The caretakers of the California Public Employees’ Retirement System (CalPERS) have chosen not to give in to pressure to divest their holdings in fossil fuel-related businesses.
The CalPERS board voted unanimously on April 17 to make it much harder to divest the nation’s largest state-based pension fund from companies producing fossil fuels and the banks that do business with them. The move disappointed divestment activists hoping to convince CalPERS to rid its $322 billion retirement portfolio fund of fossil-fuel holdings.
The updated policy states CalPERS’ board and staff have a fiduciary responsibility under the California Constitution to “diversify the investments of the system so as to minimize the risk of loss and to maximize the rate of return” and divesting “appears to almost invariably harm investment performance.”
The policy also states divestment often fails to achieve the goals intended.
“[T]here appears to be considerable evidence that [d]ivesting is an ineffective strategy for achieving social or political goals, since the usual consequence is often a mere transfer of ownership of divested assets from one investor to another. Investors that divest lose their ability as shareowners to influence the company to act responsibly.”
At the April 17 meeting in Sacramento, California, the investment committee and CalPERS officials rejected arguments made by a number of environmental groups, including RL Miller, chairwoman of the California Democratic Party’s environmental caucus and cofounder of Climate Hawks Vote.
Praises the Decision
Steven Greenhut, western region director of the R Street Institute, says the board made the right call, especially with retroactive pension increases and a string of poor investment returns having left CalPERS woefully underfunded.
“Now it has to make up ground, given the enormous taxpayer-backed pension liabilities,” said Greenhut. “Good for CalPERS for trying to put its fiduciary responsibility above political correctness. The state constitution grants it plenty of wiggle room around the divestment pressure.”
The Independent Petroleum Association of America (IPAA) tracks divestment efforts through its Divestment Facts project. Divestment Facts spokesman Matt Dempsey says CalPERS’ move is welcome but unsurprising. He says the pension fund has a track record of opposing divestment, such as previous proposals to divest from investments relating to the Dakota Access Pipeline.
“Instead of bowing down to pressure from outside activists, CalPERS acted in the best interests of its millions of beneficiaries by rejecting the costly and ineffective strategy of divesting,” Dempsey said. “Numerous studies have shown divesting from fossil fuels will invariably hurt investment returns while having no discernable impact on the environment.”
Divestment Losses Detailed
In addition to IPAA and other groups arguing politically motivated divestment strategies damage employee pension plans, Dempsey says similar statements have been made on record by public pension-fund executives.
When activists requested CalSTRS, California’s pension fund for teachers, divest from all coal holdings in 2015, CalSTRS Chief Investment Officer Chris Ailman told his board, “I’ve been involved in five divestments for our fund. All five of them, we’ve lost money, and all five of them have not brought about social change,” the Orange County Register reported on May 3.
Ailman reminded the Board a 1987 state law requiring divestment from companies doing business with South Africa under apartheid cost CalSTRS $600 million to $750 million in lost investment opportunities, and a Pension Consulting Alliance report estimated CalSTRS’ decision to divest from tobacco-related holdings in 2000 cost the pension fund $1 billion.
“CalPERS is the nation’s largest pension fund,” said Dempsey. “Its decision to say no to divestment as an investment policy adds to a growing list of fiduciaries across the country who have rejected activists’ calls to divest as a costly, ineffective, empty gesture.
“Universities and pensions still debating this issue should take note,” Dempsey said.
Kathy Hoekstra ([email protected]) writes from Saginaw, Michigan.
“California Public Employees’ Retirement System Total Fund Investment Policy,” California Public Employees’ Retirement System, April 17, 2016: https://heartland.org/publications-resources/publications/california-public-employees-retirement-system-total-fund-investment-policy