STUMP » Articles » Dirty Divestment and Clean Investment Follies: There Had Better be Returns » 21 February 2018, 05:08

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Dirty Divestment and Clean Investment Follies: There Had Better be Returns  


21 February 2018, 05:08

Looks like it’s been a month since my last post on public pension divestment from all the dirty things.

Time for another.


Before I get into individual items, let me dump all the divestment-from-dirty/investment-in-clean public pension stories I’ve collected since January.

I will pull out a few of these to talk about them below.

Also, there’s a couple ringers in the list — as in, they’re the good kind of divestment. Can you guess which ones I’ve labeled as such before I get to the bottom?


What’s this about George Soros investing in fossil fuels?

Soros Fund Management reported investments in eleven new fossil fuel corporations
George Soros founded and operates his own climate change advocacy group
The billionaire invested $54 million in Columbia Pipeline in 2016

But surely, he’s investing in them just to clean them up, right?

George Soros made big investment bets on fossil fuel companies in the fourth quarter of 2017 even though he claims these firms contribute to climate change, according to a Daily Caller News Foundation investigation.

In the last quarter of 2017, Soros Fund Management reported investments in eleven new fossil fuel corporations totalling nearly $160 million, according to his company’s December 31, 2017, filing before the Securities and Exchange Commission reviewed by TheDCNF.

Further, Soros founded and operates his own climate change advocacy group called the Climate Policy Initiative. He pledged to give at least $100 million in 2009 to the institute over ten years and in 2015 he gave $26.5 million to the group, according to his latest filing with the Internal Revenue Service.

Nevertheless, his financial investments in for-profit fossil fuel companies in a single quarter overshadow these contributions.

The billionaire’s newest fossil fuel investment was $87 million in Alerian, MLP, a fund that solely invests in “energy infrastructure” consisting of pipelines, storage tanks and processing plants for crude oil and natural gas. He purchased eight million shares of the company.

His company’s second biggest energy investment was Halliburton, one of the world’s largest oil exploration and drilling companies. His firm purchased 842,000 shares valued at $30 million.

Soros not only invested in oil and natural gas companies, but also into coal. Soros tried to position himself as an enemy of coal, stating at the 2009 Copenhagen climate change summit, “There is no magic bullet for climate change, but there is a lethal bullet: coal.”

In the last quarter, however, he invested $4.7 million into Peabody Energy Corporation, the largest “pure play coal company” in the United States, according to the company’s website. Peabody sold 188 million tons of coal to electric utilities in 2016. The company operates 23 surface and underground mines in the United States and in Australia.

Maybe he’s working to bring them down from the inside, that’s right!

Let’s check, $4.7 million into Peabody Energy, which has a market cap of … $3.2 billion. That 0.1% ownership ain’t exactly a controlling interest.

Alerian MLPthat’s about $9.9 billion.

Halliburton – $30 million has got to be a huge chunk of change for that company, right?

Over $40 billion market cap? Man, an evil mastermind just can’t get a break.

Here’s a thought: he’s investing in dirty energy, because he thinks he can make money on it.

Maybe public pension investment should be looking out for similar interests?


So the flip side of dumping all one’s “dirty” investments is loading up on “clean” investments.

New York is doing this, due to the judgment of the state’s sole fiduciary, the state comptroller.

Let’s read his press release on the matter.

NY State Comptroller DiNapoli Doubles Low Emissions Index Investment to $4 Billion
State Pension Fund’s Proprietary Index Moves Stocks Away From
High Carbon Emitters to Cleaner Companies
NY State Pension Fund’s Sustainable Investments Reach $7 Billion
New York State Comptroller Thomas P. DiNapoli today at the Investor Summit on Climate Risk at the United Nations announced a $2 billion increase to the New York State Common Retirement Fund’s (Fund) low emissions equities index, doubling its investment. The Fund was the first public pension fund in the U.S. to create an index that excludes or reduces holdings in the worst carbon emitters and shifts investments to lower emitting corporations. The increased allocation, from the Fund’s regular index holdings, raises the current value of the Fund’s sustainable investments to more than $7 billion.

“We’ve successfully shifted significant holdings to lower carbon companies without losing value,” DiNapoli said. “Our state pension fund is at the forefront of the worldwide effort to build a lower carbon economy. Our investment decisions and our shareholder engagements are a caution to corporations: if they’re not helping build a decarbonized future, they may get left behind. Our strategy for sustainable, lower carbon investing is working and will continue to expand.”

“Managing climate risk is key to protecting positive long-term investment returns,” said the Fund’s Chief Investment Officer Vicki Fuller. “The success of our low emissions index ensures its ability to expand further in the years to come and demonstrates to other institutional investors that we can decarbonize our portfolios prudently and without risking value.”

“Today’s announcement by the New York State Common Retirement Fund is a prudent and responsible step to manage the risks of climate change, and seize the opportunities of the clean energy future,” said Mindy S. Lubber, president and CEO of the sustainability nonprofit organization Ceres, which directs the Ceres Investor Network on Climate Risk and Sustainability. The Ceres Investor Network includes more than 145 institutional investors who collectively manage over $22 trillion in assets. “Tackling climate change requires a colossal shift in investment capital flows toward clean energy and away from high polluting fossil fuel energy. This announcement helps achieve this shift, and provides an example of the kind of innovation institutional investors can undertake.”

“We applaud Comptroller DiNapoli for doubling the investment to the low emissions index fund,” said Peter M. Iwanowicz, Executive Director of Environmental Advocates of New York. “Through these investments, the pension fund encourages innovation and moves companies closer to the 100 percent renewable energy economy we need.”

The index, which is internally managed by the Fund, was developed with assistance from Goldman Sachs Asset Management (GSAM) and launched in January 2016. It is modeled on the Fund’s existing indices of domestic stocks, particularly the Russell 1000, which are passive investments in the largest domestic companies with returns that match broad market performance.

There’s more at the link, if you care to read it.

At the bottom of the press release, you see that the pension fund in total is over $200 billion. So $7 billion out of that isn’t even 5% of the whole fund.

That said, I’m trying to read anything in here about the fundamentals of these investments — in terms of what sort of returns one expects, and what kind of returns one is giving up by moving out of the “dirty” investments.

Maybe I’m missing it.

But there is a different kind of danger from the divestment drive — if one excludes an entire class of investments, you lose potential diversification benefits, which means higher volatility for one’s target returns, or lower returns at your given risk tolerance level.

But if one also artificially concentrates investments in a sector one is favoring for political reasons, then you’ve got concentration risk.

Let us think about this concentration risk for a moment, as it relates to “clean” investments. If these “clean” investments rely heavily on government subsidies for their revenues/profits, and those subsidies go away due to a change in government policy… where are you then? If you have double the investment in these funds than you’d normally have, you are increasing your losses.


There were two ringers in my divestment list above — it was just normal decisions, made on the expected returns to the pensions, to get out of particular investments. It was about Miami getting out of a real estate fund, and Illinois getting out of hedge funds.

An excerpt from the piece:

Why Illinois Got Out of the Hedges
These funds are hard to understand and have lousy returns.

Can anyone explain why Illinois continues to own this hopelessly complicated bunch of hedge funds? That’s the question I asked the state’s Board of Investment, which oversees $22 billion of pension assets, when I became its chairman two years ago.

I had been reviewing the board’s portfolio and noticed a lot of holdings labeled hedge funds. They were run by something called a “hedge fund manager,” whatever that was. Most bought and sold stocks—but so did other funds we owned that showed up under the category “stocks” and were run by “equity fund managers.”

One difference was that some of the hedge-fund managers showed up on television, winning publicity by waging shareholder proxy battles. But such fame didn’t translate into better returns.

Our board began to question the conventional wisdom. Did anyone at the table really understand what these hedge funds were doing? Should we be putting the retirement funds of Illinois state employees into investments that not a single trustee, consultant or staffer could explain?

If they had been earning double-digit returns, that might have motivated us to spend more time trying to understand their strategies and risks. But for 2% returns? That was less than investment-grade bonds were earning.

Yup – two key items here.

1. The funds were underperforming in an absolute sense (forget about what the synthetic benchmarks were doing).

2. The people overseeing these investments — that is, the people with the fiduciary duty to the pension funds — didn’t understand the investments in any fundamental way.

  1. is always key. You shouldn’t invest in what you don’t understand.

As Marc Levine, chairman of the Illinois State Board of Investment, writes: if the funds had been giving outsized returns, they would have worked to try to understand these investments.

Note he didn’t say that the divestment decision wouldn’t be the same — even after understanding the investments, they may have divested for other reasons regarding future returns or the risk/return trade-off.

This reminds me of something the risk management folks at TIAA did while I worked there — they tried to dig deep into the CDOs, etc., in the company’s portfolio, and no matter what they did, they saw far more risk in those instruments than the market was pricing them for. So they advised the company dump that stuff, and they did. In 2007.

The main reason I know about that, is they wouldn’t shut up about it in 2008, when they could point out just how big a loss the company avoided due to their analysis and advice.

This is why I stay out of bitcoin — I don’t understand it at all.


So here’s the deal – and I like that Marc Levine points out the asset managers liking their faces on TV, but that didn’t translate into returns.

If one is a fiduciary to the pension fund, you are to safeguard the interest of the pension participants. That’s the stated goal.

Not to get your name splashed on TV.

Not to get awards for “sustainable investment policy”.

Not to get taxpayer-funded trips to somewhere sunny and lacking in mosquitos.

Your goal is not to save the planet, but to save the pension to the best one is able.

It is very difficult to credit some of these investment policies as being driven by fiduciary concerns given that said policies supposedly save the planet 100 years from now, and one may be concerned that cash will be gone from the pension funds within a few decades. How the hell is that supposed to help anything?

If one cannot focus on the goal you are supposed to have as a fiduciary, then you shouldn’t be a fiduciary.

Quit playing with other people’s retirement security for good political coverage, dammit.

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