy

Investing in energy sector firms involved in production of wind, solar and geothermal energy would:

1)  Provide a reasonably high return on investment (ROI).

2)  Support high levels of economic development and ongoing jobs creation. New arenas of economic development include: construction and operation of manufacturing plants to make the necessary equipment; supply chains that support the installation, operation and maintenance of equipment; building out, operating and maintaining the grid, including transmission lines and battery storage.

3)  Contribute to reducing CO2 and methane emissions as well as pollution from accidental spills and explosions in the supply chain.

This video https://www.youtube.com/watch?v=qBSgocV4TgI describes the weak state of fossil fuel investments and the potential of investing in clean energy. Here is our summary:

*The fossil fuel sector has underperformed the broad market for a decade and has a negative long-term financial outlook. Competitive forces within the sector make it a volatile and unstable store of wealth. Competitive forces outside the sector undermine its growth and share of key markets.

*In 1980, fossil fuels comprised 29% of the Standard & Poor’s 500-stock index. As of February 2024, the sector comprised 3.7% of the S&P 500 and in October 2020 it reached a low of 2.0% of the index.

*Divestment from fossil fuels has met the test of fiduciary responsibility with almost 1,600 institutional investors that manage more than $40 trillion having implemented an exclusion strategy. See https://divestmentdatabase.org/  for list, chart, data.

What’s Next?

The MN SBI takes its job of protecting our MN SBI investments very seriously. Based on emerging evidence, the long-term financial outlook for fossil fuels is poor. We ask for transparency in your plans to meet investment return targets without fossil fuels in the portfolio. Your stakeholders can only come to a fully informed judgment of its effects, timing considerations, and its prudence by considering a specific plan. 

We also encourage you to  a) heed and follow the lead of public pension plans here and abroad in the nature and scale of their investments in renewable energy and  b) align our investments with Minnesota’s legislative goal of net zero CO2 emissions by 2040.

BRIEFING to the State Board of Investment 

SEPTEMBER 2024 

The Minnesota Divestment Coalition congratulates the SBI for completing the Climate Risk Roadmap, joining a handful of states that have such a strategy. In the interests of utility, expediency, and public accountability, we recommend the SBI flesh out and refine the roadmap in ways we propose. Doing so will allow us all to assess the nature and extent of timely progress in realizing our shared vision:  the transition of our pension plan to one that supports a resilient and sustainable economy, climate, and environment.  

To make the Roadmap more robust and useful, we suggest the following additions:  

(1) Include a narrative that describes activities/strategies in detail. 

(2) Include timelines and measurable outcomes for planned activities. 

(3) Increase the level of investment in the energy transition. 

(4) Include due diligence criteria for private equity investments; and

(5) Address the SBI’s broader fiduciary responsibilities.  

1. Include detailed narrative, milestones, and measurable outcomes. 

Governor Walz said at a conference in July,  “The issue is, if the public doesn’t know how we’re going to get [to climate goals]—if there’s not measurable, displayable progress that they can see—it’s going to be very difficult to get them to buy in.” We agree. The current PowerPoint format does not provide sufficient narrative for the reader to fully understand planned activities. A fully fleshed-out Roadmap requires descriptions of planned activities, a timeline, and expected outcomes that would enable the public to assess progress.  For example, the Roadmap refers to a contract it will award to support engagement efforts; however it doesn’t specify when the contract will be issued or the approximate number of companies the contractor will be required to engage. Without concrete targets and goals, it will be difficult for the public and the SBI Board to assess implementation progress. 

2. Increase energy transition investments tenfold 

We support the SBI’s goal of accelerating decarbonization and harnessing returns from the energy transition. However, given the magnitude of the climate crisis, the SBI’s target for investing in the energy transition should exceed at least $10 billion in the next five years, rather than the $1 billion proposed.  Investing only $1 billion amounts to less than 1% of the assets currently held by the SBI. CALPERS, the California public employee pension fund that is 3 times as large as MN’s state pension fund, is aiming to invest an additional $53 billion by 2030 in climate solutions. That represents about 8% of the CALPERS pension fund. For MN to stay on par with California,  we would need to invest $17 billion over the next 5 years.  We think Minnesota should be able to achieve a minimum of $10 billion during that period.

3. Create due diligence criteria for Private Equity

The Roadmap needs to include criteria for due diligence of private equity investments.  Well-known private equity companies have been driving the climate crisis by snapping up dirty fossil fuel assets and avoiding regulatory oversight. The Roadmap is almost completely silent on private equity.  Private Equity comprises 25% of MN’s retirement funds.  Unlike publicly traded stocks, once SBI investments have been committed to private equity, there are NO opportunities for proxy voting or engagement.

4. Employ the broader statutory definition of fiduciary responsibility 

As we draft this briefing paper, there are still 1,866 households in the Twin Cities area without power 36 hours after the storm of 8/27 that took down hundreds of trees. The damage from this storm cost Minnesotans millions of dollars. Under MN Statute 356A, a fiduciary owes a fiduciary duty not only to plan members who are its beneficiaries but also to Minnesota taxpayers and the state of Minnesota. The Roadmap however narrowly defines SBI’s fiduciary responsibility as achieving a healthy return for the exclusive benefit of plan members. Without addressing the secondary risks to Minnesota taxpayers and the State of Minnesota,  it ignores the broader statute language. The negative impact on the climate of our continued investment in fossil fuels is affecting farmers, insurance companies, the tourist industry, and ordinary citizens. We ask that you bring the roadmap into compliance with the broader definition of fiduciary responsibility and divest from fossil fuels to protect the climate and livelihoods of Minnesotans.

State Board of Investment Briefing   

February 2024

Why bond investments in fossil fuel companies contribute more to the climate crisis than equity investments and what the SBI can do about it.  

There is no denying that our winter (and summer) weather patterns are severely disrupted. It is more urgent than ever for us to take swift action to rapidly reduce our use of fossil fuels. President Biden recently took the wise action of pausing permitting for new LNG terminals intended to export natural gas. As leaders in the State of Minnesota, you too have an important lever for addressing the climate crisis: halting investments in fossil fuel bonds.  

While the risk of investing in bonds is generally lower than the risk of investing in stocks, the negative impact on our climate is far greater. This is because bond issuances are one of the key ways that fossil fuel companies raise money to expand their fossil fuel operations. Our state must not fund off-shore exploration and the drilling of new oil wells by investing in fossil fuel bonds. 

The Minnesota Pension Fund owns nearly 500 bonds issued by oil & gas exploration, production, refining, and transportation companies. Many of these bonds are recent purchases, which seems inconsistent with our status as a Principles of Responsible Investing signatory. Active decisions have been made in the past few years to invest in oil & gas producers, so (unlike equity purchases) our cash is going directly to fund ongoing investments in new oil & gas production. 

Reducing our investments in bonds is an easy place to begin our journey towards a less fossil fuel-intensive investment portfolio. 

What is the SBI’s investment strategy when purchasing new issue fossil fuel bonds? We’ve heard staff say that using engagement strategies is a key part of the SBI’s approach to ensuring environmental considerations. And we know that the only time engagement is possible with bonds is at the time that a company issues a bond.  Will you work with your fixed-income managers to develop a policy that does not support bond investments in fossil fuel companies? Many of these bonds currently in the portfolio can be sold immediately, with proceeds reinvested in different sectors. 

The International Energy Agency has warned that there can be no new coal, oil, or gas development if humanity wants to prevent dangerous warming. This objective is consistent with Minnesota’s Clean Energy 2040 legislation. We expect the SBI to take action to ensure that our bond investments are consistent with legislative goals. A climate aware Investment Roadmap provides an excellent opportunity for you to put this practice in place.

MINNESOTA DIVESTMENT COALITION

MARCH 2022 BRIEFING TO THE SBI

The Minnesota Divestment Coalition recognizes the State Board of Investment for taking climate change seriously and issuing the Meketa Capital Markets Outlook and Risk Metrics Report at the February 24^th SBI meeting. This shows a genuine commitment to reviewing the climate risks of portfolio investments. That said, we hope that the next report contains a strong set of explicit instructions for SBI to take bold action to divest from companies that are fueling climate destruction. We also regret that the SBI recently approved the signing of contracts with private equity firms before developing a policy for scrutiny of the firms’ fossil fuel holdings as recommended in our February briefing. 

This March briefing covers 1) Climate finance resolutions for banks;  2) Socially responsible investing practices in other states, and 3) The MN legislature’s call for divestment from Russian fossil fuel companies.

1) Climate finance resolutions for six banks  The SBI has an opportunity as a shareholder of six of the largest US banks to support nine climate finance resolutions that will ensure that banks’ financing practices are consistent with their stated commitment to achieve net-zero. The six banks are: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo. 

While most of the banks have adopted a net-zero commitment, none has committed to halt financing for new fossil fuel development as is required by a net-zero commitment. In the meantime, natural disasters continue to mount, temperatures soar and the future of our children hangs in the balance. To address the gap between the banks’ stated objectives and actual financing practices, six of the proposed resolutions ask each bank to ensure their financing does not contribute to new fossil fuel supplies as required by the International Energy Agency (IEA) Net-Zero Emissions by 2050 scenario. Another resolution, the Audited Report on Impact of IEA Net-Zero Emissions by 2050, asks for an audited report on whether and how the fulfillment of the IEA Net-Zero Emissions by 2050 Scenario could affect underlying assumptions in financial filings. 

As responsible shareholders and public leaders, the SBI should support these resolutions at the upcoming spring shareholder meetings to compel these six banks to commit to protecting our environment, livelihoods, and all who inhabit planet earth.

2) Socially responsible investing of public treasury and employee pension funds in other states  The Divestment Coalition has been examining best practices in Socially Responsible Investing by public employee pension and state treasury funds in other states.  The management of Illinois public funds recently came to our attention. Under their Sustainable Investing Act (2019) considering ESG sustainability factors in administering their portfolio is a fiduciary responsibility, 

“Prudent integration” of sustainability factors by all public agencies or governmental units into “investment decision-making, investment analysis, portfolio construction, due diligence and investment ownership” towards the end of maximizing anticipated financial returns, minimizing projected risk, and more effectively executing fiduciary duty.” 

Members of the Minnesota Alliance for Sustainable Pension Investment (MASPI) and the MN Divestment Coalition met with Laura Williams and Max Dulberger of the Illinois Treasurer’s Offices on March 17 for a rich and productive discussion of how ESG sustainability factors are being integrated into their policies, practices, and investment decisions. 

Treasury staff emphasized that by working with coalition partners like Climate Action 100+, unions and other public employee pension funds they have been able to pressure corporations to address some ESG issues. At the same time, they acknowledged that with only two staff dedicated to corporate engagement, the level of engagement they can do is not at the level necessary to do the work. They estimated they would require at least 8 additional staff to effectively enter into discussions with company management and influence the ways in which companies are run.  This observation confirms our assessment that MN SBI staff is also under-resourced in terms of staff dedicated to ESG engagement. Lastly, they acknowledged the challenge of holding corporations to their stated climate commitments and emphasized the importance of monitoring company capital expenditure and integrated resource plans.

New York is making progress toward divesting from 21 shale oil and gas companies that have continued to invest heavily in high risk and high cost assets. They are continuing to invest in 21 other shale oil and gas companies that “have shown they are ready to move to a low emissions economy.” This is not the full divestment we want to see but it is a positive move that the MNSBI could initiate immediately. 

A recent Impax Asset Management report shows that investing in climate mitigation can be profitable for investors. Those companies that were more cognizant of climate risks and invested in mitigation efforts were more profitable than those companies that did not. The report concludes, 

“Political actors may be able to portray climate change as a partisan issue or a special interest without any pecuniary impact — but financial markets do not have that luxury. The evidence is mounting that climate change poses a great many risks, and financial markets are pricing those risks into securities markets today. Investors that ignore this suite of risks are increasingly likely to have a series of unpleasant and more frequent surprises.”   

We applaud the development of filters and metrics like the ones described in the Impax report. But in our opinion many of the studies are dancing around the edges of the real threat we face. The real measure should be a comparison between portfolios that have divested or are in the process of divesting from fossil fuels and those that remain fully invested in fossil fuel companies. Isn’t it magical thinking to imagine that fossil fuel companies will become renewable energy companies, as they continue to fight against climate solutions?  

3) The MN legislature’s call for divestment from Russian fossil fuels We applaud the recent bill introduced into the legislatures to divest from Russian gas and oil companies following Governor Walz’s Executive Order 22-03 and subsequent letter to legislative leaders. As of June 30, 2021, the SBI portfolio showed at least $82 million invested among five Russian gas or oil companies. As Bill McKibben recently stated, the most powerful way to defeat Putin is by getting off of gas and oil: “In the last decade, scientists and engineers have dropped the cost of solar and wind power by an order of magnitude, to the point where it is some of the cheapest power on Earth. The best reason to deploy it immediately is to ward off the existential crisis that is climate change, the second best is to stop the killing of nine million people annually who die from breathing in the particulates that fossil fuel combustion produces. The third best reason is that it dramatically reduces the power of autocrats, dictators, and thugs.” Ukrainian activists powerfully spell out the role of the fossil fuel industries in fueling Putin’s war. One sentence in their sign-on letter reads: this war has been funded, fed and fueled by the coal, oil and gas industries that are driving both the invasion that threatens Ukraine and the climate crisis that threatens humanity’s future.”  

The clarion call to thwart Russian aggression against Ukraine by starving the Russian gas and oil industry highlights the imperative of moving with all speed to a renewable energy future, critically for Europe but also for the United States. The $82 million in MNSBI holdings, if redirected away from Russia and towards renewables, could make a small, but more than symbolic, advance towards this future.

MINNESOTA DIVESTMENT COALITION – OCTOBER 2021 BRIEFING TO THE SBI 

Shareholder Advocacy

As stated in the Minnesota Divestment Coalition’s September briefing to the SBI, we believe that given the right set of circumstances, shareholder engagement can be used by the SBI to improve the environment and the stability of Minnesota’s investments. However, as we also stated, shareholder advocacy cannot have substantial impacts on the Carbon Underground 200 companies since their company valuations are derived from the carbon assets they hold. Any restrictions on the burning of these assets would undermine the financial viability of the company. Boards of these companies are not able to vote against their own fiduciary responsibilities. Adding climate scientists to boards does not change this. Fossil fuel companies  had scientific evidence of their impacts on climate long before it was public knowledge; climate science is not what is lacking inside of these companies. 

This briefing explores 1) decisions other institutions have recently made to safeguard their funds from the inevitable devaluation of carbon 2) how climate science has been misused inside fossil fuel companies and 3) our stance on carbon capture as a “solution.”

1) Recent Divestment Announcements.   Over the last 12 months, numerous institutions made divestment announcements. The leaders of these institutions declared that they are taking these divestment actions as prudent fund managers. The SBI should do the same to avoid future devaluations of fossil fuel companies. New York State Comptroller Tom DiNapoli announced the New York State Common Retirement Fund would sell most of its fossil fuel stocks in the next five years.  He stated that the primary reason for the shift was his duty to protect the fund and to set it up for long-term economic success in a world that is moving away from fossil fuels. Macalester College trustees announced in August that it would be divesting from fossil fuels by the end of 2021. The University of Minnesota announced in September that it would divest from the Top 200 fossil fuel companies over the next 7 years. U of M Regents declared that their decision was the reasonable choice. Harvard University announced in September its commitment to divesting its $42 billion endowment from holdings in fossil fuels, saying  in a letter to the university community, “Given the need to decarbonize the economy … we do not believe such investments are prudent.” Boston University announced that it, too, was divesting its endowment. The MacArthur Foundation announced in September its plans to divest its $8 billion endowment from fossil fuels, as did the Ford Foundation in October. California State University announced in October that it will stop making new investments in fossil fuel, and  Dartmouth College also announced updated divestment plans in October. 

2) Fossil Fuel Companies And Climate Science.  

The fossil fuel industry studied the effects of burning coal, oil and gas in the 1970’s and found that burning their product would eventually lead to an irreversible climate catastrophe. Instead of recognizing the need to change, they decided to sow doubt and spread misinformation for the next 30 years so that they could continue selling their fossil fuel assets. More recently they have acknowledged that climate change is a serious problem, but they continue to follow their business model, extracting and transporting fossil fuels. The industry has pivoted to converting oil into plastic, with a huge increase in petrochemical companies in places like Cancer Alley, between Baton Rouge and New Orleans, LA. This is one of the reasons we encourage the use of shareholder advocacy to pressure ancillary industries to find sustainable alternatives to the use of petroleum products, such as bioplastics and alternative jet fuels. 

3) Fossil Fuel Companies Using Carbon Capture and Storage (CCS) As A Facade. 

Carbon capture is another example of fossil fuel companies devising systems that allow them to continue producing coal, oil and gas without effectively addressing climate change (watch Sept 2021 webinar by Science and Environmental Health Network).  A recent study found that it is far more expensive and less reliable to set up carbon capture systems alongside fossil fuel energy plants than it is to simply replace those plants with renewable energy.  Despite this, fossil fuel companies have marketed CCS to the public as a climate solution. 

In the US, CCS is used primarily in fracking operations where it is pumped into the ground to force methane gas to the surface.  This is problematic because fracking operations are known to be harmful to the environment and leaks of methane gas and CO2 are dangerous for people living in the vicinity of pipelines or fracking sites. Captured CO2 is transported through extensive pipelines and In transport CO2 becomes acidic and corrodes pipes and rock formations where it is stored and moves where it will through cracks and fissures in the underground spaces where it has been “stored.” Currently NO approved methods for monitoring whether the carbon remains underground are available.  SEHN’s newsletter provides more details about the problems with carbon capture. 

Carbon capture misses the mark. It fails the net zero emissions investment test and fails to create the renewable energy future we urgently need. The real solution is replacing fossil fuels with wind and solar power that have been shown to be far less expensive and more effective. The MSBI should not be investing in fossil fuel companies’ risky and expensive efforts to keep on selling their product nor will a stakeholder engagement strategy work with these industries. We hope to see a more vigorous evaluation of the portfolio’s investments in the Carbon Underground Top 200 fossil fuel companies very soon.

MINNESOTA DIVESTMENT COALITION 

AUGUST 2021 BRIEFING TO THE SBI

This update highlights global action on fossil fuel divestment and serves to inspire MN State Board of Investment Members to take urgent action to protect our investments and stop climate change.

At the May 26, 2021 State Board of Investment (SBI) meeting, board members approved private equity company KKR to manage a private equity fund within the Minnesota portfolio. While the Minnesota Divestment Coalition recognizes that KKR is a reputable private equity company, we do have concerns regarding the nature of the agreement. Our apprehensions are twofold:

1. Unlike publicly traded stocks, private equity companies are not required to disclose where they are investing our money. This lack of transparency means that the SBI may have no ability to push an equity company to move away from fossil fuels. The two most recent reports on the pace of our runaway climate change – the International Energy Agency ((IEA) report, which our June 2021 briefing reported on, and the Intergovernmental Panel on Climate Change (IPCC) report – have outlined the urgency to move immediately away from fossil fuels toward renewables. The IPCC calls the situation “code red for humanity.” Both reports stress the need to cease funding new fossil fuel infrastructure like Line 3 and to shut down any coal-fired power plants still in operation. 
2. Private equity companies require a contract from investors like the SBI, stipulating that funds remain invested in the equity company (KKR) for the time specified in the contract – often for up to ten years. If the SBI learned that the fund is invested in poorly performing fossil fuel companies, for example, it could not extricate itself until the 10-year period had expired. 

The implications of these private equity fund requirements  are significant. In at least one instance reported last year, KKR invested in a coal-fired power plant that received stimulus money and then filed for bankruptcy. If this had been an investment KKR made with Minnesota pension money, we wouldn’t necessarily know about it. As publicly traded companies like Exxon are pressured to sell off fossil fuel investments, private equity firms that aren’t subject to stakeholder scrutiny are buying them up at rock bottom prices.  Do Minnesota’s pension holders want to be partners with companies that invest in climate destruction and are in long-term decline? None of our coalition’s members do.  Furthermore, the SBI has committed to undertaking a climate risk assessment of the portfolio. With approximately 25% of pension funds in private equity companies, it will be difficult, if not impossible, for analysts to assess this portion of the portfolio.

We recommend the following: 

1. The SBI should formulate a policy with a clear timeframe to divest its current investments from Carbon Underground 200 and other such fossil fuel companies. 
2. SBI contracts with private equity firms including KKR should stipulate that funds are not invested in Carbon Underground 200 or other fossil fuel companies. The contracts should also require full disclosure as to where funds are invested.  If private equity firms are unable to do this, then the SBI should cease to invest in them. 

Simple common sense requires that every institution do its part to turn the tide on climate change before it’s too late. At what point do we stop mortgaging our future for the sake of ever-higher returns?  Two decades from now, as public leaders, will you be able to look back and say you did everything within your means to prevent a climate catastrophe?