This morning, the Washington, D.C. pension fund announced it is divesting from its “direct investments” in 200 fossil fuel companies. Here’s what you need to know about this decision.
Direct investments a mere sliver of overall fossil fuel holdings
Direct holdings are only a portion of the Washington D.C. pension investment portfolio; other asset structures include mutual funds, commingled funds, and private equity – many of which actively invest in fossil fuels. The D.C. pension fund, however, is not divesting from these types of assets. In fact, according to the fund’s September 30, 2015 Private Investments Update the DC pension fund has newly invested in Lime Rock Partners VII, LP, a private equity investor that is solely focused on the upstream oil and gas sector and EnCap Investments, which is the “leading provider of venture capital to the independent sector of the U.S. oil and gas industry.” Neither of these investments would be considered “direct holdings” and are therefore not part of this, largely symbolic, divestment decision.
Divesting from only direct holdings has been an increasingly popular way to satisfy divestment activists’ demands without incurring the costs associated with actually dropping all fossil fuel investments.
Divestment carries unavoidable costs
A recent report on the United States’ largest state pensions by Sonecon, found that oil and gas investment “significantly” outperformed other assets between 2005 and 2013 and delivered returns “twice as great as their share of the funds’ assets.” Yet beyond the benefits of fossil fuels for funds, divestment also carries considerable transaction costs. According to a report by Prof. Bessembinder of the W.P. Carey School of Business at Arizona State University on the financial impacts of divestment from fossil fuels, there are serious costs related to executing often-complicated transactions and then actively managing an endowment to keep it “fossil-free.” This includes the onetime immediate transactions costs an endowment must endure, as well as ongoing annual management fees. Combined, these costs have the potential to rob endowment funds of as much as 12 percent of their total value over a 20-year time-frame.
Now, DC’s decision to divest only from direct funds means that it will be somewhat guarded from these fees – another clear indicator of what an empty gesture this decision really is. Nonetheless, pensioners should understand that divestment comes with real costs to consider.
Majority of pensioners disapprove of actions to divest
According to a recent survey focused on pensioners’ opinions on divestment, many pensioners are opposed to the idea of divestment and prefer companies that are engaging in sustainability and environmental issues. In fact, nearly two out of three (64 percent) pensioners say they want their pension fund manager to invest in a way that is solely focused on “maximizing returns” on the money they’ve invested. Interestingly, support for this position is even higher among respondents from energy‐producing states, such as Texas (86 percent), Pennsylvania (74 percent), and Colorado (71 percent). Among this group, strong majorities say they don’t want their investments to be “politicized” (55 percent) and that they’ve rightfully earned those higher returns based on their careers in the public‐sector (53 percent). Nearly two‐thirds (63 percent) of pensioners find it a compelling argument that, rather than divesting from oil and gas companies, “we need to focus on supporting organizations that do positive work on the environment and on promoting legislation and policies that improve corporate sustainability among these companies.”
Other pensioners and funds agree that divestment is the wrong decision
According to James Short, a retired deputy fire chief from the Washington, D.C., Fire Department, and Yolanda Hudson, a retired science teacher from the Detroit Public School System, “By precluding their pension funds from investing in these industries and other profitable sectors, officials are undermining the welfare of retirees for the sole purpose of waging a public relations battle against traditional energy producers. Those hoping to one day cash in on their pension should question whether such a strategy has their best interests in mind.”
Vermont State Treasurer Beth Pearce has also come out in opposition to divestment, stating “From our end, legislating investments is bad practice…My first priority is to protect the 49,000 active, vested and retired members of the system, the beneficiaries, and the taxpayers who put dollars into that system. For me, I don’t think [divestment] is the best approach.” New York State Comptroller Thomas DiNapoli also stated recently, “My fiduciary duty requires me to focus on the long term value of the Fund. To achieve that objective the Fund works to maximize returns and minimize risks. Key to accomplishing this objective is diversifying the Fund’s investments across sectors and asset classes—including the energy sector, where fossil fuels continue to play an integral role in powering the world’s electricity generators, industry, transportation, and infrastructure.”
A group of Hawaiians opposed to divestment in their state also spoke out on the issue earlier this year. According to Executive Director of Hawaii’s Employee’s Retirement System, Thomas Williams, “Transaction costs associated with divestment and reinvestment in alternative securities is estimated at $1.4 million dollars annually. Annual and quarterly reporting along with administrative costs is estimated between $80,000 and $200,000 annually. Opportunity costs are incalculable.”
In a lot of ways Washington D.C.’s Pension fund is doing well; it is fully funded and it ranks highly compared to many states. Residents who have long benefited from this fund should be wary, however, of any attempt to politicize their retirement savings. Empty gesture or not, divestment carries costs — should D.C. retirees and pensioners really be the ones left to pay?