On June 16th, Governor of Maine (US) Janet Mills signed the fossil fuel divestment bill LD99 into law. This makes the state of Maine, located in the extreme northeast of the US, the first jurisdiction in North America to advance divestment from all fossil fuels via legislation. Even if the bill directs the $17 billion Maine Public Employees Retirement System (MainePERS) and other state funds to divest from fossil fuels within 5 years, many unknowns remain about the scope of this law and its actual implementation by MainePERS.

1. What’s new

The Maine State Legislature passed LD 99, “An Act To Require the State To Divest Itself of Assets Invested in the Fossil Fuel”, which directs the Treasurer of State, and therefore MainePERS, not to invest in any prime commercial paper or corporate bonds issued by a fossil fuel company. The Treasurer of State shall, in accordance with sound investment criteria and consistent with fiduciary obligations, divest any such holdings and may not invest any assets in any such stocks, securities or other obligations. Divestment […] must be complete by January 1, 2026.

As defined by the legislature:

  • “Fossil fuel” means coal, petroleum, natural gas or any derivative of coal, petroleum or natural gas that is used for fuel.
  • “Fossil fuel company” means any company that:
    1. Is among the 200 publicly traded companies with the largest fossil fuel reserves in the world;
    2. Is among the 30 largest public company owners in the world of coal-fired power plants;
    3. Has as its core business the construction or operation of fossil fuel infrastructure;
    4. Has as its core business the exploration, extraction, refining, processing or distribution of fossil fuels; or
    5. Receives more than 50% of its gross revenue from companies that meet the definition under subparagraph (1), (2), (3) or (4).
  • “Fossil fuel infrastructure” means oil or gas wells, oil or gas pipelines and refineries; oil, coal or gas-fired power plants; oil and gas storage tanks; fossil fuel export terminals; and any other infrastructure used exclusively for fossil fuels.

2. Our analysis: a strong ambition but many unknowns

The adoption of this law by the State of Maine is a major first in the United States. In 2015, California lawmakers passed a bill requiring the state’s two largest pension plans to divest their holdings in thermal coal, but this requirement was only for coal mining. Today, the State of Maine goes much further, excluding all thermal coal (mines, coal-fired power plants and infrastructure), but also oil and gas. For MainePERS, which currently has more than $1.3 billion invested in fossil fuel companies including dozens of publicly traded companies like ExxonMobil, Chevron, and ConocoPhillips including $850 million invested through secretive private equity investment funds, the impact of this decision is significant. Until now, the pension fund had no exclusion policy for fossil fuels.

This major advance, hailed by many NGOs, could inspire many legislators around the world. Nevertheless, some unknowns remain and make it uncertain whether Maine PERS will be completely fossil fuel free by 2026.

The main unknown is the attitude of MainePERS. To date, the pension fund has not yet translated this legislation into an investment policy. In her testimony at the Maine Senate, Sandy Matheson, the fund’s executive director, was quite opposed to the legislation LD99. One of the main arguments used is the fiduciary duty, which obliges the pension fund to act in the best interests of its clients, which she said would not be compatible with divestment from fossil fuels. However, two major investment advisors provided recently a fiduciary path through the energy transition: BlackRock and Meketa show that divestment from fossil fuels improves, not weakens, investment returns. A forward-looking analysis shows that fossil fuel companies are exposed to significant regulatory, technological and market risks. Thus, fiduciary duty is not in contradiction with an exit from fossil fuels, in the best interest of the client in the long term.

In this context, MainePERS may be tempted to take advantage of some of the law’s flexibilities to minimize the impact of divestment.

  • The problem should not be on the upstream side: the choice of a top 200 publicly traded companies with the largest fossil fuel reserves allows for the coverage of between 97% of the upstream Oil&Gas sector and 98% of the upstream coal mining sector, according to The Carbon Underground 200.
  • Conversely, on the side of power production from coal or gas, the coverage is greatly reduced. By only excluding the top 30 largest public company owners of coal-fired power plants, MainePERS can still invest – considering only this exclusion criterion – in over 420 companies with coal-fired power plants, and especially in 254 companies that are planning to develop at least 324GW of new coal-fired power capacity, according to the Global Coal Exit List. These figures do not consider companies that are also involved in coal mining and may be excluded by another criterion.
  • The same applied to gas-fired power plants: the exclusion criteria defined by the law, which are not very specific, leave a lot of room for interpretation by MainePERS.
  • Moreover, even if the intent of items 3 and 4 is to make sure that companies that do not own reserves in the ground but are clearly in the fossil fuel business – like Halliburton or Schlumberger – are also excluded, the lack of a definition of “core business” or a specific exclusion threshold raises concerns about restrictive interpretation that could also be made by MainePERS.

Finally, another potential flaw in the law is that it does not consider companies that are developing new fossil fuel projects. Thus, MainePERS still has the opportunity to invest in a company that is not currently in the top 200 – calculated on existing fossil fuel reserves – but that plans to develop a new oil or gas production site. Stopping the expansion of the fossil fuel sector must be the priority, as the IEA recently pointed out. MainePERS must therefore commit to exclude any company planning to develop a new coal, oil or gas project.

The scores of MainePERS in the Coal Policy Tool

This table presents the coal scores of MainePERS based on five criteria of the Coal Policy Tool

Conclusion

The State of Maine has adopted a very ambitious law that could lead to a complete phase-out of fossil fuels by 2026. However, whether this goal is achieved will depend on the application of the law by MainePERS, which currently seems rather defensive. Many unknowns remain about the scope of the policy and pressure must be maintained on MainePERS to avoid any (mis)interpretation of the thresholds and definitions specified in the law. To be continued!

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