As the nation’s largest pension fund, the California Public Employees’ Retirement System (CalPERS) is a frequent target of divestment activists and legislators sympathetic their cause. The pension has long maintained an anti-divestment stance and has fended off several efforts by activists pushing the fund to sell its fossil fuel holdings in the past. This week, CalPERS is again fighting back, issuing some of its strongest language yet on the topic as the California State Legislature attempts to mandate costly divestment in the state.
The bill in question, AB 20, would force both CalPERS and the California State Teachers’ Retirement System (CalSTRS) to divest completely from investments in the Dakota Access pipeline. The mandate would not only force the pensions to sell their holdings in the pipeline builders themselves, but also the banks financing the project—a list that includes financial giants like Bank of America and JPMorgan. Similar efforts to divest from backers of the project are underway in Seattle and on college campuses, yet as CalPERS highlights, moving forward with such a decision carries heavy costs and limited benefit.
In the Investment Committee’s official recommendation to oppose AB 20, the staff noted that past divestment campaigns have cost the fund $8 billion in foregone returns and transaction costs. Divesting from all companies related to Dakota Access could impact another $4 billion in investments. At a time where pensions—including CalPERS—continue to experience great difficulty reaching investment return goals, divestment would further inhibit investment managers from fulfilling their fiduciary duty.
This point was not lost on the Investment Committee when it wrote:
“AB 20 would impede CalPERS ability to maximize risk-adjusted returns, and minimize risk through diversification, potentially imposing additional costs on California’s public employers and agencies, civil servants, and impairing CalPERS’ ability to pay promised benefits.”
Activists like to claim that the costs of divestment are worth the ultimate trade-off, fighting climate change. But analysis from CalPERS shows no environmental impact from selling off stocks, no financial impact on targeted companies, and no long term impact on the pension’s performance. From the report:
“There is no apparent connection between the activities targeted by AB 20 and the future financial performance of the affected industry sectors. In the absence of demonstrable evidence, and investment professional conviction, that the industries and companies potentially identified for divestment in AB 20 pose an economic risk to the PERF, the Investment Office is unable to identify how proposed divestment will enhance the PERF’s risk and return profile.” (emphasis added)
Meanwhile, divesting from prominent financial institutions and banks, like the ones targeted by AB 20, places harmful limitations on investment options for the fund. The report continues:
“…In efficient markets, however, limiting the opportunity set for investments has generally been shown to have a detrimental effect on performance. AB 20 would cause CalPERS to have a portion of its current investment universe permanently removed from its investment opportunity set, which would not be consistent with facilitating CalPERS’ achievement of its investment objectives. Furthermore, CalPERS’ experience to date has shown that divestment tends to harm investment performance and increase transaction costs.” (emphasis added)
In addition, even narrow divestment targets could have wide ranging and long lasting consequences for the fund and its returns. These costs will ultimately be borne by the retirees dependent on these benefits, as well as the California taxpayer. From the report:
“…AB 20 is expected to have a detrimental effect on investment performance. In consideration of CalPERS’ asset and liability management, every dollar in investment returns that is foregone, or expended in unnecessary transaction costs and fees, must be made up for in employer and employee contributions. Therefore, AB 20 could be expected to contribute to an increased burden on employees and employers through increased contribution rates, and potentially impair CalPERS’ ability to deliver promised benefit payments.” (emphasis added)
CalPERS does not agree with claims that selling fossil fuel stocks would hurt targeted companies financially. In fact, the Investment Committee claims that divestment is a pointless exercise that would ultimately backfire:
“There is considerable evidence that divesting is an ineffective strategy for achieving social or political goals, since the consequence is generally 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.”
Bottom line: Like many others, CalPERS has found divestment to be a losing proposition without any upside. As the report summarizes, “the end result is a potentially adverse impact on the PERF, with little or no effect on the companies being divested from, or any impact on the situation the bill appears to want to influence.”
We couldn’t have said it better ourselves.