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July 24, 2017

Deep Blue Cities and States Can’t Bring Themselves to Divest

Fresh off the heels of the Seattle pension fund’s rejection of fossil fuel divestment, it is time for the San Francisco Employees’ Retirement System to vote on the unpopular policy.  The importance of this vote cannot be overstated; it has the potential to impact pensioners for decades to come.  In fact, according to a study conducted by Prof. Fischel of the University of Chicago Law School, if the San Francisco fund divests it could incur a shortfall between $149.4 billion and $201.7 billion in 50 years, depending on their definition of fossil fuel divestment.

If these costs aren’t enough to convince the SF fund to steer clear of fossil fuel divestment it can always look to Seattle or even the state of Vermont, two traditionally left leaning locales that decided divestment was too extreme and may in fact conflict with their legal obligations to pensioners.

For example, the Seattle City Employees’ Retirement Systems recently rejected divestment because it was “found to conflict with the Board’s fiduciary duties and the [fund’s] ESG Policy.”  In other words, had they voted to divest they would be acting against the interests of the pensioners who benefit from the fund by implementing a policy that would decrease its value.   The fact that divestment would decrease the fund’s value was plainly stated in the Seattle fund’s report from April:

“Staff found that divestment would materially increase expected risk and decrease expected net-of-fee return for SCERS’s investment portfolio.”

Instead, the Seattle fund voted to pursue other sustainability policies that can actually support the environment, instead of empty and costly divestment. Seattle’s pensioners and taxpayer alike should be relieved as, according to Prof. Fischel, the fund would likely have to make up for the inevitable shortfalls by cutting payments to pensioners or pursuing tax payer bailouts.

Like Seattle, Vermont’s pension fund also came out against divestment earlier in the year after it commissioned the Pension Consulting Alliance (PCA) to conduct a non-partisan cost-benefit analysis of fossil fuel divestment.  The findings were clear, divestment would:

  • “Increase costs” and “Add diversification and technological change risks to VPIC’s portfolio”
  • “Only effect potential stranded assets risk, not other material climate change risks and opportunities”
  • “Leave unaffected the financial situation of companies offering alternatives to fossil fuels”
  • “Conflict with VPICs governance in its asset allocation, equity investment strategy, and proxy voting and direct corporate engagement”
  • “Introduce a slippery slope of potential for other restrictions on VPIC’s investment universe whose potential benefits have not been shown to outweigh the potential harm to the VPIC portfolio”

Based on these facts, Democratic Vermont Treasurer expressed a strong opinion against fossil fuel divestment telling a hearing, “I’m going to be blunt. We talked about divestment. It doesn’t work in this portfolio.”

What’s more, several of Vermont’s pensioners groups submitted letters against the policy including the Vermont State Employees Association, Vermont Retired State Employees Association, Vermont Troopers’ Association, Professional Fire Fighters of Vermont, Vermont State Labor Council, AFL-CIO, the Vermont Municipal Employees’ Retirement System, Vermont State Teachers’ Retirement System, and the Vermont-National Education Association.  In each of these letters pensioners and the groups that represent them strongly preferred for their fund’s investment policy be managed by professionals not politicians in the state legislature who are not bound by fiduciary duty.

A similar point about pension funds’ responsibility toward pensioners was made in a recent San Francisco Examiner article:

“Giving up shares in a fossil fuel company merely makes them available for others in the market  to purchase, having no impact on a company’s bottom line. Instead, fossil fuel divestment is a symbolic endeavor. This is acceptable for an individual investor, but public pension funds must consider their larger obligations to provide returns to pensioners before making such a decision.”

In making its decision about divesting its pension funds, San Francisco should follow in the footsteps of other deep blue cities and states, which don’t see the sense in hurting pensioners’ returns for a policy that does nothing to support the environment, and a lot to hurt retirees.