Divesting from fossil fuels could add billions to pension funds

University of Waterloo study reveals that US pension plans could have banked an extra $21 billion if they had acted a decade ago

Divesting from fossil fuels could add billions to pension funds
Steve Randall

Pension funds would be billions of dollars richer if they had acted earlier on fossil fuel divestment according to a Canadian study.

Ontario’s University of Waterloo found that by divesting a decade ago, six major US pension funds would have boosted their return on investment (ROI) by 13% on average – a total of $21 billion.

The researchers looked at the public equity portfolios of the six funds that represent around 3.4 million people to discover how exiting energy investments would impact returns.

Not only would they have increased ROI, but the funds would have also cut their carbon footprints by the equivalent of the emissions for powering 35 million homes per year, further increasing their ESG credentials.

"Influential investors, like these large public pension funds, can bring about positive change on a few fronts," said Dr. Olaf Weber, professor in the School of Environment, Enterprise and Development at Waterloo. "Energy divestments can create higher returns for the funds, which leads to higher returns for the beneficiaries and reduced exposure to climate risks. Consequently, it leads to safer pensions." 

The study looked at how events such as the Covid-19 pandemic and war in Ukraine would have impacted returns, given the latter has fuelled energy price hikes.

While fossil fuel investments have gained, making divestment less attractive financially, the researchers found that even in times of high performance in the fossil fuel sector, divestment does not reduce financial returns in any significant way.

Meeting fiduciary duties

The research was carried out in collaboration with Stand.earth, a non-partisan charitable organization based in Canada and the US.

"If climate chaos like fires and floods weren't enough, this latest report strengthens the case even further that public pension funds must divest from fossil fuels as part of meeting their fiduciary duties," said Amy Gray, senior climate finance strategist at Stand.earth. "As the longest-term investors for workers, the last thing pension funds should be doing is gambling with retirement and deferred wages of their members."