MainePERS ponders infra wind-down due to fossil fuel exposure

A sale in the secondaries market is also being considered, with 25 of its 49 infrastructure fund investments targeted for divestment.

The Maine Public Employees Retirement System is considering either a wind-down or sale of its $2 billion infrastructure portfolio due to the amount of fossil fuel exposure in those funds.

The $18 billion US public pension fund has procured investment consultant NEPC to analyse options to reduce its fossil fuel exposure over the coming years, in accordance with a state law passed in June 2021.

The law stipulated that “the assets of any permanent funds held in trust by the state are invested in the stocks, securities or other obligations of any fossil fuel company or any subsidiary, affiliate or parent of any fossil fuel company” must be divested by January 2026 “in accordance with sound investment criteria and consistent with fiduciary obligations”.

NEPC’s analysis found that “MainePERS’ investments in fossil fuel companies are substantial”, according to published documents, amounting to 7.6 percent of the entire fund’s portfolio, the bulk of which can be found in its infrastructure portfolio, comprising 3.9 percent of MainePERS’ entire fossil fuel exposure.

MainePERS’ infrastructure investments, which began in 2012 with IFM Investors, include successive commitments to high-profile managers such as Global Infrastructure Partners, Stonepeak, EQT and KKR, as well as commitments to Carlyle, Meridiam and Cube Infrastructure Managers.

Of the $2 billion infrastructure portfolio, NEPC analysis found that $703.2 million is exposed to fossil fuels, or 25 of its 49 fund investments. In private equity, 22 of its 149 fund investments have exposure.

At a MainePERS board of trustees meeting this week, NEPC’s co-heads of impact investing Kristine Pelletier and Dulari Pancholi presented options and costs for reducing this exposure, which included allowing existing funds to wind down, which was seen as the easiest option, or exploring a sale of its relevant portfolio on the secondaries market, which NEPC cautioned was “operationally complex and costly”. That’s despite NEPC reaching out to four unnamed secondaries managers, which reported back that “infrastructure funds hold value relatively well as assets remain attractive”.

Pelletier and Pancholi warned the board that it would not be able to sell out of individual assets in single funds.

“You’re talking about reducing infrastructure really dramatically. You’re not reducing just that [fossil fuel] infrastructure, but other infrastructures too,” Pelletier told the board.

In terms of future investments, Pelletier and Pancholi said the pension could explore options for SMAs to avoid exposure to assets prohibited by the legislation, although said this would come with higher transaction fees. They also outlined a scenario where MainePERS significantly reduced the allocation to infrastructure and reweighted it across private markets, finding returns would increase slightly, but also with increased volatility.

Both MainePERS chief investment officer James Bennett and NEPC warned that the meeting this week would be the first in a number of steps before action is taken, with the initial findings focused on cost. Pelletier said NEPC would be in touch with the state’s attorney general for further guidance and will report back next month.

In May, Bennett told Infrastructure Investor MainePERS was looking to evolve towards core infrastructure funds after committing to KKR’s Diversified Core Infrastructure Fund, and following that up with an investment in Stonepeak Core Fund.

“We’re very mature, so we’re not seeking to deploy capital at any unusual pace,” he said. “For the most part, we have the managers we like and as they come back, we’ll do our due diligence and decide whether to re-up.”