February 2024 Briefing to the SBI – Bonds

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.