California coal-divestment push mostly about politics
California voters in 1988 dramatically expanded the power of the state Department of Insurance and turned the insurance commissioner post into an elected position. The Proposition 103 initiative also gave the commissioner unprecedented authority to prescribe which specific factors private insurance companies may use in crafting rates.
The department already had the duty to monitor domestic companies’ financial solvency, in line with government’s traditional role in insurance to make sure companies have the wherewithal to pay their claims. Without this oversight, consumers face the risk of paying premiums without getting promised benefits in return.
Current California Insurance Commissioner Dave Jones, a former Democratic Assemblyman who was first elected to the post in 2010, has in recent months been accused of “bootstrapping” that reasonable authority into something much broader and more political. Nominally toward the goal of assuring insurance-company investments are sufficiently safe to ensure the companies’ long-term fiscal health, Jones has called for any insurers who write business in California to divest “voluntarily” from the bulk of their thermal-coal investments. He further has vowed to publicize the names of companies that don’t comply with this “voluntary” order, he noted in a January 2016 statement, “so that investors, policyholders, regulators and the general public can know the extent to which insurance companies are invested in the carbon economy.”
As I examine in a new policy study for the R Street Institute, California’s “Climate Risk Carbon Initiative” divestment request applies to direct investments – whether in the form of equity or fixed-income securities, like bonds – in companies that gain more than 30 percent of their revenues from thermal coal and to utilities that generate at least 30 percent of their energy from coal. It also requires insurance companies that do business in the state – even if they are domiciled elsewhere – to answer a variety of questions about such investments.
An obvious question is raised as to whether this prescription really is about assuring the solvency of some of the most stable and conservative companies in the nation, or whether it serves primarily as an opportunity for an ambitious politician to champion a high-profile issue for long-term political gain. Asked to reply to the charge that the divestment and disclosure calls are motivated by politics, the California Department of Insurance offered the following response:
As a responsible regulator, the Commissioner’s decision to ask insurance companies to divest from thermal coal and to require insurance companies to disclose investments in the carbon economy arises from his statutory responsibility to make sure that insurance companies address potential financial risks in the reserves they hold to pay future claims. Politics has nothing to do with the decision to ask insurers to divest from thermal coal.
Nevertheless, it’s hard to look at this policy outside the realm of politics. There’s no legitimate role for an insurance commissioner, or any regulator, to pick and choose which investments private companies should be allowed to make based solely on the latest political winds. Firms investing their own money and concerned about their own financial future tend to make better decisions than government planners with a different set of motives.
To be sure, there are risks that energy-sector assets, or any assets, might hold less value in the future than they do currently. But those risks already are best managed by credit and equity analysts doing their due diligence, and by investment officers ensuring a company’s portfolio is appropriately balanced and diverse. Divesting from any given set of companies won’t improve the climate and won’t guarantee any kind of fiscal protection. If there are benefits to such strategies, they flow entirely to the elected officials who promote such things.
As a University of California investment committee member said of the Board of Regents’ recent divestment campaign: “It’s just symbolism without real impact and maybe gets a quick headline.” Surely, such a serious potential problem deserves a more thoughtful – and less political – approach.
