BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 185 (De León) - Public retirement systems: Public
Divestiture of Thermal Coal Companies Act
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|Version: April 8, 2015 |Policy Vote: P.E. & R. 3 - 2 |
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|Urgency: No |Mandate: No |
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|Hearing Date: May 28, 2015 |Consultant: Maureen Ortiz |
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SUSPENSE FILE. AS AMENDED
Bill
Summary: SB 185 will prohibit the boards of the California
Public Employees' Retirement System (CalPERS) and the California
State Teachers' Retirement System (CalSTRS) from making new
investments in a thermal coal company; requires each board to
liquidate existing investments in a thermal coal company by July
1, 2017 as specified; report to the Legislature by January 1,
2018 on the divestment activities; and, in conjunction with the
California Environmental Protection Agency to report on the
feasibility of divesting from fossil fuels investments.
Fiscal Impact (as approved on May 28,
2015):
One-time administrative/transactional costs of approximately
$683,500 and $129,100 annual ongoing costs to CalSTRS (Special
Fund)
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One-time administrative/transactional costs of approximately
$1.46 million and $365,000 annual ongoing costs to CalPERS
(Special Fund)
CalSTRS indicates that the pension system currently invests in
12 companies with a combined market value of approximately $40
million that meet the definition of thermal coal company.
CalPERS invests in approximately 20-30 thermal coal companies
valued at approximately $100-$200 million. The pension systems
may additionally incur opportunity costs if suitable alternative
investments are unavailable.
Background: Under existing provisions of Section 17 of Article XVI of the
California Constitution, as amended by Proposition 162 of 1992,
the CalSTRS board and CalPERS board have plenary authority and
fiduciary responsibility over the investment of retirement plan
assets and are required to discharge their duties solely in the
interests of the members and beneficiaries for the exclusive
purpose of providing benefits. The boards must invest the
assets of the plan with care, skill and diligence of a prudent
person engaged in a similar enterprise so as to maximize the
investments and minimize the risk of loss. The Constitution
does allow the Legislature by statute to prohibit certain
investments by a retirement board when it is in the public
interest to do so and provided the prohibition satisfies the
standards of fiduciary care and loyalty required of the
retirement board.
Other measures have been enacted by the Legislature to prohibit
certain investments by public pension funds. For instance, AB
221 (Anderson, Chapter 671, Statutes of 2007) prohibits CalPERS
and CalSTRS from investing in companies that have specified
energy or defense-related operations in Iran; and AB 2941
(Koretz, Chapter 442, Statutes of 2006) prohibits CalPERS and
CalSTRS from investing public employee retirement funds in a
company with business operations in the Sudan, as specified.
Proposed Law:
Specifically, SB 185 does the following:
a) Contains Legislative Findings and Declarations relating to
the combustion of coal resources and its contribution to global
SB 185 (De León) Page 2 of
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climate change in the United States.
b) Defines "thermal coal" as coal used to generate electricity,
such as that which is burned to create steam to run turbines,
and provides that thermal coal does not mean metallurgical coal
or coking coal used to produce steel.
c) Defines "thermal coal company" as a publicly traded company
that generates 50 percent or more of its revenue from the mining
of thermal coal, as determined by the retirement system board.
d) Prohibits the CalPERS and CalSTRS boards from making
additional or new investments or renew existing investments of
public employee retirement funds in a thermal coal company.
e) Requires the boards to liquidate investments in a thermal
coal company on or before July 1, 2017 by engaging with a
thermal coal company to establish whether the company is
transitioning its business model to adapt to clean energy
generation, such as through a decrease in its reliance on
thermal coal as a revenue source.
f) Requires the boards to file a report with the Legislature by
January 1, 2018. The report will include the following:
1) A list of thermal coal companies of which the board has
liquidated its investments.
2) A list of companies with which the board has engaged
that the board established were transitioning to clean energy
generation, with supporting documentation to substantiate the
board's determination.
3) A list of thermal coal companies of which the board has
not liquidated its investments after determining that doing so
would be inconsistent with the fiduciary responsibilities as
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described in Section 17 of Article XVI of the California
Constitution.
4) A summary of the feasibility study relating to
divesting from fossil fuel investments.
g) Requires the boards, in consultation with the Secretary of
the California Environmental Protection Agency (CalEPA), to make
a comprehensive assessment of the feasibility of divesting the
public employee retirement funds of additional fossil fuel
investments, such as natural gas and petroleum, and its
implications for the fund.
h) Provides that the board will not be required to take action
to divest in thermal coal companies unless the board determines
in good faith that the action is consistent with the fiduciary
responsibilities of the board.
Staff
Comments: The purpose of SB 185 is to require the Public
Employees' Retirement System and the State Teachers' Retirement
System to divest their holding of thermal coal power, consistent
with their fiduciary responsibilities. This is deemed as one
part of the state's broader efforts to decarbonize the
California economy and to transition to clean, pollution free
energy resources.
CalPERS has historically viewed climate change as an investment
issue, adopted investment beliefs and principles in that regard,
and consistently engages companies, other institutional
investors, governments, and non-governmental organizations to
formulate strategies to address the risks and opportunities
posed by climate change and transition to low- and no-carbon
energy sources. SB 185 requires the pension boards to first
engage with thermal coal companies which is consistent with the
boards' practices of considering risk factors that emerge slowly
over long time periods, but could have a material impact on
company or portfolio returns.
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CalSTRS has its own well-established and longstanding process
for thoroughly vetting the environmental, social and governance
risks of potential investments. The board adopted its Statement
of Investment Responsibility in 1978 and more recently a list of
21 risk factors that help the board identify and evaluate
investment risks relating to the existence of conditions such as
recognition of the rule of law, shareholder rights, human
rights, the environment, acts of terrorism and other
unsustainable practices and governance crises with the potential
to hurt long-term profits. CalSTRS also has a divestment policy
to respond to external or internal initiatives to divest of
specific companies or industries, but believes that active and
direct engagement is the best way to resolve issues.
Consequently, the CalSTRS board has initiated divestment efforts
of its own such as the CalSTRS Benchmark Modification Policy in
June 2002 to remove tobacco companies from the benchmarks of all
CalSTRS managers and has effective divested of tobacco from
passive managers; and, has begun the divestment process with two
publicly traded U. S. companies that manufacture firearms, as
specified.
Amendments (as adopted May 28, 2015): Delete the feasibility
study on the divestment of fossil fuel investments.
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