June 8, 2017

Ahead of SFERS Vote, New Report Shows Divestment Would Be Costly

Just before the San Francisco Employees Retirement System (SFERS) is set to vote on fossil fuel divestment, a new report now shows that divesting carries with it a steep price tag for pensions.

According to reports, SFERS is expected to vote on a limited fossil fuel divestment proposal at their board’s Wednesday meeting.  But a new study by University of Chicago Law Professor Daniel Fischel calculates that if SFERS fully divested, it could cost up to $201 billion over 50 years and millions of dollars annually, with not environmental benefits to speak of. The fund’s Environmental, Social and Governance Subcommittee approved divesting from certain thermal coal companies in April, and the measure will now move before the full board.

The SFERS vote is also happening in the wake of a flat-out rejection of divestment by CalPERS, which has stood its ground against the policy.  In April, the fund voted unanimously to curtail its divestment policy, with language that “generally prohibits” divesting.  The fund has also fended off several attempts from the California State government to mandate different forms of divestment, while recently struggling to meet investment targets.  CalPERS’ stance on divestment stems from the fund’s acknowledgement of its fiduciary duty, adopting the following language in its new divestment policy:

“The Board and Staff also 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, unless under the circumstances it is clearly not prudent to do so’ …These fiduciary obligations generally preclude CalPERS from sacrificing investment performance for the purpose of achieving goals that do not directly relate to CalPERS operations or benefits.”

As the fund’s managers have already displayed, rejection of divestment by CalPERS makes economic sense.

According to the Fischel report, costs for CalPERS, which is the nation’s largest public fund, would be even steeper than those for SFERS.  If CalPERS divested, it could mean losses topping $289 million PER YEAR, totaling up to $3.1 trillion over 50 years.

This comes at a time when the nation’s 100 biggest pension funds are funded below 70 percent, with total unfunded liabilities at around $1.25 trillion.  To make up for this shortfall, the burden could be passed along to taxpayers in the form of increased taxes or bailouts, or pensioners could feel the impact in the form of decreased monthly payments.

CalSTRS, which is the nation’s second largest pension, has also faced its fair share of pressure to divest.  Just today, CalSTRS announced that it is “divesting” from thermal coal, even though the fund’s three investments in the sector totaled a paltry $8.3 million…out of its $200 billion+ portfolio.  We did the math, and that amounts to about 0.004 percent of the overall fund.

The financial move was negligible, but CalSTRS basically had no choice in the matter, thanks to California passing SB 185 in late 2015 which mandated both CalSTRS and CalPERS divest from thermal coal by this summer.

That didn’t stop CalSTRS from bragging about the move in an attempt to get some good PR, tweeting out a quote from the Investment Committee Chair that read:

“The motives driving today’s decision to divest the fund from all non-U.S. thermal coal, while reflecting the portfolio risks, is also a statement from the board to the global marketplace that we will not tolerate the deleterious effects of climate change, regardless of the recent actions taken by the federal government.”

Seems like a bit of a stretch.

All the CalSTRS announcement has signaled today is that the pension has complied with California’s law. However, it doesn’t mean that the fund, or CalPERS for that matter, even endorses divestment.  Representatives from both pensions have issued statements against the practice over the years.  Here are some highlights:

• CalSTRS Chief Investment Officer Chris Ailman: “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.” 4/7/15

• CalPERS Chief Executive Officer Anne Stausboll: “Engagement is the first call of action and is the most effective form of communicating concerns with the companies in which we invest. That is why, when it comes to climate change and its risks, Calpers’ view is that the path to change lies in engaging energy companies, instead of divesting them. If we sell our shares then we lose our ability as shareowners to influence companies to act responsibly.”  3/22/15

• CalSTRS Chief Executive Officer Jack Ehne: “Divestment bears the risk of adversely affecting an investment portfolio and severs any chance to advance positive change through shareholder advocacy.” 8/21/13

Try as they may, activists have not found much success in California.  That is because it is costly and can harm taxpayers and pensioners directly.  Thanks to Fischel’s new report, we know just how steep those financial costs will be.