STUMP » Articles » Public Pension Follies: Divestment! Divest from All the Dirty Things! » 26 October 2015, 05:37

Where Stu & MP spout off about everything.

Public Pension Follies: Divestment! Divest from All the Dirty Things!  


26 October 2015, 05:37

Before I jump into this, I give this disclaimer: I am not an investment professional. I am extremely knowledgeable, but I am not buy-side or sell-side. I generally look at what companies/institutions have done as opposed to saying where they should be investing.

My personal investment is using broad index ETFs. I look at my investments once a year, to rebalance. This is for long-term savings, and I don’t plan on drawing down those funds for at least 30 years.

So I’m not making any remarks as to which sectors/companies/whatnot should grow, which shouldn’t, etc.


As mentioned about my post on watch threads, I tag my posts in my watch threads at the Actuarial Outpost to make them easy to find/compile/compare.

In the 2015 Public Pension thread, I have 13 posts labeled with divestment. Let’s check them out, though some are repeats — California in particular.

Almost all of these refer to coal specifically, and fossil fuels more generally. Because Global Warming/Climate Change/Weirding/New-Buzzterm-to-be-Determined.


California Lawmakers Force Coal Divestments:

CalPERS will engage with coal companies about climate change risks after a bill was signed into law this week.

The California Public Employees’ Retirement System (CalPERS) is to begin talks with thermal coal companies in its portfolio, in response to pressure from Californian politicians.

The move is the first step required by Senate Bill 185, which seeks to prohibit CalPERS and the California State Teachers’ Retirement System (CalSTRS) from investing in thermal coal companies.

The bill was introduced by Kevin de León, California’s senate president, and signed this week by Governor Jerry Brown.

Senator de León called for the two giant pension funds—which have roughly $477 billion in assets between them—to divest from coal companies last year, but CalPERS initially pushed back, citing a preference for engaging with companies first before divesting.

CalPERS now intends to meet with the coal companies it owns to ascertain the risks posed to these holdings by a changing climate. In a statement on its website CalPERS confirmed that, following talks with the 27 thermal companies in which it has stakes, it will “evaluate divestment” from the holdings in line with the senate bill.

CalPERS CEO Anne Stausboll said her fund had “a long history of constructively engaging companies to advance sustainable business practices.”

CalPERS’ stakes in thermal coal companies are worth an aggregate $57 million, the pension said. Thermal coal is predominantly used in power generation, and according to Senate Bill 185 it is the largest contributor to climate change in the US.

Pension investment via political vote. That will go well.

The bill passed in September, and there were a few remarks at the time. From ThinkProgress:

“Coal is the fuel of the past and it’s no longer a wise investment for our pensioners,” California assemblyman Rob Bonta, who presented the bill, said in a statement. “I’m pleased that my colleagues agree: it’s time to move on from this dirty energy source.”

From Reuters:

“Coal is losing value quickly and investing in coal is a losing proposition for our retirees,” said Senate President pro Tempore Kevin de León, the bill’s author.

“It’s a nuisance to public health and it’s inconsistent with our values as a state on the forefront of efforts to address global climate change,” he said.

Prior to the vote, bill opponent Assembly member James Gallagher said lawmakers should not make investment decisions based on “emotionalism.”

“Let’s not attempt to micromanage and stop the state’s public pension boards from making new investments or renewing existing investments.”

“This is a landmark bill because it represents the first time state pension funds have divested on the grounds of climate change,” said Will Lana, a partner at Trillium Asset Management, a “sustainable” investment firm that represents $2.2 billion.

New York and Massachusetts are in the early stages of considering similar bills, he said.
This is not the first time CalPers and CalSTRS investment decisions have been managed through legislation.

Existing law prohibits both retirement systems from investing in companies with active business operations in Sudan or companies with investments in the Iranian energy sector.

The prior laws may also be objectionable, but it seems to me their impact is more limited. Can no one see there is a difference between boycotting those doing business with specific objectionable regimes and ruling out an entire sector of investment?

Here is a piece from Calpensions from back in April.

CalSTRS, through index funds, is said to have about $40 million invested in a dozen thermal coal companies. The CalSTRS chief investment officer, Chris Ailman, is a divestment skeptic.

“I’ve been involved in five divestments for our fund,” Ailman told the CalSTRS board last week. “All five of them we’ve lost money, and all five of them have not brought about social change.”

CalSTRS and CalPERS both adopted divestment policies in 2009 that prefer “engagement,” using their status as shareholders to urge companies to make changes. Divestment leaves the pension funds without a voice in company management.

Of course, when you consider the whole industry to be objectionable, what the hell is engagement going to do? “Please, coal companies, stop being coal companies!” That will work out well.

By the way, it wasn’t just coal seen as in need of divestment. Calstrs divested an eensy portion of its portfolio from gunmaker Remington, and that one was bound up with the dangers of getting involved in private equity (which can tie up capital for years, thus making it well-nigh impossible to back out easily, as one can with publicly traded securities.) More on that divestment from Chief Investment Officer magazine.

“We cannot take unilateral action, in this case, to remove a specific company from an investment pool,” CalSTRS’ statement said. “Nor can we expose the fund by prematurely or imprudently selling about $375 million worth of holdings at a loss without thoroughly exhausting all other options first. While we cannot share the details, we want to make it clear that all potential options are being fully considered and have been for some time.”

They did get out, but it took many years.


As mentioned above, California is not the only one pushing for divestment from coal, etc.

There’s NYC:

NEW YORK, Sept. 30 (UPI) — In the coming months, all five New York City pension boards will consider a proposal to divest from coal, New York City Mayor Bill de Blasio said.

“New York City is a global leader when it comes to taking on climate change and reducing our environmental footprint,” the mayor said. “It’s time that our investments catch up — and divestment from coal is where we must start.”

For New York City, a sustainability plan mandates an 80 percent reduction in greenhouse gas emissions by 2050.

Five pension funds for New York City have assets of more than $160 billion, with about $33 million tied to coal. The governor’s office said the divestment initiatives would align city pension funds with current trajectories in the energy market.

The federal Clean Power Plan set a goal of cutting emissions of carbon dioxide, a potent greenhouse gas, by 32 percent of their 2005 baseline by 2030, 9 percent more than in the original proposal. States need to meet specific emission reductions based on state-by-state energy consumption criteria.

New York state law requires that 30 percent of the electricity in the state comes from renewable energy by the end of this year. Most of its renewable power comes from hydroelectricity.

Responding last week to a message of income equality from Pope Francis, the National Mining Association said what it described as “impressive” reductions in emissions from U.S. power plants was a testament to its commitment to environmental responsibility and to providing an affordable source of energy.


Massachusetts’ public pension fund lost more than half a billion dollars due to fossil fuel investments during the fiscal year that ended in June, according to new data analysis released Monday from Trillium Group.
The Massachusetts Pension Reserves Investment Trust Fund’s fossil fuel investments, including in coal, oil and gas, and production and exploration companies, lost 28 percent of their value — $521 million — the analysts found, using public records. The pension fund has been under scrutiny for its investments recently, and there are companion bills in the Massachusetts Senate and state House that would force the public fund to divest from all fossil fuels.

“I think sometimes divestment is assumed to be a financial mistake,” Will Lana, a partner at Trillium Asset Management, told ThinkProgress. “It’s important to stop for a moment and say, well, it hasn’t been a mistake [lately].”

Divestment has gained popularity among Massachusetts’ public sector unions. The Massachusetts Nurses Association, the Boston Teachers Union, and two other unions have come out in support of divestment. In addition, 14 Massachusetts towns and cities have passed resolutions supporting the move.
There are essentially two key arguments for divestment, according to Massie. First, there is a political, moral argument to move away from fossil fuels that contribute to global warming and put the world’s health and well-being in jeopardy. But there is also a strict financial argument.

Fossil fuel industries are in what Massie argues is “structural decline.” In other words, the industry models are not sustainable. Several big coal companies have already declared bankruptcy, but other fossil fuel industries are also exposed to risk, as the world moves to a more and more sustainable future.


The pension funds of half a million public sector workers in Scotland are investing a massive £1.7 billion into fossil fuel corporations.

An investigation by environmental groups has revealed the huge and increasing sums of money local government pension schemes are pouring into ‘dirty investments’ like coal, oil and gas companies – despite the dangers they pose to the planet.

The investments have been condemned by trade unionists, politicians and pension fund members. They are demanding that councils pull out of fossil fuels, and put their money into clean energy, housing and other socially useful projects instead.

Multi-billion-pound pension funds covering hundreds of public sector bodies are run by 11 local authority organisations across Scotland. Using freedom of information requests, researchers have calculated how much is being invested in major fossil fuel companies.

The total comes to £1,664 million, the equivalent of £311 for every resident of Scotland. The most money – £56m – goes to the coal and metal mining giant, Rio Tinto, followed by £39m to the UK oil company, BP and £33m to the Italian oil firm, ENI.
Oil and Gas UK, which represents over 500 companies, didn’t want to comment on the commercial decisions of individual organisations. But it stressed that everyone’s daily life depended on ready access to energy.

“Global population is projected to grow by 20 per cent over the next twenty years and energy demand rise by one third as the quality of life improves in many countries around the world,” said the group’s economic director, Mike Tholen.

“Even with rapid growth in renewables and significant improvements in efficiency, oil and gas will be needed to supply at least 50 per cent of global energy demand in 2035. Divestment of oil and gas is not the solution and will only make the challenge of meeting global energy demand all the greater.”

This was disputed, however, by, the environmental group leading the growing divestment movement. “Public investments in fossil fuels are fuelling dangerous climate change, and present a threat to pensions,” stated the group’s Danni Paffard.

“There’s a strong ethical and financial case for local councils to divest from fossil fuels and reinvest into infrastructure fit for the 21st century.”

I’m just copy/pasting from my watch threads, but it seems to me some investigative journalist might do well to see who founded and runs


Here’s their website, and I don’t know who these people are (other than Naomi Klein). No clue about these, and Oh, jeez, Van Jones. I know him.

I’m just wondering about their money.

Here is what they say about divestment in 2014:

Since 2012, 181 institutions and local governments and nearly 700 individuals have pledged to divest from fossil fuels — representing over $50 billion USD in assets.

The fossil fuel divestment movement has grown faster than any previous divestment campaign in history. The fossil fuel divestment campaign is now on nearly 450 campuses, and it has spread to cities and churches in the US and in Australia, New Zealand, the UK, The Netherlands, Sweden, Norway, and Germany.


Hundreds of local divestment campaigns have been launched on the website, including active campaigns in some of the United States’ largest cities such as New York and Los Angeles. In 2014, we trained over 600 people at workshops across the country, and we held smaller trainings particularly around negotiation. Local groups worked with staff to pursue a strategy to push state level pension funds, especially CALPERS and NYPERS to pursue divestment.

In Europe, the campaign moved very quickly with successes in Sweden, Norway, The Netherlands, and in the United Kingdom where over 40 universities took up the campaign. In New Zealand, the Anglican Church of Aotearoa New Zealand and Polynesia and the Dunedin City Council voted to divest from fossil fuels. In Australia, we pressured big banks such as Westpac, ANZ, NAB, and Commonwealth Bank and encouraged the public to switch banks.

There are tax filings on there, so it might be interesting to see who is giving money and who is making money off of this.


But back to the effort at hand. The problem is that pension fund trustees have a fiduciary duty.

For those unfamiliar with the concept, here’s a definition:

A fiduciary duty is a legal duty to act solely in another party’s interests. Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals. Fiduciaries may not profit from their relationship with their principals unless they have the principals’ express informed consent. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries’ other clients. A fiduciary duty is the strictest duty of care recognized by the US legal system.

Now, in the case of California, it’s been taken out of their hands somewhat — legislators do not have a fiduciary duty to the pensions. They can screw around with public pension funds in a political matter, and they’re untouchable from a legal point of view (though not political).

(IANAL, but I’m pretty sure about that remark, on constitutional grounds, if nothing else.)

Since I am not a lawyer, I thought to see if there were any legal opinions online, and here’s one:

Legal Opinion: Is Divestment from Fossil Fuel Companies Consistent with Fiduciary Duty?
The Interfaith Center on Corporate Responsibility (ICCR) recently requested an opinion from Covington & Burling LLP, asking them to consider whether divestment from fossil fuel companies is consistent with fiduciary duties. This legal opinion has now been finalized and provides an explanation of fiduciary duties, stating in part that: “the foregoing provisions, especially the duty of loyalty, likely preclude a fiduciary from eliminating the entire fossil fuel industry from its portfolio without looking at each investment that would be effected on a case-by-case basis.”

The opinion also quotes statements by the Presidents of Harvard University and Tufts University, and states that Covington & Burling “believe[s] these same considerations will constrain many churches, charities, educational institutions and non-profit organizations from subscribing to the divestment strategy advocated by the fossil free movement.”

Here’s a different opinion from a different lawyer: (this one is from 2013 and relates to divesting from gunmakers)

First and foremost, fiduciaries must be dedicated to their beneficiaries’ financial goals. This requires a deep understanding of risk and opportunity, including those relating to “social issues” that affect consumer demand and the broader economy, or impose legal risks and operational costs (e.g., cleanup costs). The debate has moved on from the artificial, bifurcated view of reality that views the investment portfolio in isolation from the real world. A modern fiduciary must understand how the corporation affects the health of the systems upon which it depends for its long-term survival.

P&I urges pension funds to ignore calls for divestment and to “step up and communicate the value of investments to their portfolios. … They must stay focused on securing the highest risk-adjusted returns possible for their funds.”

This is roughly half right. As Justice Benjamin N. Cardozo famously wrote, the courts have kept “the level of conduct for fiduciaries … at a level higher than that trodden by the crowd.” Fiduciaries should not respond to every demand — they need to set a higher standard and stay focused on long-term goals. But where P&I and other critics of divestment would ask fiduciaries to ignore these demands in favor of an exclusive pursuit of profit maximization, Mr. Cardozo had something else in mind: “A trustee is held to something stricter than the morals of the marketplace.”

And here is yet another opinion – from 2007: (and this relates to that Iran/Sudan divestment from California earlier)

According to Wall Street Journal reporter Craig Karmin, some legislators want public pension funds to shun companies that invest in terrorist countries such as Iran. Citing efforts by Missouri State Treasurer, Sarah Steelman, Karmin lays out the pros and cons of forced liquidation. (See “Missouri Treasurer’s Demand: ‘Terror-Free’ Pension Funds,” June 14, 2007.)

As part of a June 14 interview with CNBC’s Maria Bartiromo, I offer four considerations (as much as I could say in a short on-air appearance). First, selling stocks because of statehouse mandates could cost taxpayers and plan participants in the form of “unexpected” transaction costs. This would in turn exacerbate funding problems for any states already in the red. Second, trustees would have to decide how to invest the proceeds of disposed equities, possibly earning less than before. Third, there could be a conflict for fiduciaries in terms of duty. Do they follow new rules that require divestiture, even if it forces them to violate state trust laws that demand careful analysis before deciding on an “appropriate” strategic asset allocation? Fourth, plan fiduciaries will likely need to spend considerable time and money in order to identify which companies offend, now and regularly thereafter.

No one supports terrorism but this “solution” might invite more problems. There is never a free lunch. Someone, somewhere pays.

And sometimes, it’s not the purported target.


The danger of divestment is more to the funds which are divesting than the targeted sector. I have no idea if the fossil fuel sector is in structural decline. It may be, in the very long run. Say, a couple centuries. I don’t know. My forecasting of this sort of thing isn’t likely to be good, mainly because we’ve only had about a few centuries experience in this particular area.

But these pension funds have a duration on the order of a few decades (maybe…some are shorter).

The last link, from 2007, gives four reasons that divesting a whole group (in this case, companies that do business with Sudan, Iran, etc.) can be problematic. I think it unlikely any of these trustees will be sued for breach of fiduciary duty, especially when non-fiduciaries (i.e. the politicians) remove choice from them.

But the issue is that public pension funds are desperate for investment income. They’ve been scraping for it in private equity and hedge funds, as well as any growth sector they can. Calpers and others have lost a great deal of money on “green” investments, and this seemed like a good gig as long as the money keeps rolling in from taxpayers, plugging any holes.

But if that money isn’t forthcoming….

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