It’s no secret that a number of state and city public pensions are in crisis. From Puerto Rico to Detroit to Illinois (and many other states, as we will soon come to discover), governments have made promises to their public employees that simply cannot be kept, which has already resulted in financial crises in several localities that have put enormous pressure on governments.

Recognizing this, some analysts have suggested that a switch from fossil fuel holdings to green energy technologies such as solar and wind might be prudent for pension managers, pointing to the strong performance of many of these stocks over the last several years in comparison with traditional oil and gas. Such a transition would also have the benefit of satisfying ethical concerns and social responsibility considerations many of these people profess.The responsibility of any public pension manager should first and foremost be to the shareholders.

It’s worth asking whether these arguments stand up to scrutiny, or if they merely represent wishful thinking on the part of a set of policymakers and analysts whose political and environmental biases trump sound economic policy.

Green Investment

The responsibility of any public pension manager should first and foremost be to the shareholders. How best to accomplish this may be a matter of some debate; a pension manager may privately loathe the petroleum industry and wish for a rapid switch to biofuels, but his public duties demand that he do what is best for the pension holders, not for his conscience.

If we allow pension managers to substitute personal biases for fact-based investing strategies then any number of unintended long-term outcomes may result, with the retirements of public servants being frittered away on investments that might result in good optics, but not actual returns.

But what if more green energy production really does represent the sound actuarial choice? That perspective cannot be resolved merely by examining the recent past: while some green energy stocks have indeed performed well over the short term, it is a far from a conclusive trend, and the reality – regardless of passive investor behavior – is that our nation’s reliance on petroleum and coal may slightly diminish over the near term it is not going to disappear anytime soon.