We love our Permanent Fund Dividends! But as a shareholder you should know that there’s trouble brewing in the Alaska Permanent Fund.
Other large investment funds around the world are getting out of fossil fuels. Why? Because the future of fossil fuel investments will be a downward slide and other investors know it. Their poor performance holds back the gains that we need if Alaskans want to continue getting healthy PFDs and use fund earnings to pay for state services.
We live in a risky oil and gas-dependent economy. Since 2014, Alaska has been hammered by declining oil revenues, job losses and a recession. Shattered state oil revenues have led to billion-dollar budget deficits and the draining of state savings accounts.
When the Alaska Permanent Fund was created in 1976, people recognized that the day would inevitably come when Alaska could look to a prudently saved and invested account to replace dwindling petroleum monies. Over its 40-plus year investment history, the fund has grown to roughly $65 billion — $15 billion being the earnings available by state law for spending.
Unfortunately, the oil-dependency risk to Alaska’s economy is further magnified today by a relatively high concentration of oil, gas and energy-related investments in the fund’s portfolio. According to the Alaska Permanent Fund Corporation (APFC) in November 2017, about $5 billion (or 8 percent) of the fund was invested in fossil fuels such as oil, gas and coal. At a time when Alaska considers tapping the fund’s earnings for essential state services, the fund is over-weighted in poor-performing energy investments that have lagged behind robust gains in other sectors.
Oil and gas investments are becoming increasingly risky in a global market with flat price forecasts, unsettled geopolitics, carbon cap and trade or taxes and indigenous opposition. Capital sources are tightening as global banks (World Bank, ING, BNP Paribas SC) and insurers (AXA) back away from traditional energy projects. Most importantly, the world is undergoing a fundamental and accelerating shift to renewable energy. Technological innovation and the marketplace for cost-competitive alternatives are driving the move away from oil and gas. Furthermore, there is a scientific and international consensus that fossil fuel use must be curtailed to limit global warming.
Other large institutional investors have recognized the risks that energy investments pose to their funds.
Norway’s $1 trillion Sovereign Wealth Fund, built on North Sea oil revenues, has committed to divesting its oil and gas investments based on a financial analysis. The Rockefeller Brothers Fund, also based on oil wealth, has divested. Major cities are divesting their pension funds and other equities including New York, Sydney, Copenhagen, Berlin and Seattle. Religious organizations and universities are selling off these investments as part of a worldwide movement to distance themselves from fossil fuels.
It is time for the APFC to undertake a thorough assessment of the performance and risks of the fund’s energy sector holdings. According to Alaska law, the APFC is governed by “the prudent investor rule.”
This rule directs the fund trustees to exercise judgment and care in investments to preserve the fund’s purchasing power while maximizing the fund’s total return. The APFC is also directed to ensure that “… Fund investments must be of a quality considered acceptable by other prudent institutional investors, including endowments, foundations, sovereign wealth funds, … pension funds.” As prudent investors, does the APFC keep apprised of the global trend toward carbon pricing that will make fossil fuels costlier? Does the APFC monitor the accelerating trend of fossil fuel divestments by other institutional investors which will reduce the value of these investments in the future? Since Alaska law makes no exceptions for political influence, why does the fund have such a high concentration in energy sector holdings and how can this be explained under the corporation’s mandate?
Alaska’s economy is on shaky ground. Now more than ever, the APFC needs to ensure that returns on the Alaska Permanent Fund’s investments are strong and sound. An assessment of our fund’s energy investment risks and performance, and a subsequent public report, would be timely and prudent action.
• Gretchen Keiser and Bob Schroeder are steering committee members of 350Juneau, a climate action organization.