Should the State Investment Board buy shares in and take profits from fossil fuel companies or invest in funds and projects directly linked to controversial energy projects? The SIB considered that question last week after a Seattle-based environmental think tank discovered the SIB has large stakes in both coal and oil projects.
On the surface, the answer is a simple one. The SIB’s legal mandate is to make money for the pension funds it manages. Its fiduciary duty is simply to get the best return possible for the individuals who will someday depend on those pensions.
But setting investment policy is more complex than that. The SIB members are responsible for examining the short- and long-term risks of its investments. And that requires assessing both internal and external factors that might influence an investment’s return.
In regards to its positions in projects related to fossil fuels, the State Investment Board took the appropriate action at its most recent meeting. When evaluating a future investment, the SIB said it will consider whether climate change poses any financial risk to its expected returns.
It should not stop investing in lucrative but controversial energy projects. That would expose the board to potential legal action over its failure to produce as much value as possible.
Outgoing SIB Chair Jim McIntire, who is also the state Treasurer, proposed a more responsible strategy for showing sensitivity to environmental issues. He said the SIB should press companies for greater transparency about the risk from climate change, and how they are mitigating that risk.
A large institutional investor such as the state of Washington can use its leverage to change company policies. McIntire said that’s the SIB’s preferred approach.
The State Investment Board’s policies based on its fiduciary responsibilities shouldn’t be confused with Gov. Jay Inslee’s clean energy initiatives. The governor is driving a political agenda derived from his interpretation of the wishes of the majority of Washingtonians who elected him.
And, by the way, let’s put to rest the notion that the SIB is handling “public” money.
The State Investment Board does not manage public funds, but money that belongs to individual public employees. The money might start out as sales tax collected by a local government, for example, but it becomes a private individual’s funds once it is paid to employees who puts it into their pension account or once the government entity puts the money directly into an employee pension account.
To further bolster the private status of the funds, the original principal and the earnings go to pay amounts contractually owed to retirees.
The State Investment Board got it right.