Oregon state pension fund to review carbon-intensive fossil fuel holdings

State's $94bn fund to examine transition readiness of sectors and may divest poor performers as part of wider net-zero strategy.

Oregon’s $93.8 billion pension fund for state employees is set to launch a review of its publicly listed carbon-intensive fossil fuel holdings for their transition readiness as part of a wider net-zero plan.

The plan, presented last week at a meeting of the Oregon Investment Council by state treasurer Tobias Read, would see the Oregon Public Employees Retirement Fund (OPERF) review its equity and corporate bond holdings in thermal coal, oil sands, shale oil and gas for their transition readiness.

The fund will set minimum standards for transition readiness and risk mitigation, and will conduct and publish a review of each sector, a process it expects to take around four months per sector. The review will be completed by February 2025.

Companies which fail the assessment will be subject to engagement and options will be developed “for [the] investment team to implement if companies fail to demonstrate transition readiness and/or willingness to engage”. This could include exclusions, divestment or addition to a watchlist.

The plan also mentioned the possibility of separately divesting firms exposed to stranded asset risk. Around 2.4 percent of OPERF’s portfolio is in fossil fuel extraction, with 0.5 percent of AUM in oil sands companies.

Recent energy sector reviews by pension funds in the US and Europe have resulted in mass divestments of non-aligned companies.

Last week, Dutch healthcare pension fund PFZW completed the sale of €2.8 billion in oil and gas companies which it said were not Paris-aligned, with just seven companies remaining eligible.

In the US, sector-by-sector assessments conducted by the New York State Common Retirement Fund have resulted in sizeable sales. For instance, in February 2022, the fund announced that it had exited $238 million worth of holdings in shale oil and gas firms.

Net-zero target

OPERF’s review is part of a comprehensive plan to hit net-zero emissions by 2050, with an interim target of a 60 percent reduction in Scope 1 and 2 portfolio emissions intensity by 2035.

Read described the plan as “aspirational, daunting, and the right direction given the stakes”.

The fund plans to triple its $2 billion investments in climate-positive private markets investments, as well as ensuring that 10 percent of its active and 30 percent of its passive equity investments are climate- or transition-aligned.

The net-zero plan warns that the intensity of OPERF’s active equity portfolio is twice that of its benchmark – the MSCI ACWI IMI – due to higher exposure to emissions-intensive sectors. Part of the plan is to reduce this intensity to be in line with benchmark figures.

OPERF will also look at switching its passive equity and corporate bond investments to climate-aligned indexes. No decisions have been made, but the state will look at what products are available, and plans to test part of its passive portfolio with a climate index before making the full switch.

It also plans to monitor manager selection to ensure investment strategies are aligned with net-zero progress, expand its engagement activity, and establish a net-zero beneficiary advisory committee.

By the end of 2024, OPERF investment staff will make recommendations on whether to sign up to or commit to a number of initiatives, including the Taskforce on Nature-related Financial Disclosures, Net Zero Asset Owner Alliance and Paris-aligned Investment Initiative.

Treasurer Read has also considered introducing a 2040 net-zero target, which some New York pension funds have in place. However, the strategy says that hitting the 2040 target would “require immediate and large shifts in portfolio allocation, including widespread restrictions, that could have major impacts on our investment risk and returns”.

While the target would require the scaling up of existing strategies, and not fundamentally new ones, it says, such an approach “would be costly and entail increasing the risk and tracking error allocation to public equity at a level that could constrain investment opportunities elsewhere”, and could also lower the projected rate of return.