Oregon treasurer wants to eventually ‘decarbonize’ $90 billion pension fund. Will it happen?

Oregon State Treasurer Tobias Read at Camille Park in Beaverton Thursday, Feb. 24, 2022. Mark Graves/The Oregonian

Oregon Treasurer Tobias Read said Wednesday he will devise a long-term plan to “decarbonize” the state’s pension fund investments and present it to the citizen’s panel that oversees those investments for review by early 2024.

Whether his proposal might gain approval is far from certain.

While the state of Oregon has adopted aggressive decarbonization goals and many officials acknowledge the need to pull back from fossil fuels, Read is just one of five voting members on the Oregon Investment Council, the panel that sets investment policies for a $90 billion pension fund.

Moreover, he is term-limited as Treasurer, will be leaving office at the beginning of 2025, and members of the panel are obligated by statute to maximize the fund’s risk-adjusted returns. The council and Treasury staff also have little day-to-day control over decisions by third-party managers who actually make most of the fund’s investments.

Read has been under pressure from outside groups to take action on climate change for some time, even if he can’t do so unilaterally. After losing the Democratic primary for governor, it’s not clear what his next move will be. But more clearly establishing his bona-fides on the issue probably can’t hurt politically, and could add to Treasury staff’s and the investment council’s discussion of the risks, even if they don’t adopt his plan.

Read on Wednesday said more needs to be done and he wants Oregon to adopt policies that will get the pension fund to 50% decarbonization by 2035 and “net zero” by 2050.

Sustainable investing has grown substantially over the past two decades, and many large pension funds have embraced the approach, in principle at least. In 2017, Treasury added a so-called “ESG” officer to its investment staff to help evaluate environmental, social and governance risks across the investment portfolio. In 2020, the council amended its policy to add those risks to its statement of management and investment beliefs. And last year, it received a report from an outside consultant indicating climate change posed a material risk to the pension fund’s investment returns, and that the longer it takes for a coordinated response to the crisis the more disruptive it would be for markets.

Read said he now wants Treasury staff and perhaps outside advisors to do a far deeper dive into those financial risks to the fund and its beneficiaries, some 385,000 current and former government employees.

“We’ve said this is an issue, but what does it mean? What are we doing about it?” Read said of environmental risks. “This is a beginning of an answer to that question. The world changes and we have to adapt to that. We have to remain flexible and responsible to the beneficiaries, but we’re going in that direction.”

Divest Oregon, a coalition of environmental advocates, unions and social justice groups, issued a report in April criticizing the Oregon State Treasury for not prioritizing climate risks or taking aggressive action to limit the pension fund’s exposure to them. The report, drawing on Treasury data, said the state had at least $5.3 billion invested in fossil fuel companies, including $1 billion in the coal industry. Those totals don’t include investments by private equity partnerships, which are exempt from disclosure and currently account for 27% of the fund’s investments.

The coalition has been pursuing a transparency bill mandating that Treasury disclose all the assets it manages. One proposal died during this year’s short legislative session, but the group is preparing another for 2023 that would forbid new investments in carbon intensive entities, establish a portfolio-wide plan to phase them out altogether, and require more transparency and reporting on the portfolio.

The coalition on Wednesday called Read’s plan a missed opportunity that was too little, too late.

“We’re glad he’s made a first step, but he’s not making any commitment to reduce new investments in fossil fuels,” Jenifer Schramm, a volunteer with the organization, said Wednesday. “The problem is it’s so slow and there’s no real commitment to make significant change and move out of even the most problematic investments.”

While investments in fossil fuel companies are a standard part of most investment portfolios and have skyrocketed this year, Schramm called it “a dying sector” that poses an unacceptable risk to the pension fund and the planet.

“It’s their fiduciary duty to get out,” she said.

In reality, Read can’t commit the council to anything on his own, and any move by the Legislature to dictate investment policies with a high level of specificity would be unprecedented. While many large pension funds have increased their focus on climate change, the issue has also become politicized, with states like Texas and Florida telling some investment managers they’ll be shut out of doing business with their pension funds if they consider the environmental risks associated with the fossil fuel industry.

Read acknowledged the complexity of his goal, and said the pension fund has to operate within the existing landscape of investment vehicles and the mandate to maximize returns while taking into account the degree of risk necessary to achieve them. But he said his decarbonization goal is more sweeping than just getting out of fossil-fuel companies, though the “net zero” goal isn’t a commitment to zero carbon exposure, but to balance its investments in entities that generate carbon with those that are carbon neutral or generate carbon offsets.

Even that objective is ill defined at this point. The general description of the proposal he issued Wednesday said immediate, broad-based divestment from particular sectors was likely inconsistent with the council’s fiduciary duty, but that the council should use it as a tool aimed at specific investments where there is a measurable financial risk, and to guide its dealings with outside investment managers. Read’s eventual proposal would include interim decarbonization targets and a timeline to review certain investments, including in tar sands, coal, and natural gas from fracking.

Read said he doesn’t have any clear answers about how to reach the decarbonization goal at this point, and that underscores the need to do the review. “It’s hard work. It will take time. It’s complicated. But I want it to be robust and real.”

It remains to be seen how enthusiastic the other members of the Oregon Investment Council will be about such an ambitious proposal, which Read said will be ready by February 2024. The pension had a $20 billion funding deficit at the end of 2021. As of Sept. 30, its investment portfolio had declined 4.4% this year, a number that likely doesn’t capture the full extent of the damage since much of it is tied up in illiquid private partnerships that aren’t regularly priced.

Cara Samples, chief financial officer at an investment management firm and current chair of the council, said members had been provided with a copy of the news release and supporting material beforehand, but it was presented to them as a Treasury initiative.

“His department intends to do some research on how and if it would be feasible,” she said, “and make suggestions that we can choose to adopt, or not, at that time.”

- Ted Sickinger; tsickinger@oregonian.com; 503-221-8505; @tedsickinger

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