October 9, 2015

Forced Divestment from Coal for CalPERS, CalSTRS Bad News for California Retirees

This week, California’s Gov. Jerry Brown signed SB 185, a law that in essence forces the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to divest their extensive portfolios from coal.  “Forces” is the operative word here, as officials from these very funds have spoken out against divestment in the past, regarding them as an ineffective way to reduce carbon emissions and bringing with it steep financial penalties.

Here are some of those comments from top executives at CalSTRS and CalPERS about divestment:

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 Ehnes: “Divestment bears the risk of adversely affecting an investment portfolio and severs any chance to advance positive change through shareholder advocacy.” 8/21/13

As many investors and academics have already advocated, CalPERS, with its near $300 billion in assets, and CalSTRS, with its roughly $184 billion in assets, is in a much better position to effect the change it seeks by maintaining investments and engaging as shareholders.  Divestment, on the other hand, cedes away that influence and is thus a counterproductive strategy for funds as socially active as CalPERS and CalSTRS.

They are not alone in their assessment.  Even as the University of California system sold off its holdings in coal and oil sands (on purely economic grounds), members of the Board of Regents were quick to note that divestment is only symbolic in nature, with little to no tangible benefit. From UC Regent Bonnie Reiss:

“It was really the belief of everyone on this committee, myself included, who cares about climate that simply divesting from a list of a couple hundred companies that the students were presenting would absolutely do nothing. So we sell a few shares and stocks in an oil company. It won’t change their behavior in any way. It’s just symbolism without real impact and maybe gets a quick headline like we saw with Stanford.” 9/16/15

Professors across California’s most respected universities also agree that divestment accomplishes very little.  As UCLA’s Prof. Ivo Welch asserts, “Individual divestments, either as economic or symbolic pressure, have never succeeded in getting companies or countries to change.”  This is due to the nature of the financial markets.  Here’s what Prof. Welch had to say after Stanford decided to divest from coal:

“Global public equity markets constitute about $60 trillion of market capitalization. With about $19 billion, Stanford’s endowment represents only about five-hundredths of 1 percent of the world’s capitalization. Even if Stanford divested itself fully of all its stocks, both fossil and nonfossil, it would probably take the market less than an hour to absorb the shares. It would not lead the executives of the affected companies to engage in soul-searching, much less in changes in operations.”

Frank Wolak of Stanford also agreed that divestment is an empty gesture that does not accomplish anything significant:

“Divestment comes at the expense of meaningful action. It will do nothing to reduce global greenhouse emissions. It will not prevent these companies from raising capital.”  6/13/15

And while divesting has no financial impact on targeted companies, the same cannot be said for the institutions giving up those investments.  Professor Bradford Cornell from Caltech just released a comprehensive study that put institutional financial losses in real dollar terms.  The report found that if Harvard, NYU, Columbia, MIT and Yale were to divest their endowment portfolios, they would lose $195 million every year.  Among the findings:

“Over a 20-year period, excluding oil, gas and coal-related securities from several major institutional investors’ portfolios would result in expected losses of 23 basis points per year on average relative to equivalent non-divested portfolios, adjusted for differences in risk. This kind of long-term evidence about fossil fuel securities is what investors should focus on.” 8/23/15

Arguably, the most convincing statements can come from those most adamant about transitioning away from coal.  Take Richard Muller, a leading climate scientist and a physics professor at the University of California, Berkeley.  Though he advocates for doing away coal, he still remains dead-set against the idea of divestment:

“Just reducing fossil fuels in the United States doesn’t really help global warming…You have to address a much bigger problem. This little mantra of ‘fossil fuel bad, renewable good’ is not going to be effective in reducing global warming.” (emphasis added)

The decision from the California legislature forces “partial divestment” from coal – eventually; the bill Gov. Brown signed wouldn’t actually kick-in until 2017 — but fails to address how many companies this decision would actually impact. According to a report from Bloomberg, other groups that have divested from coal have missed the mark as “the criteria they use to select candidates for divestment exempts some of the biggest producers, however. That’s because those companies are large, diversified miners and only get a small part of their revenue from coal.” All the more evidence that this move is more attention grabbing than action making.

So, in sum: divesting has no impact on targeted companies, lessens influence and opportunity for engagement and inflicts financial harm on those choosing to divest.  Is this really the right choice for California retirees and pensioners?