Financial Irresponsibility

In 2019, Sens. Jeff Merkley (D-Ore.) and Maggie Hassan (D-N.H.) commissioned a report from the Government Accountability Office (GAO) investigating the risks posed to the TSP by climate change.

The GAO released its report this June, concluding that the TSP’s passive investment strategy exposed it to climate-related financial risks. Moreover, it found “in managing the TSP, the FRTIB has not explicitly assessed the potential financial impact of climate change on the $700 billion in assets it manages for 6 million active and retired federal workers.”

According to the GAO report, “FRTIB officials told us that beyond monitoring whether TSP’s core funds are tracking their respective target indices, they cannot take actions to adjust TSP’s holdings or investment strategies in response to specific investment risks… The officials said that if they found a particular company to be at heightened risk from climate change, they could not change how any of TSP’s funds are invested in that company to account for the risk.”

That position has alarmed federal employees and climate policy experts.

Cantello, the AFGE local president, recently pressed Hassan and Merkley to review the FRTIB’s claim that it didn’t have the authority to divest.

“The recent comments of the FRTIB leadership expose an ideological bent that is more dangerous to federal employee retirement savings than divestment from climate risk could ever be,” Cantello wrote in a letter dated July 13.

She added: “The FRTIB, by law, is supposed to act in the sole fiduciary interests of their 6.2 million participants. FRTIB officials told the GAO that they are so constrained by law that they must institute a passive investment strategy that may not take into account climate risk. We ask that you protect federal employees from this view and do an independent survey of the FRTIB’s legal authority.”

Steven Rothstein, managing director of Ceres Accelerator for Sustainable Capital Markets, said that it is the FRTIB’s duty as a fiduciary to consider climate risk.

“The fact that there are federal workers’ portfolios, roughly $700 billion of hard-earned money, and they haven’t looked at climate risk, is irresponsible,” Rothstein told me.

Biden has taken aim at the TSP’s investment strategy. In May, before the GAO report was released, Biden had issued an executive order directing the Department of Labor to review its authority under the Federal Employees’ Retirement System Act, which set up the TSP, to “protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk” and assess the extent to which the TSP “has taken environmental, social, and governance factors, including climate-related financial risk, into account.”

But federal employees and retirees say Biden needs to go further.

Cantello helped organize a petition with other federal employees calling on the Biden administration to divest the TSP from fossil fuels and appoint members to the FRTIB who “(a) understand that climate risk is a systemic risk to financial markets, and (b) will require the asset managers for the Thrift Savings Plan to support shareholder resolutions on climate change mitigation and deforestation.”

Filling the FRTIB with board members committed to divestment could be done in a matter of weeks. Unlike most federal boards, there is no requirement that the board be bipartisan. Moreover, appointments are governed by a special statute that doesn’t require Senate hearings for nominees.

Cantello acknowledged that the appointment process is slow, and other key administrative positions also remain unfilled. But, she added, appointing divestment advocates to the FRTIB would be one of the fastest ways for the Biden administration to take bold action on climate change.

Legislative Pressure

Legislative attempts to divest the TSP from fossil fuels have been held up by the GOP in the past, but Democrats might now have a better opportunity to make it happen.

Merkley and Hassan, as well as Reps. Rashida Tlaib and Emanuel Cleaver in the House, have introduced legislation for the third year in a row that would require the fund to assess the risks posed by climate change.

The Restructuring Environmentally Sound Pensions In Order to Negate Disaster (RESPOND) Act would direct the FRTIB to establish a Federal Advisory Panel on Climate Change and require the board to make a plan to divest the TSP from fossil-fuel assets if the advisory panel found that divestment would be consistent with the board’s fiduciary duty.

“We already know that climate chaos is claiming lives, and destroying homes, businesses, and entire communities,” Merkley said in a statement. “But what many don’t realize is this crisis is also putting individuals’ life savings, and our entire economy, at major risk — risk that has led some of the world’s largest and most sophisticated investors to begin divesting from fossil fuel projects. Our hardworking federal employees, who number in the millions and work in every state across America, deserve the same protections.”

Cleaver told me that he disagreed with the FRTIB’s claim that it did not have the authority to divest the TSP from fossil-fuel assets.

“Above all else, the FRTIB has a fiduciary responsibility to manage and protect the retirement savings of federal employees,” he said. “Well, the reports are in and the data is clear: pensions are exposed to significant financial risk due to our changing climate and action is urgently needed to insulate them from those long- and short-term risks and losses.

He added: “Despite their claims that their hands are legally tied, the FRTIB has previously identified and addressed systematic risks in their investment strategies, as the GAO report points out, and there is absolutely no reason they should not do so again now, especially when the data is clear that climate risks are significant.

Both Cleaver and Merkley said they believed Biden should fill the vacant and expired FRTIB seats with nominees committed to divesting the fund.

Merkley said that his office has been pressuring Biden “to ensure that divestment is a priority for appointees to the Federal Retirement Thrift Investment Board,” adding: “It’s long past time for us to make it possible for federal workers to invest in less risky, more sustainable portfolios.”