STUMP » Articles » Divestment and ESG Follies...and Heroes: YAY for President of Brown University, Oil, and Private Prisons » 27 March 2019, 17:46

Where Stu & MP spout off about everything.

Divestment and ESG Follies...and Heroes: YAY for President of Brown University, Oil, and Private Prisons  

by

27 March 2019, 17:46

It’s been about 3 weeks since my last divestment-related post, so let me dump a bunch here. There was actually quite a few good results.

Brown University President Rejects Israel Divestment

Brown University’s president has rejected a student-approved referendum calling for the university to divest from companies that conduct business with Israel.

Last week, Brown University undergraduates voted for a referendum that called on the university to “divest all stocks, funds, endowment, and other monetary instruments from companies complicit in human rights abuses in Palestine.” The referendum also called for establishing “a means of implementing financial transparency and student oversight of the university’s investments.”

The referendum passed with 69% of the 2,810 students who voted approving it, although that was only 27.5% of the university’s total undergraduate student population.

However, shortly after the referendum passed, Brown University President Christina Paxson wrote a letter to the Brown community saying that the university is not obligated to take action on the referendum, and that she is opposed to divestment from companies that conduct business in the West Bank and Gaza Strip.

“Brown’s endowment is not a political instrument to be used to express views on complex social and political issues,” she wrote. “As a university, Brown’s mission is to advance knowledge and understanding through research, analysis, and debate. Its role is not to take sides on contested geopolitical issues.”

Paxson said Brown “should not embrace” the boycott, divest, sanctions (BDS) movement, adding that when several academic associations called for boycotts of Israel in 2013, “I made it clear that Brown would not support academic boycotts of Israel or any other country, since doing so would inhibit the open scholarly exchange that is critical for the advancement of knowledge.”

Good for the University President.

I am pleased when someone smacks down the students for their idiocy. Nobody cares what undergrads think with respect to endowment investments. You guys don’t know a damn thing.

Also, good for the Paxson for pointing out that she is not going to allow support for academic boycotts.

So, good for her to stand up for these principles first.

Because the next detail points out it would be well-nigh impossible for Brown to actually follow such a rule, given how their endowment is managed.

Regarding the issue of financial transparency in the university’s investments, Paxson cited a recent op-ed in Brown’s student newspaper written by Joseph Dowling, Jane Dietze, and Joshua Kennedy, who are the CEO, CIO, and managing director, respectively, of the university’s investment office.

The three wrote that there were “misunderstandings” among the students about how Brown manages its endowment. They said that although many believe the endowment consists of stocks and other investments selected by the investment office, this is not the case for approximately 95% of investments.

They said Brown does not directly manage its own investments, but hires and oversees external investment managers who manage portfolios of investments. And as part of its agreements with the investment managers, it is prohibited from disclosing the underlying managers’ positions.

“The mix of investments that constitute these portfolios is essentially the managers’ intellectual property,” they wrote. “They allocate considerable research resources on developing these positions. In order to generate competitive investment returns, the managers cannot afford to have this intellectual property shared freely.”

They said a key part of generating competitive returns for the endowment is selecting the investment managers. Brown’s endowment portfolio gained 13.2% in 2018, beating its benchmark of 9.7%, and increasing its value to an all-time high of $3.8 billion.

Brown is a private institution, and there is no real issue with them deciding to have their endowment managed in this way. To be sure, various asset managers could probably accede to specific divestment requests, but the asset managers may think it would hurt their performance and would prefer to decline to bid for the business. This does happen.

If the alumni or students are unhappy with the lack of transparency of the endowment, there are things they can do:
1. Go to a different university. Brown is highly-rated, and it’s probably fairly easy to transfer from Brown to an equally prestigious school.
2. Do not donate to Brown, so you don’t have to worry about how your money is being invested on the behalf of Brown.

Everybody has choices here.

That said, I don’t want to smear the Brown students. 69% of 2,810 voters is 1939 (ew, that’s a bad number). The writing wasn’t clear, so I found that there’s about 6,580 undergrads at Brown. So 1939 out of 6580 is just scant of 30% of the students.

That’s still sad that that’s so high, but I don’t want to blame all the Brown students for a small portion who are idiots or worse.

I remember being a young idiot who would have signed on for such a campaign when I was a freshman in college, though I did start re-thinking my views by the time I graduated. By the time the Second Intifada rolled around, my sympathy for that particular cause had entirely dissolved.

All that said, if Brown wanted to divest from Israel, and to ban Israeli professors from coming to Brown, ban their own professors going to Israel for anything (sabbaticals, conferences, etc.), and whatever other things the anti-Zionists want, that would be their deal, too. It would almost definitely hurt them on multiple levels, but as a private institution, they can be idiots on that score.

OIL DIVESTMENT: THE GOOD, THE BAD, AND THE INDIFFERENT

Good divestment: dumping volatile investments highly correlated with entitity’s own revenue stream

World’s Largest Sovereign Wealth Fund Cutting Volatile Energy Stocks

Norway’s nearly $1 trillion sovereign wealth fund, the Government Pension Fund Global, will be letting go of a chunk of its energy holdings.

The fund, which recently posted $56.6 billion in losses due to 2018’s equity volatility, has wanted to ditch nearly all of its oil and gas assets since 2017. Since a majority of its net worth is in this area, the Finance Ministry decided that was too much. Instead, it plans on the divestment of 150 “upstream” oil and gas companies, worth about $7.5 billion. Those holdings account for 1.2% of all the fund’s equities, and less than 1% of the entire portfolio.

….
“The objective is to reduce the vulnerability of our common wealth to a permanent oil price decline,” said Minister of Finance Siv Jensen. “Hence, it is more accurate to sell companies which explore and produce oil and gas, rather than selling a broadly diversified energy sector.”

It is now up to parliament to approve the decision. If approved, the upstream firms will be phased out “over a longer period,” said the fund.

“The Government follow the intentions in our advice from 2017,” said Deputy Gov. Egil Matsen. “By removing exploration and production companies, the goal is to make the government’s wealth less vulnerable to a permanent drop in oil prices.”

That is smart risk management.

More on oil divestment: CIOs and Asset Owners Discuss Fossil Fuel Divestment:

A deep dive into those who have divested and done well, not so well, and those who have considered divesting, but haven’t.

The movement to divest from fossil fuel holdings has picked up considerable steam recently. So who’s in and who’s not? And what does it all really mean for returns?

Divestment, of course, focuses on concerns about global warming. A report from the United Nations in October found that the planet could reach the crucial threshold of 2.7 degrees Fahrenheit above pre-industrial levels by 2030, causing rising sea levels, as well as extreme flooding, drought, and food shortages around the world. Scientists point to emissions from fossil fuels as the major cause of global warming.

Certainly, since student protests kicked off the movement to divest from fossil fuel holdings about nine years ago, an increasing number of endowments, pension funds, sovereign wealth funds, religious organizations, and universities have entered the fray. Over 1,000 institutions have committed to divest nearly $8 trillion in assets from their portfolios, according to 350.org, a non-profit advocacy group. Their reasoning rests not only on moral grounds, but also on fears that governmental actions could hurt returns.

But divestment is still controversial. Critics say that, by exiting from carbon-intensive businesses, they lose any chance to influence those companies. Plus, they argue, it’s not a responsible fiduciary step.

For investment professionals, such financial questions lie at the heart of the matter: Is there the potential for financial losses if they do or don’t divest? On the “go for it” side, an analysis by Corporate Knights, a Toronto-based business magazine and research firm, found that The New York State Common Retirement Fund (NYSCRF) would be an estimated $22.2 billion richer had it divested its fossil fuel holdings 10 years ago. The analysis examined the fund’s stock holdings, weights, and valuations for each of the past 10 years, comparing that information to the investment returns of the fund’s equity portfolio with those of a portfolio without any oil, gas, or coal stocks.

Timing the market is difficult. It’s pretty easy to look backwards and find which were the winners and which were the losers over a given period. It can be that the energy sector, or specifically fossil fuels, will be a loser over the next several decades. Heck, and it could even be global warming that cuts into energy profits — no, not because countries would have regs that would effectively do anything, but because people would need less energy to heat, and one needs far more energy to heat than to cool. Demand would be down!

Those who oppose divesting say that the financial risks are too great. “Every divestment to date has lost us money,” says Christopher J. Ailman, chief investment officer of the California State Teachers’ Retirement System (CalSTRS), which has decided against selling off fossil fuel holdings. For example, from 2000 to September 2018, divestment, mostly from tobacco stocks, cost the fund $6 billion, according to Ailman. In addition, opponents contend that, by exiting carbon-intensive businesses, they lose any chance to have a seat at the table and push for change.

Ultimately, at least for public entities, the final decision about divestment could be made by legislative bodies. In 2015, for example, the California state legislature required that pension funds engage publicly traded companies making 50% or more of their revenues from mining thermal coal and divest from them if the enterprise was not “transitioning its business model to adapt to clean energy generation.” In New York State, State Sen. Liz Krueger recently re-introduced a bill mandating that the state pension fund divest from all holdings in the 200 largest publicly traded fossil fuel companies, as defined by content in the companies’ oil, gas, and coal reserves. Divestment from coal companies would be completed in one year; divestment from other fossil fuel business would take place over a period of five years.

There is, however, a provision that allowsthe state comptroller to pause divestment, or even re-invest, if a divestment is projected to have a significant impact on the fund.

At least NY State Sen. Krueger is not totally nuts. But also, she should consider butting out where she’s not a fiduciary. If you want to have a salutary effect on the pensions, I highly recommend expanding the number of fiduciaries the state pensions have… because NY has only one.

In some cases, investors report somewhat slower returns. But even in those instances, they’re satisfied with results. Take the California Academy of Sciences’ $185 million endowment. Working with Cambridge Associates, its investment advisor, it decided to divest from all fossil fuels in 2014, also using the Carbon 200 as its guide.

Returns have been “a challenge,” says McGee. But, “We’re still in the top 1% quartile of our peers in returns,” he says. “We’ve upheld our fiduciary requirements to the letter.” That track record is in large part due to investments in US stocks. Over the past five years, the endowment has reduced its investment in private asset and hedge funds, allocating a larger portion to equities and equity funds, especially US stocks; that’s because, with the latter, it’s easier to identify and choose non-fossil fuel assets. It’s been a positive for overall returns, he says, thanks to the strong performance of those equities over the past five years.

For some of the biggest divestment moves, however, it’s way too soon to tell what impact they’ll have. For example, in January 2018, New York City Mayor Bill de Blasio and Comptroller Scott Stringer announced a goal of divesting the $194 billion New York City Retirement Systems (NYCRS) of fossil fuel assets over five years. NYCRS includes five pension funds, each with independent boards; three have agreed to sign on, while the rest are considering their options. They have in total about $5 billion in assets invested in more than 190 fossil fuel companies. “In the face of catastrophic climate change, we would be shirking our fiduciary duty if we were not exploring all options to address climate risks,” said Stringer in an email.

I don’t think you understand what fiduciary duty means, Stringer. To the extent that climate risks will affect asset value, sure. That you’ve got a goal other than providing for the security of the pensioners…. no.

Or consider New York City. Along with its recent divestment moves, it has pushed companies through shareholder resolutions to reduce their greenhouse gas emissions and advocated for proxy access, including adding more “climate competent” board members. “It’s not one versus the other,” said Stringer in an email. “We’re using all the tools in the box to maximize returns and take action for our environment.”

Engagement also is the approach of choice for organizations choosing not to divest. California Public Employees’ Retirement System (CalPERS), for example, was a co-founder of Climate Action 100+. The group, launched in December 2017, has more than 300 investors and over $32 trillion in assets in total, pushing 100 companies accounting for two-thirds of annual global industrial emissions, plus 60 others, to reduce their carbon emissions.

Similarly, in 2017, the Seattle City Employees’ Retirement System board decided not to take action to divest the fund’s $2.5 billion in assets from fossil fuel investment. The board, instead, decided on a “positive action strategy.” That includes “Engaging as shareholders with corporations and other entities, considering sustainability investments and integrating climate change risk into the investment process,” Jason Malinowski, the system’s chief investment officer, wrote in an email.

So, that can be good, too.

PRIVATE PRISONS: NY TARGETED, CALPERS SAYS GET LOST TO ACTIVISTS

The American Federation of Teachers has been pushing this “divest from private prison companies” thing for a while.

Here is somebody writing at a socialist website on the topic: WE WON’T LET OUR PENSIONS BUILD PRISON CELLS

This was the plan until Basma called me. She informed me that the organization she helped found, Freedom to Thrive, recently helped New York State United Teachers (NYSUT) members make sure their pension funds divest 100 percent from for-profit corrections corporations GEO Group and CoreCivic, and she was looking to spread this throughout New York state.

“It’s time NYSTRS [New York State Teacher Retirement System] align its investments with the demands of its members,” said Basma Eid. “With over $8 million invested in the incarceration of our communities, we will continue to organize until NYSTRS reads the writing on the wall and finally divests from an industry that profits off of pain and reinvest in our students and community.”
….
NYSUT DID pass a resolution to divest, but it still hasn’t. We can’t underestimate the power of rank-and-file teachers to get the job done, and now that more of us know about it and are fighting, we are confident we’ll win. Unions need to be transparent with all its members so when going to battle over something so important, we can help. Let us help.

It’s absolutely ludicrous that the second school district in the country to support Black Lives Matter at School wouldn’t have all its members aware of the fact that their pension money is going to the racist school-to-prison pipeline. And so our caucus, which began with three teachers, grew to seven in two days and included a guidance counselor.

We are now at 10 and growing, and our caucus now includes social workers as well. This is just “official” in-person meetings every week. Our closed Facebook group of Rochester educators went up to 55 members just two days after it was launched.

10 teachers?

Well, I’m just one person blogging, so I guess you gotta start somewhere.

In the meantime, Calpers told the activists to take a hike.

CalPERS Says No to Legislation Forcing It to Divest from Private Prisons

Investment officials of the California Public Employees’ Retirement System (CalPERS) are opposing state legislation that would require the pension plan to divest of its stock in private prison companies.

The opposition has broader implications. Agenda material for the system’s investment committee meeting on March 18 details that not only are the officials opposed to being forced to divest, they also likely don’t plan to voluntarily divest holdings in two American private prison companies, GEO Group and CoreCivic.

The two companies have been thrust into the spotlight because of President Trump’s immigrant crackdown. They have housed not only immigrants in their facilities, but entire families in two correctional facilities in the San Antonio, Texas, area—one run by GEO Group and the other by CoreCivic.

It’s doubtful that the CalPERS investment committee would choose to overrule investment officials. Investment committee members have generally been philosophically opposed to increasing divestments, which includes tobacco companies, companies that do business in Iran and Sudan, and thermal coal companies.

They don’t want legislators putting limits on them (I fully understand that), and the longer the checkbox list becomes, the much more difficult the job becomes to actually invest.

CalPERS says in the agenda material that it owns approximately $10 million in stock in GEO Group and CoreCivic.

Understand, that is $10 million out of a total asset amount of about $300 billion. That is 0.0033% of the portfolio.

So it’s not like they would necessarily be greatly affected by this specific bill. The problem comes in compliance costs, but also knowing the politicians would just go for more and more and more and more. Better to say stop right now.

CalPERS’s view of the financial damage it would incur from divestment sharply contrasts to the views of CalSTRS investment officials. Their review late last year said removing the private prison companies from the CalSTRS portfolio does “not pose a significant risk or benefit to the portfolio because they are so small relative to the US equity and fixed income allocations.”

CalSTRS had around $12 million invested in CoreCivic and GEO Group, $2 million more than CalPERS.

And CalSTRS itself has about $200 billion in assets. So I agree with Calstrs that eliminating such a teeny portion of their portfolio would have minimal effect. But, they are not thinking strategically. How many constraints are they willing to entertain from external parties who aren’t fiduciaries?

Heck, one of the Calpers board members wants the fund back into tobacco:

CalPERS’ newest elected board member floated a proposal Monday asking the pension fund to consider investing in tobacco, an industry that CalPERS abandoned 18 years ago.

Jason Perez, a Corona police officer who was elected to the pension board in October, put forward the motion during a meeting of the fund’s investment committee Monday.

Board members Margaret Brown and Dana Hollinger supported the proposal to consider reinvesting in tobacco, but the rest of the 13-member committee rejected it.

Perez campaigned last year as an opponent to so-called divestment measures, which lawmakers propose from time to time forcing CalPERS to pull its money out of industries ranging from coal to guns.

I don’t know about the growth/profit potential for tobacco, but I agree that as much of these divestment strictures should be undone, even if the funds don’t actually re-enter the previously barred investments.

Here’s a press release from an anti-divestments group:

CalPERS Chooses Prudent Management Over Politics Earning Praise From Pension Warriors

WASHINGTON, D.C. – In part driven by one of the newest board members Jason Perez, the California Public Employees’ Retirement System (CalPERS) voted to oppose pending state legislation to require the divestment of funds from private prison companies. The Institute for Pension Fund Integrity (IPFI) stands with Perez and his fellow board members, commending them for choosing prudent management of the fund over following political whims.

CalPERS yesterday chose to focus on its fiduciary responsibility to “make money” for the millions of retirees who have earned a secure retirement after dedicating their lives to public service. Beyond the estimated $175,000 in transaction costs associated with a potential divestment, the proposed divestment would negatively impact the fund’s investment strategy, exposing the fund to unnecessary risk and reducing returns.

The Institute for Pension Fund Integrity firmly believes that politically-motivated divestment does not belong in the management of our public pensions. Beyond the financial repercussion to the funds, divestment as a means of creating change is ineffective. For instance, advocates in favor of divesting from private prisons want to do so in opposition to current immigration policy. However, private companies don’t set the public policy that that has determined today’s immigration strategies. Divestment advocates are directly infusing politics into the financial management of one of the country’s largest public retirement funds. Therefore, IPFI supports the decision by CalPERS to prioritize fiduciary responsibility, and to oppose allowing politics into the management of the fund.

IPFI President Christopher Burnham reacted to the vote saying, “It’s clear that new board member Jason Perez is bringing a much-needed focus on fiduciary responsibility to CalPERS, and that the board is moving in the right direction.” He continued, “the politically motivated divestment movement across the country has proven to hurt pension performance and funding levels. This threatens all current employees, and retirees such as me.”

IPFI supports CalPERS for choosing to oppose California Assembly Bill 33 to mandate the ineffective and costly divestment from private prisons.

The problem, of course, is all these politicians, who have no fiduciary responsibility to the funds, only political repercussions when they don’t do well, think they are finance and moral experts.

In the California legislature?

via GIPHY

In some of these cases, as with private pensions, it’s a very small sector represented in the portfolio. But when it’s a huge sector like energy… well, then these strictures become destructive.


Related Posts
A Proposal for Public Pension Reform: The Idea and Coming Attractions
Connecticut Pensions: Pushing Off Payments Til Later Ain't Reform
Vladimir Bukovsky Makes the New York Times