STUMP » Articles » Stupid Public Pension Trends: Divestment Expands » 21 March 2017, 12:08

It’s all the rage.

When I set out my themes for STUMP this year, one was questionable pension asset management practices, one big category being divestment from entire industries, and politically targeting various areas/entities to divest from.

Well, guess what’s back in the news.

CALIFORNIA DOES COLUMBO: ONE MORE THING….

Yes, I know this is a really dated reference.

I like really dated references.

So, here’s the latest thing politicians in California want the pension funds to divest from: any companies involved in building a border wall with Mexico.

California shouldn’t invest in companies that build President Trump’s border wall, lawmakers say

Three state lawmakers have introduced a bill that would require California’s pension funds to divest from any company involved in building President Trump’s proposed wall along the U.S.-Mexico border.

Assembly Bill 946 from Assemblymen Phil Ting (D-San Francisco) and Eduardo Garcia (D-Coachella) and Assemblywoman Lorena Gonzalez Fletcher (D-San Diego) would require the California Public Employee Retirement System and the California State Teachers Retirement System to liquidate any investments in companies that helped build the wall.

“Californians build bridges not walls,” Ting said in a release. “This is a wall of shame and we don’t want any part of it.”

CalPERS and CalSTRS are the nation’s largest and second largest pension funds with nearly $312 billion and $202 billion in investments under their control, respectively. The AB 946 announcement follows last week’s U.S. Customs and Border Protection’s request for companies to submit formal border wall prototypes.

At some point, the asset management guys at Calpers and Calstrs really need to tell the politicians that their blacklist is getting too damn long, and it’s making it difficult to do their jobs.

Prior posts on divestment — all of which involved California:

• Calpers: Moving Targets, in More Way than One – one item has to do with divesting from tobacco-related companies. The divestment had existed before, and had cost the pension fund a lot of returns. That was from just a week ago.
• A Week of Bad Pension Ideas: Finally, Divestment – how politically-targeted divestment drives hurts pension fund returns
• Public Pension Follies: Divestment! Divest from All the Dirty Things! – on drives to divest from coal and other fossil fuels, specifically.

So throw this “one more thing” on the pile. I assume this bill will be passed, as the other legislature-driven divestments also passed.

I believe the current divestment list for California pensions is:

• fossil fuel anything (which includes coal, but maybe excludes natural gas)
• guns
• tobacco
• any construction company building a wall with Mexico

There may be others, but I haven’t been looking at this overly closely.

VICE PAYS

At least with fossil fuels, guns, and tobacco, the argument has been made that these are dying industries… so the returns shouldn’t be there…

Description of VICEX:

The Vice Fund primarily invests in the following industries: Aerospace/Defense, Gaming, Tobacco and Alcoholic Beverages.

These four industries were chosen because they demonstrate one or more of these compelling and distinctive investment characteristics:

Natural barriers to new competition
Steady demand regardless of economic condition
Global Marketplace – not limited to the U.S. economy
Potentially high profit margins
Ability to generate excess cash flow and pay and increase dividends

We believe that there are numerous investment opportunities in these industries which have been largely overlooked by other funds. While many of the most widely held and well-known mutual fund families invest in companies doing business in these industries, no other fund concentrates solely on these four industries.

Mmm, hmmm.

Yeah, it’s not a direct link to fossil fuels, but hey. It pays to go where snooty investors don’t. If they make money, yippee. Note the dividend focus of VICEX above — don’t have to worry about selling your shares if they’re giving you cash flow.

CLEAN FUNDS: FEELING GOOD ABOUT BAD RETURNS

Once the California politicians are done going through removing all the deplorables from being considered from pension investments, they’ll be left with some artisinal gluten-free bread company in Vancouver. I’m sure the billions will fit comfortably there.

As I mentioned in the post on California divesting from dirty things, politicians have no fiduciary duty to the pension funds. They can screw them over as much as they like.

Of course, when the pension funds lack money and the taxpayers find out the politicians are asking them to fill the hole…

….well.

As I said in January:

How quaint, thinking that the pension funds should be invested with the benefits of the participants in mind, as opposed to throwing one’s political weight around.

Good luck suing the trustees for pissing away your fund values because they wanted the investments to be politically correct.

And forget about making politicians feel any shame whatsoever over this.

NORWAY GETS IN ON THE ACT

Mind you, this divestment thing is not just some groovy idea in U.S. blue states. It is happening elsewhere, too.

Indigenous people ‘convince Norwegian pension fund to ditch investment in Dakota pipeline’:

Norway’s second largest pension fund has decided to withdraw investments from companies linked to the controversial Dakota access pipeline project, which is backed by Donald Trump.

Pension fund for the public sector KLP has announced that it will sell shares worth £55m from four companies, which own part of the project and are building the pipeline “due to an unacceptable risk of contributing to serious or systematic human rights violations”.

The Sami Parliament in Norway, which represents the indigenous Sami people, convinced the pension fund to divest in an act of international solidarity between indigenous people, according to the Guardian.

….
The firms excluded from KLP’s investments include Energy Transfer Partners (ETP), Enbridge Energy Partners, Phillips 66 and Marathon Petroleum.

…..
KLP’s decision to sell its shares also come after the UN Special Rapporteur on the Rights of Indigenous Peoples concluded earlier this month that the approval of the Dakota access pipeline was granted “without an adequate social, cultural or environmental assessment” and in “the absence of meaningful consultation or participation by the tribes”.

“This has been a difficult case. In making the decision to divest, KLP places significant emphasis on the UN Special Rapporteur’s assessment, a previous recommendation on exclusion from the Council on Ethics for the Government Pension Fund Global, as well as the lack of progress through active ownership” said Annie Bersagel, Acting Head of Responsible Investments at KLP.

Oh, and of course, activists asked Calpers to also divest:

Activists are packing today’s CalPERS Board of administration meeting, urging the retirement fund to divest from the controversial Dakota Access pipeline.

The CalPERS board is considering an Assembly bill that would compel it to divest from the project, as well as with any business that is helping to fund or finance it.

CalPERS leaders last week released a report that urged the board to oppose the Assembly bill, arguing that it could risk $4 billion in investments.

Protestors gathered early Monday for a rally outside CalPERS’ headquarters.

“I guarantee you that CalPERS had never seen anything like this,” said R.L. Miller, who helped organize the demonstration.

The activists plan to hand the board about 52,000 signatures they collected from people who want the fund to divest from the project.

That was back in February.

CALPERS FIDUCIARIES PUSH BACK

Interestingly, there was pushback on that:

LA Times Blasts Divestment Crusade Targeting Dakota Pipeline

One of the newspapers leading the charge against Exxon Mobil is now criticizing a Democratic-led scheme forcing California’s enormous pension fund to divest from the Dakota Access Pipeline.

Forcing the California Public Employees’ Retirement System (CalPERS) to purge all assets associated with the company constructing the multi-billion-dollar pipeline would blow an enormous hole in the state’s pension fund, the Los Angeles Times editorial board wrote on Tuesday. Its warning stands in stark contrast to its ongoing crusade against Exxon’s climate research.

The editorial board was responding to proposed legislation from California directing the $300 billion fund to cut all ties from institutions investing in the so-called DAPL, a pipeline that has come under intense scrutiny from environmentalists and Indian American tribes. The paper opposes the 1,172-mile-long pipeline but is not in favor of divestment.

The bill,spearheaded by Democratic Assemblyman Ash Kalra, would compel CalPERS to dump shares in Dakota Access LLC and Energy Transfer Partners (ETP). It would also have to sever relation with 11 other banks associated with DAPL.

“The bill, if it were to become law (and it shouldn’t), wouldn’t stop the project from being completed … It would, however, blow a multi-billion-dollar hole in the pension funds — and the public pocketbook, because state and local taxpayers would be left to fill that hole,” the paper wrote.

….
Democrats targeted CalPERS’ fossil fuel investments last year. Democratic Congressmen Ted Lieu and Mark DeSaulnier, for instance, sent a letter to the fund’s CEO Anne Stausboll in March 2016 suggesting the pension fund’s decision to invest in Exxon Mobil is “morally suspect.”

CalPERS argues that it shouldn’t vacate investments from DAPL for the same reason it refused to disconnect from Exxon.

Good for Calpers to hold the line against the politicians on this matter.

TOUGH TO STAY “PURE” IN A CONNECTED WORLD

But as This SF Weekly bit notes, it might be a bit difficult to divest from DAPL compared to some other better-targeted investments.

The myriad companies financially involved in building DAPL are fairly complex. The pipeline itself is being built by Dakota Access LLC, whose parent company is a Texas-based oil conglomerate called Energy Transfer Partners. Well-known gas station chains Sunoco and Phillips 66 both have significant ownership stakes in it, and financing to build the pipeline comes from large national banks like Citibank, Wells Fargo, and Bank of America.

In other words, any bank that has a sports arena or stadium named after it is most likely financially involved with the construction of the Dakota Access Pipeline.

This reminds me of telling vegans they can’t escape all animal products. Animal products are everywhere, and once big finance enters the room, everybody grabs a piece.

Back to the news-divestment-people-can-use:

To that end, the coalition has created a list of San Francisco banks whose hands are clean of DAPL investments.

“We looked at a list of 1,000 or so U.S. chartered banks,” Fielder says. “From that list, we gathered about a dozen that have at least one branch in San Francisco that are not financers of the Dakota Access Pipeline and that are not shareholders of the Energy Transfer Partners family of companies.”

Of the banks recommended by the S.F. Defund DAPL Coalition, those with the most San Francisco branches — in other words, the most convenient for finding a branch or an ATM — are East West Bank, Silicon Valley Bank, and Sterling Bank & Trust.

My own recommendation for people who want “purity” in their banking is to join a local credit union, if you can. I’m a member of two (and I have a regular evil bank account as well). Credit unions may not be as convenient as the big banks with ATMs and branches everywhere.

And again, I don’t want this bad pension investment idea sound like it’s coming from within Calpers itself. It’s not. They do have fiduciary duties, after all.

But the politicians do not.

And they do seem to look on billions of dollars sitting around as their personal playthings, even if this money is supposed to fund pensions.

MORE DIVESTMENT COMMENTARY

I’m soooo happy to read this press release from the New York state pension fund:

New York Pension Fund joins multi-billion-dollar international investors to reduce carbon footprint

January 24, 2017 – In the latest demonstration of institutional asset owners’ commitment to climate action, New York State Common Retirement Fund (CRF), the third largest public pension fund in the US with $184.5 billion in assets, has joined the Portfolio Decarbonization Coalition (PDC).

The CRF is the first major US pension fund to join the Coalition’s 28 members, who between them control over $3 trillion in assets and have pledged to gradually decarbonize a total of $600 billion by designing investment portfolios with a smaller climate change impact.

One year ago, New York State Comptroller Thomas P. DiNapoli, trustee of the CRF, announced plans at the Paris climate talks to position the Fund for a low carbon future. In partnership with Goldman Sachs, the CRF developed a low emission index, which steers assets away from large carbon emitters and increases investments in carbon-efficient companies.

Whee. I’m going to be paying for this one. But if global warming does kick in, I was thinking of moving to Alaska. So maybe I’ll escape that.

Public Pensions and the Siren Song of Environmental Activism:

Retirement funds are being urged to sell off their investments in traditional energy producers. That’s bad for retirees, and it wouldn’t help the environment.

In America and around the globe, there are signs that consumers are becoming more socially conscious. In a 2015 report, 84 percent of the citizens of the 10 largest countries who were surveyed indicated that corporate responsibility would guide their decisions about product purchases.

But while few would argue against heightened public awareness of social accountability, those attitudes should not supersede the welfare of workers counting on their pensions to help provide them with a comfortable retirement. Ideological causes should be accessory to that fundamental obligation; they should not come at a cost to it.

Regrettably, however, some would now put dogma grounded in a false narrative ahead of the financial livelihood of our nation’s public employees. These activists are pressuring state and local government pension funds, along with university endowments and other institutional investors, to sell off their holdings in traditional energy producers. Such divestment, the activists argue, will destabilize fossil-fuel production, which they blame for much of the destruction of our environment.

….
While the impact of divestment on energy producers is questionable — after all, the selling of those holdings will simply open opportunities to new investors — it unquestionably hurts the funds. A study last year by Daniel Fischel, a law professor at the University of Chicago, found that divestment of traditional energy equities by pension funds, college endowments and other investors reduced investment-portfolio returns by 0.7 percent annually. That’s a number that public pensions, many of them already struggling to achieve the investment returns they need to meet their obligations to retirees, should take to heart.

In the end, it is impossible to square the costs of divestment — and the very tangible consequences it would impose on retirees — with its goal of destabilizing energy producers. Efforts by energy companies to reduce emissions is a cause that activists should champion, not oppose. And our public pension funds should put pragmatism ahead of dogma and resist the siren song of those who would squander our civil servants’ pensions on social activism that contradicts itself.

Interestingly, one of the authors on the above piece, Yolanda Hudson, is part of Help Protect Our Pensions. Hudson is a retired Detroit teacher, and you can imagine, she is concerned about her own pension’s safety under divestment.

PENSION ACTIVISTS AGAINST DIVESTMENT

Let’s check their about page:

Protect Our Pensions’ concern is the act of divestment politicizes pensions and potentially undermines the financial interest of pensions.

When I worked as a firefighter, my main job was to protect and serve my community. Since retirement, I’ve been trying to find new ways to do this through organizations and activism. One issue in particular has caught my eye, and I’m surprised no one really seems to be speaking out about it: divestment.

My concern is the act of divestment politicizes pensions and potentially undermines the financial interest of pensions. My pension is tied to the investment savvy of the DC pension board, which I feel strongly should make decisions based on financial interests, not political activism nor policy.

There are many different types of divestment and many sensitive feelings about each type of divestment. But, I started this group to see if others share my concerns about politicizing pensions –and it turns out they do. Our core beliefs are simple:

Don’t Politicize Pensions: State pensions are the livelihood for many retired state workers, including teachers, police officers, and firefighters. We have growing concerns around the politicizing of pensions – a movement that could be detrimental to the financial well-being of our pensions and our retirement savings.

Keep Your Fiduciary Responsibility: State treasurers and pension boards across U.S. states should help ensure investments are being made with only the sound financial consideration of the pension. A pension board or retirement board’s paramount fiduciary responsibility is to generate steady financial returns their pensioners and shareholders. This objective should not be undermined by a misguided political agenda..

Public Policy Debates Should Not Affect Investments: Public policy debates should not interfere with financial investment decision-making. Issues surrounding gun control, prison reform, and environmental preservation are all worthwhile and essential discussions. But, these discussions should not affect the financial holdings of public pension funds.

Our hope is that maybe together we can help change this growing trend. – James Short

Good for them. If you look at the list of the people who are “coalition members”, there’s quite a lot of retired public employees as well as current politicians and other interested parties.

I’m happy to see some pensioners push back on politicians playing with their pension assets. It’s a very dangerous game for the pensioners, and the politicians have less at stake. They still have a little at stake — they have their own government pensions as well — but they know politicians are always the last to get whacked on pensions, right?

The environmental activists have nothing at stake personally, other than perhaps their egos. They aren’t the ones who get hurt when the pension funds go sour because every money-making proposition is nixed as an investment opportunity because it’s not “pure” enough for them.

In some of these cases, the “dirty” investments should not be invested in, because the financial outlook is bad. But in some of the cases the depth of analysis seems to be “we think this stuff is bad, so obviously it can’t keep making money.”

Man, if life worked that way, we’d have no reality shows.