Increasing concern over climate change, loss of confidence in the long-term financial stability of the fossil fuel industry now facing the prospect of stranded assets, and the growing competitive advantage of emerging solar, wind, and other renewable energies are triggering a reevaluation of funding priorities within the global financial sector, with an escalating number of funds transitioning capital away from fossil fuels and into green energies and the clean technologies of the twenty-first century.
A 2018 survey of UK fund managers with portfolios totaling £13 trillion ($17 trillion) conducted by the UK Sustainable Investment and Finance Association and the Climate Change Collaboration found that they believe that “International Oil Companies (IOCs) will be negatively revalued within a few years because of climate change related risks.” In the report, 62 percent of fund managers “see peak demand for oil impacting valuations in the next 5 years and peak demand for gas impacting valuations in the next 10 years.” Over half of the respondents (54 percent) said that “the reputational risks of IOCs are already negatively impacting their valuation.” Seventy-nine percent said they will have an impact in the next two years. Fund managers cited a number of other related concerns, “such as the increasing competitiveness of alternative technologies leading to a drop in demand for fossil fuels and a shift in market sentiment as investors lose faith in IOCs ability to transition in a financially successful manner. In all, 89 percent of managers agreed that these and other transition risks would impact valuations of the IOCs ‘significantly’ in the next 5 years.” Half of the fund managers reported that they “already offer active funds or bespoke portfolios that have ‘divested from (at least) the 200 coal, oil and gas companies with the largest reserves.’”1
In the United States and around the world, the question of where the money is going to come from to build out and scale up a Green New Deal Third Industrial Revolution infrastructure, customized in each region, is becoming ever more pressing. When we think of a Green New Deal, the issue of “massive federal government expenditures” is inevitably the first roadblock on the way to constructing the grand vision and narrative. Even now, when the crisis is nothing short of the very survival of life on Earth, the naysayers are apt to argue that we can’t afford it, as if the issue of potential extinction is merely a line item to dispose of among the many other weighty government priorities that require attention.
Although some government funding at each level—city, county, state, and federal—will be required, it is probable that a good portion of the financing needed to build out the new infrastructure will come from global pension funds. Pension funds are the deferred wages of millions of workers in the public and private sector, payable upon retirement from their employment.
Karl Marx would never have envisioned a twenty-first century reality where “the workers of the world” are the primary owners of global investment capital via their public and private pension funds. It might come as a revelation that pension funds were the largest pool of investment capital in the world by 2017 at $41.3 trillion. As mentioned in the introduction, the US workforce is the most powerful voice, with assets exceeding $25.4 trillion in pension funds.2
Worried over climate change and the prospect of their funds remaining in a fossil fuel industry beset by stranded assets, which could wipe out the retirement funds of millions of American workers, US pension funds are beginning to take the lead in the divestment process. States and cities are divesting public pension funds from the fossil fuel sector and related industries that service and/or depend on it, like the petrochemical industry, and reinvesting in the green opportunities that constitute the smart Third Industrial Revolution economy. Private pension funds are also beginning to do the same.
A growing number of union voices are also pushing for the retraining of their workforces for the new employment opportunities that accompany the transition.3 It is foreseeable that in the future pension funds will increasingly invest in green infrastructure in regions across the United States and in other countries, with the expectation of using unionized workforces, at least in part, on the projects.
The enormous pool of pension capital has been amassed in just seven decades. While it’s not a revolution in the traditional sense, and although most people, including the millions of owners of these pension funds, are unlikely to view themselves as a class representing this impressive pool of capital invested in the world, this is the new reality. In some ways, it’s the best-kept secret of modern capitalist history.
The sheer economic clout that this $41.3 trillion represents, if fully embraced and controlled by the millions of individual capitalists that make up this cohort, could lead to a fundamental realignment in the relationship between the global workforce and the economic institutions that govern the international economic order.
So, to turn Marx on his head, imagine the workers of the world uniting as an army of “little capitalists.” As of 2017, there were 135 million public and private sector workers in the United States, and 54 percent of them participated in pension fund retirement plans. That’s nearly 73 million part- and full-time workers—an army of little capitalists.4 And what would happen if the American pension capitalists were to join together with a legion of pension capitalists from around the world and begin to exercise control over this giant pool of capital in the global economy?
Without firing a shot, without a class struggle, without strikes, rebellion, or revolution, the tables have turned, at least on paper, with the reality that these millions of workers are the primary capitalist class today. I say “on paper” because very few of these millions of capitalists see themselves as a class or even a cohort. But what if they did step up and make a claim—a seizure of power, if you will—over how their deferred wages and retirement income are to be invested? What then?
The day was May 13, 1946, a rather ordinary day in the halls of the US Capitol. The Senate began deliberating on who should control a newly emerging form of wealth they referred to as “pension capital.” A debate was gaveled into session by the president pro tempore, Kenneth McKellar. At stake was a bargaining demand made by John L. Lewis, the powerful head of the coal miners’ union and a leader of the American labor movement. Lewis had called for employers to set aside ten cents for every ton of coal mined by their miners to be put in a health and welfare fund, which would then be administered by the union on behalf of its membership.
Senator Harry Byrd of Virginia was the first to take to the floor. Byrd made no pretense in expressing his opposition to the proposal that Lewis had put forth. Looking down the line, Byrd warned that “if such a privilege were to extend to all contracts made between employers and employees throughout America … it would result in payments totaling at least $4 billion a year and perhaps more.” If labor were “to use such payments in establishing funds over which nobody but the labor representative would have any control … labor unions would become so powerful that no organized government would be able to deal with them.” Eyeing the implications of unions overseeing their members’ own funds and investing them on their behalf, Byrd argued that it would eventually lead to a “complete destruction of the private enterprise system of the United States.”5 Despite Byrd’s misgivings, the US House of Representatives and the US Senate passed a bill, only to see it vetoed by President Harry Truman.
A year later, however, Senator Robert Taft, a prominent Republican leader, inserted an amendment in the Taft-Hartley Bill—a piece of legislation that was designed to establish how labor unions were to be regulated—calling for a jointly trusteed board in all union-bargained pension funds, with half the representatives coming from the unions and half from the employer. Taft was concerned that if union leaders were to be the sole trustees, they might use their members’ funds for corrupt purposes or to exercise financial clout and political power.
Senator Claude Pepper, a Florida Democrat, took umbrage at Taft’s insinuations and suggested the real reason Republican members of Congress opposed labor unions controlling their members’ funds was fear that the Republicans’ close friends on Wall Street might lose control over a promising new pool of investment capital that was sure to grow and become a force to reckon with in ensuing years.
The amended bill passed, and Congress was able to override a second presidential veto, making it the law of the land. An ancillary condition was inserted into the final bill: that the pension funds could only be invested in a way that maximized the returns on the investments for the beneficiaries. This limitation on how the funds could be used effectively put them exclusively in the hands of Wall Street and ensured they would only be used to advance the capital market.
In 1974, Congress passed and President Gerald Ford signed the Employment Retirement Income Security Act, known as ERISA, which further tightened the ways the funds could be invested, inserting what has become known as the “prudent man rule,” ostensibly intended to protect pension funds from unscrupulous financial advisors. Instead, it ensured that the funds would only be used to advance the interests of the financial community, which would determine the scope and dimensions of what constituted a prudent investment. William Winpisinger, the head of the powerful Machinists Union, spoke for organized labor, suggesting that the “prudent man rule” was merely legalese for seizing control of workers’ deferred wages to advance the interests of the banking community.6
Decisions made in the US Congress back in 1946 on how and who should oversee pension capital would come home to roost in the late 1970s, in ways that will be described in detail below, literally changing the fate of the fourteen northeastern and midwestern states and the lives of millions of working people. The consequences would reverberate forward to this very day, locking generations into downward mobility, poverty, abandonment, and exclusion from the great American dream.
To better understand how this change in the economic landscape of the country occurred, and its impact on the lives of millions of Americans, we need to explore the importance of new infrastructure paradigms. Infrastructure is a far more pivotal agent in dictating the well-being of individuals, families, communities, businesses, and workforces, and the distribution of the fruits of society, than is generally recognized in academia or in political discourse.
In the case of the First Industrial Revolution in the United States, railroads played a key role in the rearrangement of economic life. Hub-to-hub rail service gave birth to dense, highly populated cities along the rail routes across the northeastern and midwestern corridors. Similarly, the telegraph system, which was first used to coordinate rail traffic, was located along rail routes. Coal, the primary energy powering the First Industrial Revolution, came largely from mines in Pennsylvania and Ohio in the northern tier. The steel industry, publishing industry, and other First Industrial Revolution industries similarly lined up alongside the rail infrastructure that connected the bustling northern cities.
The build-out of the Second Industrial Revolution infrastructure between 1905 and the 1980s overlapped and eventually absorbed or replaced much of the First Industrial Revolution infrastructure. During this transition, the economic geography in America shifted again. The mass production of automobiles and the introduction of national road systems, particularly the interstate highways crisscrossing every part of the country, distributed mobility and logistics. Electricity and telephone lines were strung everywhere and extended to everyone, reaching into every nook and cranny in America. Oil, the key energy to power an automobile culture, although originally discovered in Titusville, Pennsylvania, in 1859, was quickly found in Texas, Oklahoma, and later California. Oil also made airplanes and air travel possible, as well as giant container ships, advancing trade from a national market to a global market.
Let’s bring this home to the vast economic, social, and political upheaval that occurred in the United States in the mid-twentieth-century. The story starts below the Mason-Dixon Line on October 2, 1944, when a crowd of some 3,000 people in Clarksdale, Mississippi, watched with awe the demonstration of a new machine—the mechanical cotton picker. In one hour, the machine picked 1,000 pounds of cotton in the same time a single black laborer picked 20 pounds.7 By 1972, 100 percent of the cotton in the South was picked by machine.8 Immediately after World War II, chemical defoliants were introduced into the southern farm fields, eliminating jobs for black workers who for centuries had chopped down weeds, first as slaves and after the Civil War as sharecroppers.
Overnight, the black workforce in the South became unemployable and redundant. Thus began what Nicholas Lemann, the author of The Promised Land, characterized as “one of the largest and most rapid mass internal movements of people in history.” More than 5 million African American families headed north in the “Great Migration,” settling in the northern and midwestern states.9 There, the men found jobs in the auto industry in Detroit, the steel industry in Gary, Indiana, and Pittsburgh, the stockyards of Chicago, etc. By the 1970s, over half of the black population of the South had migrated to the North, leaving behind a rural life of poverty and destitution governed by Jim Crow laws for employment in northern factories.10
The big industrial unions—particularly the United Automobile Workers (UAW), the United Steelworkers, the Industrial Union of Electrical Workers, and the Machinists Union—were becoming more vocal in the two decades following World War II, making more pressing demands in their labor negotiations with management. And these giant international unions welcomed black workers newly arrived from the South. Ford’s flagship River Rouge plant in Detroit, for example, was also the home of the UAW’s most activist local union, whose membership was over 30 percent African American.11 Similarly, in the 1950s in Detroit, 25 percent of Chrysler’s workers and 23 percent of General Motors’ workers were African American.12
Management, anxious to escape the growing demands being made by an empowered unionized workforce, developed a two-prong exit strategy. First, the automobile companies introduced computers and numerical control technologies on the factory floor—the first automated technologies—which eliminated the jobs mostly held by semiskilled black workers. The trend soon spread to other northern industries. Between 1957 and 1964, manufacturing output doubled in the United States while the number of blue-collar workers declined by 3 percent with the introduction of automation on assembly lines.13 Second, the build-out of the highway system provided the Big Three automobile companies with a literal escape route to the new outer-ring suburbs of Detroit, where they built highly automated factories operated by a more skilled workforce that was eager to escape the inner city.
Other industries and, particularly, the industries that made up the military-industrial complex, built their new plants across the southern states. When foreign auto companies—Honda, Toyota, Nissan, BMW—established their production facilities in the United States beginning in the 1980s, they, too, were virtually all located in southern states along interstate highway exits.14 The southern states had “right-to-work laws” designed to impede or prohibit union organizing. In the South, global companies found a more complacent white rural workforce ready to accept low wages and less than enthusiastic about organizing unions.
The Interstate Highway System connecting the country meant that companies could locate in anti-union southern states and still have access to supply chains and distribution routes across the entire country, freeing their businesses from reliance on the hub-to-hub rail system connecting major metropolitan regions across the northern and midwestern sections of the country.
Here’s where the other shoe dropped, stranding the now unemployed black workforce, many of whom could not afford an automobile, in their neighborhoods. The freeways and Interstate Highway System created a new form of segregation, not much talked about to this day, except among urban planners and select academics. Mass transit, a vital means of transportation in inner cities, was allowed to atrophy across the North at the height of the auto age. Inner-city trolley systems and public bus systems were often scuttled to ensure exclusivity for automobile transport. Unemployed, on welfare, without mobility, and isolated and ghettoized, generations of African American families became wards of the state. Drug traffic, gang warfare, and the rest followed.
In 1977, my colleague Randy Barber and I began a conversation about the plight of American workers and small- and medium-sized businesses in the northeastern and midwestern tiers of the country. We saw close up the devastation wreaked on African American and white working-class communities in the inner cities by the mass exodus of companies and whole industries to the Sunbelt. We also became painfully aware of the dramatic shift in American commerce from Main Street to Wall Street, as well as the rise of global companies whose loyalties and ties were no longer restricted to the United States and whose interests, reach, and engagement now stretched across the world.
We searched for threads that might direct our future efforts to spark a deep national conversation around building a more open and democratic economy. We were particularly interested in ideas and themes that could reinvigorate the small- and medium-sized businesses at the heart of American ingenuity, create new jobs, and bring vibrant social life back to the inner cities.
Over the years, we had established close ties with local and national labor leaders who shared our concern about the disempowerment of working people at the hands of Wall Street. Randy had reached out to many labor leaders and academics and compiled a wealth of research on a growing phenomenon that had the potential to transform the economic and political dynamic in America and around the world. As Randy and I put the pieces together, we began to realize that a change was taking place in the very nature of capitalism that to date had gone unnoticed and unseen. Our conversations during those months would bear fruit in the joint authorship of a book published just a year later with the poignant title The North Will Rise Again: Pensions, Politics, and Power in the 1980s.
Here is the thesis we laid out in the book. First, the obvious. The sixteen northeastern and midwestern states were fast being abandoned by the very industries that made them the economic powerhouse of the world. Second, the American labor movement was watching its ranks diminish by the day in those regions as companies and whole industries searched out new opportunities in states in the South and West governed by anti-union right-to-work laws. This was no small matter, as 60 percent of all union members lived and worked in the Northeast and Midwest, while only 15 percent of union workers lived and worked in the Sunbelt.15
Efforts to unionize workers in the Sunbelt had repeatedly run up against anti-union sentiment among the largely rural workforce and local political establishments and chambers of commerce. Success in unionizing southern companies had been marginal at best. Stymied, organized labor found itself with little left in its recruiting toolkit.
What to do? We argued that America’s labor union leaders needed to wake up from a long sleep to a new and potentially powerful and promising reality. While slumbering, their millions of workers, both in public and private employment, had part of their weekly wages deferred via collective bargaining contracts in the form of pension funds, retrievable upon retirement. Nation-states, provinces, and cities around the world had been following America’s lead, establishing similar pension-fund accounts for both public employees and workers in the private sector.
In America, we said,
pension funds are a new form of wealth that has emerged over the past thirty years to become the largest single pool of private capital in the world. They are now worth over $500 billion.… Pension funds at present own 20–25% of the equity in American corporations and hold 40% of the bonds. Pension funds are now the largest source of investment capital for the American capitalist system.… Today, over $200 billion in pension fund capital comes from the combined deferred savings of 19 million union members and the public employee funds of the sixteen states that make up the northeast/midwest corridor.
If this weren’t enough to shake up the labor movement and Wall Street, we concluded with a scathing indictment of the American labor movement’s leadership, as well as the leadership of state and local governments across the northeastern and midwestern tiers of the country.
The unions and the states have, over the years, relinquished control over this powerful capital pool to the financial establishment. The banks, in turn, have used these capital assets to shift jobs and production to the Sunbelt and overseas, thus crippling organized labor and the northern economies of the United States.16
In other words, it was the deferred wages of millions of northern unionized workers that the banks and the financial community used to invest in America’s major corporations that, in turn, were abandoning their unionized workforces and relocating in southern right-to-work states. Millions of unionized workers’ savings were being invested in companies whose explicit policies were to eliminate their very jobs, and nobody seemed to be aware of it.
Randy and I then put the question directly to the states and cities of the northeastern and midwestern regions of the country and local and national labor unions: Would they “continue to allow their own capital to be used against them,” or “would they assert direct control over these funds in order to save their jobs and their communities”?17
Although the question we posed was more pragmatic and strategic, behind it was an ideological question that has plagued capitalism since Adam Smith penned The Wealth of Nations in 1776. We asked, “Who should control the means of production?”18 This question, we observed, was becoming more salient than ever as the financial community and global companies were using the deferred savings of union workers in the form of pension capital to relocate, not only to the Sunbelt but also beyond, setting up operations around the world, beggaring workforces in country after country, pitting workers and communities against each other to enlist the cheapest labor available and locating in communities where they could depend on lax or nonexistent environmental standards and few, if any, checks on the working conditions in their factories.
The reaction to the book was immediate. Tens of thousands of local and national labor leaders and rank-and-file union workers read it, as did leaders in the financial community and executives in Fortune 500 companies, all of whom had a stake in the struggle to control this gigantic pool of capital. While the book has been cited and credited over the past forty years with helping spark the movement for socially responsible investment (SRI), it’s fair to ask whether nation-states, cities, and labor unions around the world have moved effectively to seize control of the trillions of dollars in pension funds whose investments dictate the direction of markets in the capitalist system.19 Or have the efforts been more incremental and around the edges, chipping away bits and pieces of the power and securing small concessions without capturing the social capital itself?
In 1998, twenty years after the book was published, Richard Trumka, then secretary treasurer of the AFL-CIO (and now its president), convened a meeting of the nation’s trade unions’ secretary treasurers in Las Vegas and invited Randy and me to assess progress made. We were polite but not effusive. I should hasten to add that Trumka is one of the most vocal advocates of the themes we raised in the book, remarking that “there is no more important strategy for the labor movement than harnessing our pension funds and developing capital strategies so we can stop our money from cutting our throats.”20
One of the more measured and tightly reasoned analyses and critiques of the successes and failures that dogged our thesis and call to action came from Richard Marens, an assistant professor of organizational behavior and environment at California State University, in an article titled “Waiting for the North to Rise: Revisiting Barber and Rifkin After a Generation of Union Financial Activism in the U.S.,” published in the Journal of Business Ethics in 2004. Marens wrote:
A generation ago, two community activists, Randy Barber and Jeremy Rifkin, urged a new direction for the American labor movement in The North Will Rise Again (1978). Their book was a response to political and organizing setbacks that Labor had experienced in the 1970s: a 20-year decline in its share of the workforce and a demoralizing defeat of a concerted effort to reform labor law. They identified a positive counter-trend in the rapidly accumulating wealth of public and union-controlled pension plans. The job for labor was to learn how to wield this capital, both as a tool for generating investment in new union jobs and as a weapon in the fight against recalcitrant corporate management.21
Marens went on to say that many American unions and their leaders embraced our analysis and vision and within a decade were working side by side with newly formed SRI organizations “routinely involved in various forms of financial activism and, after another decade, investment activists working for unions could point to a long list of innovations and apparent accomplishments.”22 Shareholder resolutions multiplied on topics previously hidden behind closed doors in corporate suites, forcing changes in management practices.
Some of those shareholder resolutions opposed outrageous executive compensation while workers were summarily let go and wages remained stagnant; others focused the spotlight on Dickensian sweatshop conditions, mostly in Asia, sullying the public image of the companies and undermining shareholder value.
Still, Marens concluded in a 2007 article that while public and private pension funds became key players in advancing socially responsible investment and shareholder value, institutionalizing this new watchdog role in the oversight of corporate America, “labor’s shareholder activism … is likely to remain a tactical weapon, albeit an intriguing and potentially useful one, for skirmishing with corporate management and publicizing grievances.”23 As for our vision of the workers of the world taking responsibility for how the pool of global pension capital will be invested on behalf of their workplaces, communities, and families, Marens suggested that the evidence, at least in 2007, was that it was unlikely. At best, he faintly hinted that the jury was still out. No longer.
This time, it’s the public pension funds of cities, states, and nations that are leading the charge, moving beyond shareholder resolutions to controlling and directing their vast investments in the decarbonization of their economies. A global movement has taken root as governments and public employee unions have begun divesting their public pensions from fossil fuels and related industries and reinvesting them in renewable energies, green technologies, and energy efficiency initiatives.
In the United States, the revolution began at colleges and universities, with students petitioning the schools’ boards of trustees to “divest and invest.” Bill McKibben, the head of 350.org, one of the nation’s leading environmental activist organizations, played a central role in helping scale the movement. At first, only a few small, scattered municipalities—mostly college towns—made the shift in their pension fund investments. It was more a symbolic gesture. It wasn’t long, however, before the investment trickle became a stream, and it is now on the verge of becoming a deluge. Bigger cities have come forward and joined all over the world—Washington, DC, Copenhagen, Melbourne, Paris, San Francisco, Sydney, Seattle, Stockholm, Minneapolis, Berlin, and Cape Town, to name just a few. Today, 150 cities and regions across every continent have taken steps to divest their public pension funds from the old fossil fuel energies and reinvest in renewable energies, electric vehicles, and zero-emission building retrofits that make up a Third Industrial Revolution infrastructure.24
The turning point came in 2018 when both New York City and London brought their influence to the table. On January 10, Mayor Bill de Blasio and trustees of the public pension funds of New York City announced their decision to fully divest from fossil fuels by 2023 and in a single stroke positioned America’s lead city as the flagship in a worldwide transition into a Green New Deal society. New York City’s public employee pension funds represent 715,000 members, retirees, and their beneficiaries, and together their funds amount to $194 billion.25 The mayor made clear in a press conference that the decision to divest was both a moral one and a financial one. His message was unsparing. He told his fellow New Yorkers that
New York City is standing up for future generations by becoming the first major U.S. city to divest our pension funds from fossil fuels. At the same time, we are bringing the fight against climate change straight to the fossil fuel companies that knew about its effects and intentionally misled the public to protect their profits.26
De Blasio went on to remind New Yorkers and the rest of America of the damage New York City experienced when Hurricane Sandy hit the five boroughs head-on in October 2012, leaving forty-four deaths in its wake and more than $19 billion in damage to property and infrastructure and in lost economic activity.27 People around the world watched in horror as live TV coverage showed torrents of water washing over roadways, smashing through windows into department stores, and racing down into the subways. New York is one of the world-class cities most in harm’s way as seawaters rise and storms and hurricanes gain in intensity and frequency, and its citizens are beginning to ask if parts of their city will be permanently submerged by the second half of the century.28
The loss of life and property as the city moves deeper into the century could be incalculable. The decision to divest, said the mayor, was equally an economic consideration to ensure the city’s economic stability and future. The mayor’s office estimated that 3 percent of its portfolio, totaling approximately $5 billion, was invested in fossil fuels and that those divested funds would need to be distributed across the city’s pension investments, with a priority on finding opportunities to invest in renewable energy, retrofitting of building stock, and green infrastructure.29
The divestment is part of a broader decarbonization plan called One New York: The Plan for a Strong and Just City. The goal is an 80 percent reduction in greenhouse gas emissions by 2050, compared to 2005 levels, putting the city in sync with the Paris climate agreement.30
Sadiq Khan, the mayor of London, similarly announced plans to divest £700,000 ($903,000) in public pension funds still invested in carbon-based energies. The mayor said that the city’s pension portfolio’s last tie to the fossil fuel industry would be quickly severed, making it entirely free of fossil fuel investments. The city has also launched the Mayor’s Energy Efficiency Fund, investing £500 million ($645 million) in greening the city’s social housing, universities, libraries, hospitals, and museums.31
In a jointly authored opinion piece in The Guardian, the two mayors said, “We believe that ending institutional investments in companies that extract fossil fuels and contribute directly to climate change can help to send a powerful message that renewables and low-carbon options are the future.”32
Just after the editorial appeared, Jerry Brown, the governor of California, signed into law a bill requiring that the state’s two largest public pension fund managers, overseeing the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS), “identify climate risks in their portfolios and report on that risk to the public and the legislature every three years.”33 The first of its kind passed by a US state legislature, the law not only establishes a statutory definition of climate-related financial risks but also defines the legal responsibilities that the state’s public pension plans need to adhere to in their investment decisions while also ensuring that their investment choices align with the state’s other legislative requirements on climate change. It’s worth briefly reviewing a few select passages, as they provide a boilerplate for reassessing and understanding fiduciary responsibility for states and municipalities across America, and even other countries, as governments administering public pension funds take hold of the financing of a Green New Deal and transition from a fossil fuel civilization to a postcarbon green era.
The new law states unequivocally that “climate change presents an array of material financial risks, including transition risk, physical risk, and litigation risk, that reasonable investors must take into account when making investment decisions.” The law also warns that “failure to acknowledge and address these risks will result in exposure to subsequent liabilities and financial risk,” and given the fact that climate change occurs over time, investment decisions must “consider both short-term and long-term effects and risks of retirement fund investments.”34
The law concludes on a tough note designed to make clear to the trustees of these two powerful investment funds that their investment decisions can no longer simply be tied to short-term market returns, especially if those investments are in enterprises or endeavors that by their very nature contribute to climate change: “Given the potentially catastrophic consequences of climate change, the documented social and economic cost of carbon, and the emerging body of literature on the material financial risks of climate change, retirement boards simply cannot disregard financial climate risks.”35
We need to hit the pause button and grasp the significance of this new law. CalSTRS is the largest education-only public pension fund in the world, with 950,000 members and beneficiaries, and manages financial assets totaling nearly $224 billion.36 CalPERS is the largest pension fund in the United States, with 1.9 million public employees, retirees, and families, and it oversees financial assets totaling $349 billion.37 Together, these two mega-giants control over $573 billion in assets, or more than half a trillion dollars invested on behalf of almost 3 million public employees, retirees, and their beneficiaries.
This law fine-tunes the fiduciary principle that guides public pension fund investments, helping asset managers better appreciate what it means to maximize the financial returns of members. The rather sophomoric understanding of the “prudent man rule” that has guided pension fund trustees for well over seventy years, in which the only criterion is a return on investments, fails to take into consideration how such investments, though they might well appear to be prudent at the moment they are made, could also trigger negative effects on other investments, with a boomerang effect that undermines the long-term maximization of the members’ overall investment portfolio.
For example, take investments in fossil fuel energy companies and electric utilities whose contributions to global warming emissions exacerbate drought conditions in California and trigger wildfires that down power lines, creating power shortages and brownouts, destroy property, and disrupt commerce, potentially undermining the funds’ investments in other California companies impacted by the disruptions and losses. These multiplying effects are not theoretical but very real. PG&E, a Fortune 500 electric utility in California, filed for bankruptcy in 2019 when California officials announced that the company’s equipment caused at least seventeen of the twenty-one major wildfires in the state in 2017.38
And this is the very point Randy Barber and I made in The North Will Rise Again when we stated that every pension fund investment decision, regardless of its short-term return, has consequences that need to be considered, because those consequences could undermine the mid-term and long-term economic well-being of the workers whose funds are being invested. Recall, we had charged that in the past banks had invested the public and private pension funds of workers living in northeastern and midwestern states in companies fleeing those states to right-to-work states in the Sunbelt or Asian nations that have lower labor costs. This happened continuously from the 1960s to the 1990s, impoverishing millions of working people and their families, their communities, and their states. There is likely not a single worker alive today who would think in hindsight that those investments made by the trustees of the funds were “prudent,” even though they showed decent returns. Investments today in companies and industries most responsible for emitting global warming gases are of a similar ilk. Prudent investments? Difficult to justify!
Lest there be any remaining doubt about the fundamental change taking place in how public and private pension fund assets are invested and assessed, the UK government—the world’s fifth-largest economy in 2018—put the issue of what constitutes a “prudent” investment to the test in June 2018.39 The UK government’s Department for Work and Pensions (DWP) issued new regulations around the same time that California did. The regulations govern how future investments of public pensions are to be evaluated in the oversight of the nation’s £1.5 trillion in pension assets.40 And as in California, the issue centered on deepening the understanding of what is entailed in exercising fiduciary responsibility.
In issuing the new guidelines, Esther McVey, the secretary of state for the DWP, left aside legalities and coded references to speak directly to the British people, and especially the youth. She noted that “as we see the younger generation care more about where their money is going, they are also increasingly questioning that their pensions are invested in a way that aligns with their values. This money can now be used to build a more sustainable, fairer, and more equal society for future generations.”41 The regulations include a warning to pension fund trustees to “include climate change as a specific item because it is a systemic and cross-cutting risk … it affects not only environmental risks and opportunities, but also social and governance considerations … [adding that] the UK’s commitment to the Paris Agreement on Climate Change demonstrates the Government’s view that climate change represents a significant concern.”42
Some might read these recommendations and conclude that Big Government is merely flexing its regulatory muscle to impose its own ideological will on pension fund trustees and millions of public employees; in fact, the opposite is the case. In many instances, it’s the public employee unions that are pressuring the governments to come to the table.
UNISON is the UK’s largest union, with 1.3 million members working in both the public and private sectors in local government, education, the National Health Service, and the energy field. Having discovered that local governments across the UK had £16 billion ($20.6 billion) invested in the fossil fuel industry, UNISON made the decision at its national convention to mobilize its nationwide members in a campaign to press local governments to divest fossil fuels from their pension fund portfolios and reinvest in green energies and other socially responsible investments. UNISON’s general secretary, Dave Prentis, said in an open letter to the membership that “as the law stands, a decision to divest, taken for financial reasons—such as a view that the assets of BP, Shell, etc., will become ‘stranded’ in the ground and therefore worthless is an acceptable reason for a fund to do so.”43
In July 2018, Ireland became the first country to announce that it will divest “all” public pension funds from fossil fuel companies within five years. The Irish Parliament passed a bill forcing the Ireland Strategic Investment Fund, which oversees the investment of €8.9 billion ($10.4 billion) of government funds, to divest the estimated €318 million the country is investing in the global fossil fuel industry.44
Just eight months later, in March 2019, Norway sent tremors across the financial community when its government announced a recommendation that its sovereign wealth fund divest from all upstream oil and gas producers. Norway is Western Europe’s biggest producer of petroleum, and its sovereign wealth fund is the largest in the world.45 The message was clear: Norway is beginning to get out!
In countries where national governments have either turned a deaf ear or dragged their heels on establishing protocols for divesting from fossil fuels, public employee unions have taken on the mission of unilaterally announcing divestment of their members’ pension funds. In South Korea, the eleventh-largest economy in 2018, 46 percent of electricity is still powered by coal.46 Frustrated by the government’s intransigence, the Teachers’ Pension and the Government Employees Pension System, with a combined $22 billion in assets under management, announced they would “commit to stop investing in new coal projects” and reinvest the funds being withdrawn from coal projects in renewable energies, hoping it would steer similar commitments by other investment bodies and action at the national government level to divest.47
While localities, regions, and national governments and their public pension funds are quickly coming onboard by divesting from the fossil fuel industry and reinvesting in green energies, some of the world’s leading insurance companies are not far behind, and for good reason. Eighteen insurers, mostly in Europe, with assets of at least $10 billion each, have already begun to divest from the fossil fuel industry. Several of the biggest insurers—AXA, Munich Re, Swiss Re, Allianz, and Zurich—have either limited or eliminated insuring coal projects. AXA and Swiss RE have also limited underwriting tar sands projects.48
Yet, only two of the ten largest American insurance companies—AIG and Farmers—have modified their investment strategies in response to climate change, which is remarkable considering the US West Coast has been devastated by climate change–induced droughts and wildfires for years, with $12.9 billion in insured losses in 2017 alone.49 Texas and the southeastern states of Louisiana, Florida, Mississippi, Georgia, South and North Carolina, and Virginia have been ravaged by hurricanes, and the midwestern states of Nebraska, Iowa, Wisconsin, and Missouri have experienced ever-worsening 1,000-year historic floods yearly, all brought on by climate change in just the past decade, with loss of lives and property damage. I suspect, however, that the reality of the impacts of climate change will draw American insurance companies into the divest-invest fold over the course of the next two to three years.
The pushback by trustees of public and private pension funds who remain reluctant to divest from the fossil fuel industry and industries connected to it generally centers around not wanting to compromise returns on investment to satisfy demands for “socially responsible investments” that, while noble in purpose, generally perform less well in the marketplace. This argument is often wrapped around a warning about the long-term underfunded liability of pension funds around the world, suggesting that the last thing trustees want to do is invest in socially responsible funds whose returns are low, further depleting the benefits owed to the workers.
It is true that pension funds have been traditionally underfunded, but, as suggested earlier, this is because to some extent banks and other institutions have notoriously used them as a captive pool to invest in poor-performing stocks to shore up their own balance sheets.
Both public and private pension funds in America were woefully underfunded in recent years, for the most part because of the damage the Great Recession wreaked on the entirety of investments between 2008 and 2012 before the economy began its recovery. Pension fund coffers have been filling up in recent years in the overheated bull markets, but here again we need to strike a note of caution. At midyear 2018, the average stock trading on the S&P 500 was 73 percent above its average valuation. Looking back at the history of the stock market, only two times were stocks more overvalued—just prior to the Great Depression in 1929, and in the run-up to the now-infamous dot-com bust in 2000.50
According to Pew Trusts research, state pension liabilities are 72 percent funded (some analysts think that figure is generous). If the market were to plunge into bear territory, given that stocks are wildly overvalued on the exchanges, the underfunded liability of pension funds would suffer, but so too would every other investment vehicle.51
Where the argument against pension funds divesting from fossil fuels goes completely off track is the sobering reality that oil and gas stocks enjoy the dubious distinction of being one of the worst-performing sectors of the S&P 500—certainly not a good argument for continuing to invest in fossil fuels.52
When we get more granular, the numbers become even more revealing. In 2016, Corporate Knights analyzed returns on investments of the New York State Common Retirement Fund, the nation’s third-largest pension fund, with $185 billion held in trust for its 1.1 million members. Had the fund divested from its fossil fuels portfolio, its returns over a three-year period would have increased by $5.3 billion, with each pensioner $4,500 richer.53 Enough said.
We need to grasp the full implications of the imminent collapse of the fossil fuel civilization. Environmentalists and social justice activists have for decades been fighting the economic power that the fossil fuel culture has wielded over the global marketplace, the governance of society, and our very way of life. In recent years, we have become more and more terrified over the toll that the fossil fuel sector and related industries have taken, bringing us to the precipice of runaway climate change and an extinction event.
Where things stand now was a long time coming. In October 1973, the Organization of the Petroleum Exporting Countries (OPEC) slapped an embargo on oil delivered to the United States. Within weeks, the price of gas skyrocketed from $3 to $11.65 per gallon at the pump, with long lines of automobiles stretching for blocks around their local filling stations with drivers desperately waiting their turn for the privilege of pumping a few gallons of gas into their vehicles.
This was the moment that the public, for the first time, felt the heavy hand of the oil giants, accusing them of being complicit with the OPEC nations by taking advantage of the embargo and spiking the price of gasoline to ensure record profits off the crisis. The public’s anger was boiling over in neighborhoods across America.
With the 200th anniversary of the Boston Tea Party just weeks away, the comparison between the East India Company of two centuries ago and the big oil companies of today struck a chord. My organization, the People’s Bicentennial Commission, which was established a year earlier to provide an alternative to the federal government’s celebration of America’s 200th birthday in 1976, reached out to local community activists in Boston and New England with a call to protest the giant oil companies. Over 20,000 Bostonians joined us in a blizzard, tracing the steps of the first Tea Partiers from historic Faneuil Hall down to the Boston wharf, where a replica of the original East India ship was docked and the mayor and national officials were huddled to open the ceremonies. Local fishermen from Gloucester sailed up into Boston Harbor and docked alongside the replica ship and climbed the masts, dumping empty oil drums into the harbor while thousands of protesters chanted “Impeach Exxon” and “Dirty oil, polluted world,” initiating what The New York Times would call the “Boston Oil Party of 1973” in the next day’s edition. This was the first protest in America against the giant oil companies, to our knowledge, but it would be far from the last.
After forty years of protests against Big Oil all over the world, suddenly the tables have turned. The fossil fuel sector, once seemingly invincible, is quickly collapsing before us. It’s happening at a speed and on a scale that we could barely have imagined just a few years ago. While we will have to remain vigilant in taking on the oil industry, we will also have to quickly begin building a green culture from the ashes. We need to finance a transition into a zero-carbon economy and mobilize governmental response in every community and region to take us into an ecological era. We need a Green New Deal in America and around the world.