Coal Stocks Are Tanking. So Why Is Seattle’s Pension Fund Holding On to Them?

When the financial argument for divesting is growing?

Seattle’s pension fund will divest from coal—maybe.

“There’s always a lot of maybes,” says City Councilmember Nick Licata. “That’s the problem.”

Licata, who chairs the Seattle City Employee Retirement System (SCERS) Board of Administrators, is trying to wheedle the board into dropping its investments in the dirtiest kind of fossil fuel. He’s joined in this mini-crusade by local environmentalists and, more surprising, by investment professionals.

“The financial argument for divestment is, I think, growing in strength, and it’s based on stranded assets,” said investment consultant Alex Bernhardt at last week’s Retirement System Board meeting.

When valuing energy stocks, Wall Street counts oil and coal that’s still in the ground as assets, as if those fossil fuels were sitting in a warehouse somewhere waiting to be sold. But as government regulators crack down on carbon emissions, those fuels risk becoming “stranded” underground, causing balance sheets—and stocks—to shrink overnight. Over the past year and a half, four major coal companies have declared bankruptcy, and just last month the Obama administration passed tough new rules targeting carbon emissions that could cause many coal-fired power plants to shut down. Without those plants, the value of American coal comes into a serious question. (This market dynamic is also a big factor in coal companies’ keen interest in shipping coal through downtown Seattle and onward to China.)

“[These companies] have reserves of these raw fossil-fuel materials, and those are credited on their balance sheet as an asset,” says Bernhardt. “If they become devalued, then the company’s finances are challenged.”

This was the upshot of Bernhardt’s presentation to the Retirement System Board, based on a new report released by his employer, the Mercer Group, an investment consulting firm. It’s no tree-hugger’s manifesto: The report is for hard-nosed investors who want to maximize profit. It models several different scenarios for climate change through 2050, depending on how quickly world leaders are able to rein in carbon emissions.

According to the report, “The average annual returns from the coal sub-sector could fall by anywhere between 18 percent and 74 percent over the next 35 years.” In other words, investments in coal will lose Seattle retirees money.

Or, more precisely, have already lost them money. Since 2011, coal stocks have been bleeding value, and a side-by-side comparison shows that fossil-fuel-free stocks have recently begun to outperform the stock market overall (though they’re also statistically riskier).

“One hates to say I told you so,” says Bill McKibben, co-founder of the climate change advocacy group, “but if the pension board had listened to scientists three years ago . . . they would have avoided the tanking of the coal market, which has been the single worst performer of any industry group over the last period.”

That could change, of course, particularly if plans to build a coal export mega-terminal near Bellingham proceed. But in the long run, coal will likely plummet in value as regulators respond to the world’s climate crisis and other fuels—like arguably less-dirty natural gas from fracking—enter the energy market. A study published earlier this year estimates that to avoid catastrophic global warming (that is, an average global temperature increase greater than 2 degrees Celsius), 80 percent of existing coal reserves must stay in the ground, unused.

The writing on the wall for coal stock may be enough to push the Retirement System Board to begin divesting, something they’ve hesitated to do in the past. Their overriding legal responsibility as supervisors of the city’s retirement fund is to ensure it remains solvent. Lynn Fitz-Hugh, a Seattle activist with McKibben’s group, described the Board this way: “What they basically said was, ‘We’re concerned about climate change, we hear what you guys are saying, but our reading of fiduciary responsibility is we can’t just do this [just] because it’s the right thing to do. We have to protect the pension.’ ”

The Board’s own investment consultant, NEPC, has repeatedly advised against divestment because it would make their stock portfolio less diverse and therefore riskier. Licata says this is because they’re biased to prefer measurable, short-term results, which can block them from seeing the bigger picture of long-term market trends—especially bubbles like the “carbon bubble” that some investors have argued will eventually pop. “Sometimes it has seemed like NEPC has ignored studies, cherry-picked evidence, and created a narrative against divestment,” he recently blogged.

“I think what’s holding the board back is . . . a reluctance to embrace something that’s new and not quite understood,” says Licata. “It’s an excessive amount of caution . . . [that’s] not really necessary, given what the preponderance of evidence is.”

In addition to the Mercer report, the Board got some more political cover for divestment at the beginning of this month when the California legislature voted to divest the state’s two public pension funds from thermal coal and to indemnify their board members against lawsuits from pensioners if they do divest. Part of the rationale for not divesting the SCERS fund was that no other pension fund was doing it. Now that argument is kaput.

The stakes of the Retirement System Board’s decision are pretty low in terms of actual dollars. Only $7.4 million (or 0.3 percent) of SCERS’ $2.3 billion investment fund is in coal. But a little money can establish a big precedent. “Like so much inside politics,” says Licata, “often it’s not necessarily the size of the ask. It’s the precedent of saying yes.” Once the SCERS board is willing to dip its toes into the water of coal divestment, he says, it will be that much easier to push them—and, crucially, other investment funds—to dive into divestment from other fossil fuels.

“Divestment by key institutions like the pension board robs this industry of its legitimacy,” says McKibben, “and helps ever more people understand why its business plan is incompatible with the physics of climate change.”

Bernhardt agrees. “[The] stigmatization of coal could . . . push policymakers or creditors, potentially, who are trying to lend to coal companies; they might say, ‘There’s all this divestment pressure, we don’t want to lend to you now.’ ”

It seems ironic to Licata that investment consultants like Mercer are now poised to transform the American stock market for public investments. “This is a new playground for investment advisors to move into,” he says. “That’s the nature of capitalism, that they’re always looking for basically where you can make a profit. They make a profit by selling guns and shooting other capitalists.

“But the irony is that capitalism has gotten us into this problem, but we could also use it to help us mitigate the problem.”

The next SCERS investment committee meeting will be held at noon, Thurs., Sept. 24 at City Hall.

Casey Jaywork covers City Hall and policy for Seattle Weekly. He can be reached at or 206-467-4332. Follow him on Twitter at @caseyjaywork.

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