October 13, 2017

Massachusetts Mulls over Pension Divestment Bill

After striking out in Seattle, New York State and Vermont, it appears divestment activists are now hoping for better luck in Massachusetts.  This week, the Boston Business Journal reports a divestment bill is being debated in the state legislature “as a way to speed decline of fossil fuels.”

The proposed bill would require the state’s nearly $70 billion pension fund to divest from thermal coal by the end of the year and to establish a commission to determine whether or not to move forward with divestment of other direct fossil fuel holdings by 2020.

Notably, the statute does not compel the pension to divest from indirect holdings – the comingled funds that make up the majority of its assets.  That is likely because even the most pro-divestment lawmakers acknowledge how costly full divestment really is.

For example, Vermont cited the exorbitant costs associated with actively managing a portfolio as one of the main reasons to reject divesting. From the Vermont Pension Investment Committee report:

“The largest measurable explicit costs of divestment to VPIC would be ongoing increased management fees. Management fees would increase under each of these three divestment scenarios because VPIC commingled funds, where the bulk of VPIC’s fossil fuel were held, would have to be restructured into materially higher-cost SMA funds.” (emphasis added)

Indeed, academics agree with the VPIC’s assessment: divestment is all cost and no gain. A recent report by Prof. Hendrik Bessembinder of Arizona State University showed that the transaction costs associated with divestment and actively managing a large portfolio could cost a given fund up to 12 percent of its value over a 20-year timeframe.  Since divestment means actively selling off holdings and monitoring investments, it could mean huge losses even if the amount of securities sold remains minimal.

A recent study by Prof. Daniel Fischel of the University of Chicago Law School also calculated how much full divestment would actually cost a pension fund over the long term.  He and his team found that if 11 of the nation’s top pension funds were to divest, it would mean trillions in shortfalls over a 50-year time frame.

Costs aside, divestment is simply an ineffective policy. As an editorial in the Boston Herald recently called out, the effort to push Boston’s fund to divest is a fruitless gesture. From the report:

 “But Decker and her colleagues can’t really believe that pulling state pension funds out of fossil fuel companies will suddenly find us all heating our homes with solar panels and driving around in cars powered by vegetable oil. No, as they are surely aware, the statement is symbolic. The practical effect, however, will be to increase costs and potentially make it more difficult for the fund to reach its return on investment, and that is far from symbolic for the fund’s participants and for taxpayers.”

This is simply yet another example of lawmakers trying to score cheap political points by promoting an empty gesture like divestment in order to demonize an industry.  That’s why most of Massachusetts’ most high profile universities have seen through divestment and flatly rejected the strategy.  Harvard, MIT, Tufts, Boston College and Northeastern have all opted against selling off fossil fuels citing its ineffectiveness and costs.

So far, the bill has not been able to advance out of committee. For the sake of Massachusetts pensioners, let’s hope it stays there.