Limits on Pension Investments Hurt Returns

Commentary, Economy, Ian Madsen

Recently, members of ‘Extinction Rebellion’, a climate change activist group, sat in protest at the University of British Columbia, beginning a hunger strike on January 6th, trying to stop UBC’s pension fund from making or holding any investments in fossil-fuel-related companies.  Sadly, the university appeared to acquiesce in part to their vehement demands, agreeing to review $1.7 billion in potential investments for possible liquidation, and transferring $380 million from its general endowment fund to its ‘sustainable future pool’. 

While the university’s actions thus far are not full capitulation, they are already a damaging precedent, in many ways.

The first is that they have allowed a strident special interest or pressure group to sway its behaviour and policy via mob action, not rational debate. The second is that they have allowed political or social pressure to influence investment policy and asset allocation. The third is that fossil fuel exploration and production is a legal, highly regulated industry which supports millions of people and provides products millions more use and need; it does not deserve the opprobrium foisted upon it by alarmists.

The fourth is that narrowing investment alternatives limits the universe of possible investments.  Whenever that happens, risk of the overall investment portfolio rises, because diversification of assets into vehicles with less than one hundred percent correlation always reduces risk, as defined and calculated by standard deviation of returns.  

The fifth reason is that narrowing of investment alternatives potentially violates the professional standards of investment portfolio managers, who must, according to law and, if they hold the Chartered Financial Analyst designation, their profession, cannot act in a way that could cause subpar performance and reduced benefits for their clients, whether endowment funds or pensioners.

The sixth reason is that it could be hard to limit the total number of possibly forbidden investments, as there are not just hundreds of oil and gas producers, public and private, in Canada, the United States, and overseas, but many hundreds more oilfield service providers, other contractors, pipelines which transport the products, chemical firms which use the products, and other suppliers, customers, financing firms, and even utilities which use oil, gas or coal, plus automobile, truck, locomotive and other manufacturers whose products use fossil fuels, and transportation firms which also use them.  

Other firms use petrochemicals, in plastics, fibre-glass, solvents, paints, inks, detergents, soaps, insulation, fibre-optics, building materials, textiles and clothing, housewares, defense products, electronics, even medical implants, devices, and pharmaceuticals.  Oil and gas pervade nearly every aspect of our lives, and, indeed, even save lives, here and abroad. They are also used in mining and making materials for solar arrays and wind turbines, and transporting to where they are installed.

Finally, one major fossil fuel could be a strong solution for the possible excess CO2 emissions of coal burning and oil consumption:  natural gas. Roughly half of the energy from burning natural gas comes from hydrogen, the rest from carbon.  All the energy in coal comes from carbon, which it, essentially, is.

Opposition to natural gas, and its liquefied form, ‘LNG’, is an obstacle to allowing this cheap, abundant energy to supplant all the scheduled future coal burning power generation in China and India, which would do more than anything else to ensure CO2 emissions not only do not rise, but actually fall, as it has helped do in the United States in two out of the last three years.  Natural gas is also a flexible base or backup energy source to make solar, wind and wave power practical and viable, now and henceforth.

Earlier efforts by other activists to stop investment in questionable industries and odious nations often had merit.  However, institutional investors and their regulators should resist the latest attempts to force them to adhere to the ill-informed and irrational crusades of climate and other alarmists.



Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.