Fossil Fuels And Prudent Fiduciaries: TIAA Invest Vs TIAA-Divest

Urged on by faculty, students, and staff, the Cornell University Board of Trustees voted to halt new fossil fuel investments in 2022, after taking a serious look at the risk climate change posed to Cornell’s $6.9 billion endowment. Just a year earlier, environmentalists had launched their own inquiry into the retirement fund behemoth TIAA, which manages $1.3 trillion in assets, including $78 billion in fossil fuels.¹ Shocked by what they found, the environmentalists launched TIAA-Divest, making the moral argument against investing in fossil fuels given their destructive impact on our planet. TIAA pushed back, citing fiduciary duties. Not giving up, TIAA-Divest launched an inquiry into the meaning of fiduciary duties for a retirement fund in today’s “changed climate.”

TIAA’s fiduciary duties and fossil fuels

According to the Employee Retirement Income Security Act of 1974, a fiduciary shall discharge their duties solely in the interest of the participants and beneficiaries “with the care, skill, prudence, and diligence under the circumstances then prevailing…”

How should a prudent asset manager approach fossil fuel investments in an era of rapidly accelerating climate change? ClientEarth attorney Ben Segal captures their dilemma:

“Fiduciary duties are real but fiduciary duties are not a suicide pact.”

TIAA holds investments for its participants–predominantly university professors like myself–and pays out our investments when we retire. TIAA has a fiduciary responsibility to manage those investments to generate the highest income for its participants. So, let’s say TIAA decides to rid itself of its fossil fuel holdings. The risk is that if the new investments produce lower earnings than its current fossil fuel holdings, its participants will be unhappy, and may even sue.

But what if fossil fuel investments, which have been dragging for a decade, are headed toward disaster? Retirement funds are responsible for both the short- and the long-term. I am a near-retirement TIAA participant. I have a particular interest in my retirement funds not crashing over the next 20 years to the point where I am not able to recover their value during my lifetime. Young investors are concerned about the profitability of their investments over the next 50 or more years. Can we count on fossil fuel investments being profitable over the near-term, let alone 50 years?

With the global average temperature having crossed the 1.5°C threshold, extreme floods and fires are razing homes and businesses, leading insurance companies to withdraw from risky markets. And yet, fund managers continue to invest in the very products that are driving these catastrophes. Why? University College London economist Steve Keen points out that economists lack knowledge of the science of global warming. For example, in refereed articles, economists have claimed that if the planet warms to 6°C above pre-industrial temperatures, the global GDP will shrink by less than 10%, and investment consultants have advised pension funds that global warming of 2-4.3°C will have only a minimal impact on their portfolios. In contrast, scientists predict that even 1°C of warming—which we have already passed—could trigger dangerous climate tipping points and any rise over 5°C will result in damages “beyond catastrophic, including existential threats”–that is, the end of humanity as we know it.

Before retirement portfolio managers can prudently fulfill their fiduciary duties, they need accurate information about the prevailing risks posed by a climate change future. Yet, no one with climate science expertise sits on TIAA’s Board of Directors.

What are the climate risks confronting prudent fiduciaries?

The risks that climate change poses to retirement incomes are not distant and small, but immediate and potentially wealth-destroying. According to the Center for International Environmental Law, those risks encompass:

Physical impact

Sea level rise, unprecedented floods, and raging fires are some of the physical effects of climate change. In the U.S., fossil fuel refining and export infrastructure is concentrated along the hurricane ravaged Gulf Coast, creating significant risk of disruptions to oil and gas markets. In 2020, Hurricane Laura shuttered Cameron LNG in Louisiana for over a month. And after Hurricane Harvey hit Houston and Port Arthur in 2017, US retail gasoline prices rose by 13% in a matter of weeks.

Stranded assets

As societies confront the real costs of climate change, they are moving away from fossil fuels, resulting in billions of dollars in stranded assets. For example, TIAA is the world’s 4th largest holder of coal bonds, even as the three coal plants it owns are shuttered. The World Economic Forum estimates that the world would realize a net gain of $85 trillion from phasing out coal power, or 1.3% of current world GDP per annum leading to 2100.

Energy transition

The transition to a low-carbon, renewable energy economy is here–and it’s happening a lot faster than forecast. The International Energy Agency predicts that renewables will overtake coal as the leading source of electricity this year, and that fossil fuel demand will peak by 2030. Further, solar investment in India and the U.S. is expected to reach nearly $25 billion over 2022-2027, a sevenfold increase over the previous five years. The 85% acceleration in expansion of renewables from 2022-27 is nearly 30% higher than forecast.

Litigation

According to the Center for Biological Diversity, by December 2024, eleven attorneys general and dozens of municipal and Tribal governments had filed lawsuits against oil and gas companies for deceiving the public about fossil fuel’s role in climate change. In responding to litigation brought by the city of Honolulu, the U.S. Supreme Court denied an appeal from fossil fuel companies to block lawsuits holding them responsible for billions of dollars of damages due to climate change. The Town of Carrboro NC has alleged that Duke Energy deceived the public about the transition away from fossil fuels and should be held responsible for the costs to rebuild after Hurricane Helene. And Oregon’s Multnomah County sued fossil fuel corporations for their role in the area’s fatal 2021 heat dome.

The Center for International Environmental Law summarizes the physical, asset stranding, energy transition, and litigation risks for the oil and gas industry:

Fossil fuel companies that have rigs and rely on extensive infrastructure face physical impact risks; the effort to reduce carbon emissions may strand significant fossil fuel assets;

changing demand for carbon-intensive fuels, the emergence of new technologies, and evolving regulations will subject fossil fuel companies to transition risk; and the impacts of climate change on property and human populations may present significant litigation risk.

What fiduciary duties are triggered by climate risk?

Given known climate risks, prudent fiduciaries have duties to evaluate investment risks, monitor portfolios on a continuing basis, and act in accordance with updated plans. They must act solely in the interests of fund beneficiaries, including protecting them from misleading information, diversifying holdings to minimize risk, and acting impartially so as to not jeopardize long-term viability of investments to maximize short-term gains. According to the Center for International Environmental Law,

All of these duties are triggered by the reality of climate change and how it will impact our financial markets, our society, and our global economy. Actively engaging with these financial challenges and opportunities can shield a fund from unnecessary risk and loss while allowing it to achieve prudent, safe growth. A failure to acknowledge and act to address these risks may lead to financial loss, litigation, and liability.

To understand how fiduciaries balance their duties in light of climate risk, I reached out to Greg King, Chair of the Denver Deferred Compensation Retirement Board (who is also my son-in-law). He explained:

Because climate has become a culture war issue, fiduciaries are backed into a corner. If they divest from fossil fuels, they could be sued by participants who think that their investments have underperformed, and if they don’t divest, they could be sued by participants who see fossil fuels as posing an existential threat to humanity.

Mr. King feels that a lot of the responsibility for addressing the climate crisis rests with the organizations hiring TIAA or another firm to manage their funds. For example, the City of Denver established a Retirement Board, which holds meetings six times per year, where participants are able to speak about emerging trends such as the climate emergency. Similar opportunities for input are not available to TIAA’s university participants. Further, whereas universities allow TIAA to market its own funds, Denver’s retirement fund provider is not allowed to offer its branded funds to participants. This opens up their offerings to a large and diverse group of funds, including ESG and fossil fuel-free options. Mr. King envisions that in the future, universities might pressure retirement fund companies to be more transparent in their reporting, and even lobby the federal government to standardize ESG criteria so all funds follow the same rules.

TIAA is addressing climate risks, but TIAA-Divest says progress is shamefully slow

TIAA-Divest has made ten demands of TIAA and its subsidiary Nuveen. One demand is that the retirement company divest from all direct fossil fuel investments immediately and lay out a clear, rapid path to moving its funds away from all coal, oil, and gas. Another demand is transparency. Although TIAA says that it aligns its portfolio with a 1.5^oC pathway, it does not disclose its portfolio-wide emissions. The complainants argue that TIAA actively misleads its participants by offering so-called ESG and “social responsibility” funds that are “awash in fossil fuels.” In a meeting with TIAA ESG and engagement leaders, TIAA-Divest complainants felt stymied in their attempts to learn more about the company’s ESG commitments.

I experienced this lack of transparency when I reached out to TIAA head of Responsible Investing, Amy O’Brien, with a list of questions to help clarify their response to the claims brought by TIAA-Divest. Rather than responding to the charges, a “TIAA spokesperson” asked me to state the following in my article:

Our purpose is investing for future generations to thrive. Rather than divest from major sectors of the economy, we seek to manage climate risk across a diversified portfolio. We believe this makes us better investors and stewards on behalf of our clients.

We are fully committed to ensuring our clients have clear publicly available information on how we manage climate risks and opportunities for their investments. We continue to enhance transparency on this topic to align with the evolving needs of our participants and the world around us.

We consider a wide range of stakeholder perspectives as we constantly evaluate how we can better serve our clients’ long-term financial interests in a responsible way.

Frustrated by the vague language in the TIAA response, I reached out to TIAA investment management arm Nuveen, but received no response.

TIAA did share its 2024 climate report with the unfortunate title of “Staying the Course.” According to the report, TIAA “asked 100 portfolio companies that comprise most of our public markets financed emissions to disclose material climate-related information and to establish industry-leading strategies to manage climate risks. As the energy transition matures, so will our assessment of company progress—shifting from standard disclosure to robust planning to implementation.” An example of company engagement comes from Chevron, where TIAA advocated for the fossil fuel giant to participate in the “United Nation’s (sic) Oil and Gas Methane Partnership 2.0 … and continuously engaged Chevron on its methane abatement strategies…”. (Yet Chevron continues to bet on a fossil fueled future.) TIAA plans to transition from asking its companies for transparency to accountability to impact over the next 25 years, reaching net zero emissions in its General Accounts by 2050. For TIAA-Divest and the planet, this is too little too late.

To date, eleven universities have passed resolutions asking TIAA to divest from fossil fuels, and in 2024, the American Association of University Professors adopted a resolution urging universities and retirement funds, including TIAA, to divest from fossil fuels.This spring, TIAA-Divest is implementing its “seven university strategy,” using TIAA’s biggest university clients’ combined leverage of $20 billion in TIAA investments to pressure the retirement company to take faster and more comprehensive action, appropriate to their fiducial duties and the risks posed by climate change.

According to Caroline Levine, a national TIAA-Divest leader and professor of English at Cornell University (my employer), she and her colleagues realize that TIAA may not meet all their demands. They would be thrilled to see a climate scientist on the TIAA Board of Directors, and they expect TIAA to offer participants more choices in investing in fossil-free funds. (I tried to change my investments to fossil-free funds last year, and the TIAA advisor could only show me two such funds among hundreds to choose from.) TIAA-Divest would also like to see TIAA hold open meetings where participants can listen in and comment, as is common in other retirement funds.

Professor Levine remains puzzled by lack of TIAA action. The urgency of fossil fuel divestment seems obvious as students increasingly share with professors their experiences of destructive floods, heat domes, and fires threatening their homes. Expressing her frustration, Levine shared

“As university teachers and researchers, we spend our lives committing to the wellbeing of students whose future is in our hands. At the same time, we are destroying these students’ futures with our investments.”