STUMP » Articles » More Divestment Follies: the Iffy Priority, the Sensible Strategy, and the Lack of Fiduciary Duty » 6 December 2017, 18:55

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More Divestment Follies: the Iffy Priority, the Sensible Strategy, and the Lack of Fiduciary Duty  


6 December 2017, 18:55

I last wrote about public pension fund divestment calls about a month ago.

Obviously, idiocy doesn’t end … the divestment crap continues.


Here are a few pieces over the past month re: a push for New York City to divest from fossil fuel investments. On NYC Pension Climate Risk Study: “No More Excuses Not To Divest”

New York, NY – Today, as world governments gather in Bonn for the COP23 climate talks, New York City’s Pensions Investment Committee received their second commissioned climate study from Mercer consulting. Following last month’s carbon footprinting report by S&P’s Trucost, this report, originally scheduled for release in September, analyzed climate risk of the City’s $186 billion pension funds. A second component of the study is expected in February.

“This report leaves no more excuses not to divest,” said Betámia Coronel with, coordinator of the #DivestNY coalition. “As Comptroller Stringer issues study after study, the costs of climate change are paid for in the lives and livelihoods of New Yorkers. This latest from Mercer offers a voluntary step to be transparent about climate risk. Stringer needs to stop delaying and divest to be a real climate leader.”

Last month, on the fifth anniversary of Superstorm Sandy, over 5000 New Yorkers rose up to demand elected officials take bold and immediate climate action, highlighting the more than $3 billion of public pension money invested in fossil fuel companies as immoral and financially risky. Since its launch in 2012, fossil fuel divestment has become a financially and morally responsible mainstream investment tactic.

On Wednesday, November 29, New York City Public Advocate Tish James will convene a public hearing on action necessary for New York to be a true climate leader, including fossil fuel divestment. New Yorkers will gather for a rally at 8:30am at Fiterman Hall, Borough of Manhattan Community College to demand divestment from companies knowingly causing climate change and reinvestment in real solutions that put New Yorkers first.

The meeting page is here.

By the way, I’ve written about before – in 2015 – a group solely focused on fossil fuel divestment.

So let’s check out the slides from this meeting.

Before we get into this, I find it interesting that the title I get for this page is “2012—Private Equity Strategic Plan” — seems somebody forgot to clear out some document info from an old presentation.

Here are the four sections:

  • Project Overview [gives timeline and scope]
  • Best Practices Review [what is everybody else doing?]
  • Introduction to Climate Scenario Analysis [portfolio risk analysis – top-down and bottom-up]
  • Next steps

I searched in the document — fiduciary duty appears once, on slide 11:


Developing a climate change strategy is consistent with fiduciary duty

So they’ve got that covered.

Slide 19 gives a nice overview of timeline:

Note that the impact isn’t til 2050, really. Keep 2050 in mind.

The consultants consider a few different portfolio results under different strategies, with a 10-year horizon.

So: in both cases, the expected return would be less, and the expected risk would be more. This is exactly the result one would expect from a more restrictive investment policy (unless what is being restricted away actually will be more poorly-performing).

The impacts are not actually that large, but note that the expected return is less than 7%, which is the assumed rate of return for all the NYC plans.

The point is that the climate change impact would be after 2050, and you’d be seeing the impact of the investment strategy change right away.

Okay, remember the 2050?

Check this out:

Oh, but I had it at 6% return! What about 7%?

A couple years difference, not much more. Yes, I’m just making up the various rate items, but NYC TRS really has a poor funded ratio at 57% fundedness. The other NYC plans have higher and lower funded ratios – I just had the best stats for the teachers fund.

This is my point: they may want to concentrate on the pension funds themselves making it to 2050, forget about the climate change aspect.

More on NYC divestment pushes:

NYC’s Public Pensions Should Dump Fossil Fuels, Activists Say

Pension funds, sell your oil & gas stock


Here is a divestment that makes a huge amount of sense to me.

Norway’s $1T pension fund wants out of oil stocks.

The subhed is why it’s a good idea for them to divest: “Oil revenue fueled massive fund”.

Let’s take a look at the article:

LONDON (CNNMoney) – Norway used oil revenue to build its national pension fund into a $1 trillion behemoth. Now, the fund is planning to dump oil and gas stocks.

The fund’s managers recommended Thursday that oil and gas investments worth roughly $37 billion be sold in order to protect the country against a permanent drop in energy prices.

“This advice is based exclusively on financial arguments and analyses of the government’s total oil and gas exposure,” said fund manager Egil Matsen.

Matsen said the decision does not reflect a particular view on energy prices or the sustainability of the sector.

This is basic risk management. Norway’s government revenues are very dependent on oil & gas. If they are using oil & gas revenues to fund their pensions, and then invest in oil & gas… they have a double exposure to the oil & gas sector.

It would be similar to NYC pensions having heavy investments in companies like Morgan Stanley and Goldman Sachs — the city does very well (and those firms do very well) when the investment markets are going great. But if it’s not going well, the tax revenues will also plummet — do you want your pension fund values to drop at the same time your tax revenues drop?

That’s like a positive feedback loop… which is not a good thing.

Negative feedback would be good — that is, diversification of risk.

If oil & gas does poorly, Norway’s government revenues will plummet… and they really wouldn’t be able to afford topping up their pension funds then.

So yay for Norway for intelligently pursuing a strategic divestment.


Here comes the fun.

If state is a climate leader, why is CalPERS backing firms that burn rainforests down?


Oh dear lord.

Okay, let me just pull out a few quotes.

While the Trump administration has turned away from the Paris Agreement and actively sought to dismantle federal environmental protections, I am proud to see that California’s legislators are boldly stepping up to the challenge of climate change.

However, there is one disappointing gap in California’s leadership on climate. The state public employees’ retirement fund, CalPERS, is invested in a number of companies well known for burning and bulldozing the world’s rainforests.

Funding tropical deforestation is out of step with the values best represented by California’s leaders, who have long taken the mantle as environmental vanguards. CalPERS can do better, as it showed by being one of the first major funds to divest from coal, inspiring other investors to follow suit.

Okay, you idiot. Do you know why Calpers divested from coal?

Because it was forced to by idiot California legislators. It wasn’t because of some supposed moral awakening by Calpers managers.

If you read the whole thing, you will never see anything from Waxman about what the money in Calpers is there for and who it really belongs to.

But he’s not a fiduciary, so he doesn’t have to worry about it. And, for all I know, he has a bolthole in a state with better finances that he’ll skedaddle to, so he doesn’t have to worry about extra taxes to make up for all the investment returns Calpers will have had to give up under the schemes he loves.


Anyway, you don’t have to take my word for any of this.

Logan Albright of Free the People: Risky Green Investments Won’t Save Public Pensions

An example from the real world will be illustrative. With the acknowledgment that tobacco products are hazardous to the health of users, some investors assumed that the share prices in major tobacco companies would decline steadily over time. CalPERS managers concluded as much, and in response they divested their holdings of tobacco companies in 2000, allowing it both to claim the moral high ground while at the same time assuring retirees this decision will lead to higher long-run returns on their investments.

In fact, the decision to divest appears to have cost these pension plans as much as $3 billion in forgone returns. Even things that can appear to be an obvious winning bet can be anything but. When people’s careers are on the line, such decisions are carefully considered and thought through. But if it’s merely the well-being of government coffers at stake, dubious logic can win the day.

David Blackmon: Public Pension Funds’ Anti-Fossil Fuel Activism Raises Risks For Beneficiaries:

In my prior piece, I mentioned that the managers at CalPERS recently admitted that their investment portfolio currently contains just 65% of the funds necessary to meet its future obligations to retirees. A new report published earlier today by the American Council for Capital Formation (ACCF) analyzes in great detail how CalPERS has reached its current point of under-funding. The report lays out how much of the blame for CalPERS current $138 billion funding deficit – it sported a $3 billion surplus as recently as 2007 – can be laid at the feet of “How CalPERS has prioritized relatively poor performing Environmental, Social and Governance (ESG) investments at the expense of other investments more likely to optimize returns (four of CalPERS’s nine worst performing funds as of March 31, 2017 were ESG-focused).”

Perhaps the most telling aspect of all in the ACCF report is its analysis of the personal investment decisions made by those who manage the CalPERS fund. It found that, while these senior managers – including CalPERS Chief Investment Officer, Theodore Eliopoulos – own portfolios showing personal investments in a variety of industries, including oil and gas, railways and pharmaceuticals, none have any holdings in the kind of ESG-focused investments into which they have chosen to direct a large portion of CalPERS funds:

“Based on review of California’s Form 700 Statement of Economic Interest for all board members and senior investment officer, it was discovered that none had any personal capital allocated to any environment-focused funds or equities. CalPERS spent more than $1 billion on fees to investment advisors, hedge funds and private equity in 2017. These three people had access to $1 billion worth of investment advice and chose to steer clear of the type of investments they direct pensioners’ money into.”

The report is here. Alas, I don’t like any of the graphs they have within — the graphs are just for single holdings, as opposed to the fund as a whole. Whatever.


The point is this: once you start playing politics with pension funds, the taxpayers and pensioner may not be too pleased.

And may not look kindly on politicians throwing money at solar energy boondoggles.

The pensioners always thought they’d be made whole in these cases….

…ah, but that’s for tomorrow.

Spreadsheet for cash flow projections

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