UPDATE (7/13/17, 5:30 pm EST): This afternoon the Seattle City Employees’ Retirement System (SCERS) voted to reject divestment once again. Even though fossil free activists took to Twitter to express their shock the fund’s reasoning was simple; it is their job to look after the best interests on the pensioners not environmental activists. In SCERS own words:
“On February 12 2015, the Board of Administration directed SCERS to undertake a positive action strategy that is intended to have a beneficial impact on climate change and is appropriate for SCERS as an institutional investor…This strategy has been proposed by staff as a viable alternative to fossil fuel divestment, which SCERS investment consultant and staff have found to conflict with the Board’s fiduciary duties and the SCERS ESG Policy.”
Even Seattle realizes divestment is as an ineffective and costly policy that does nothing to support the environment. Let’s hope other pensions across the country take note.
— Original Post, July 13, 2017 —
The Board of the Seattle City Employees’ Retirement System (SCERS) will discuss divestment at its July 13 meeting today despite the fund’s own opposition to divestment a the city’s $2.48 billion pension fund.
As reported in the Seattle Times, troubled Mayor Ed Murray called on the board in an April letter to “re-evaluate its position on fossil-fuel investments in general” and “divest any holdings the fund has in companies whose primary business is the mining or burning of coal.” Murray also calls on SCERS to “re-evaluate its position on fossil fuels by updating a legal and fiduciary analysis of the issue” since, as the Times points out, “the board always must put the financial interests of SCERS beneficiaries above political considerations.”
So just what would the financial implications of divestment be for Seattle’s pensioners? The SCERS Board has already answered this important question, stating earlier in 2017 that divestment would “increase risk” and “decrease” returns. From the April 2017 report:
“The meeting focused on the ESG proposal submitted by 350 Seattle that requested SCERS divest from investments in fossil fuel companies. Staff found the proposal to be duplicative and recommended that it not be forwarded to SCERS’s investment consultant for further review since similar proposals had been reviewed multiple times since 2013. A staff analysis on the topic of divestment was provided to the Investment Committee. Staff found that divestment would materially increase expected risk and decrease expected net-of-fee return for SCERS’s investment portfolio. Staff recommended that SCERS continue to maintain its fossil fuel holdings.”
This is just one of many opinions and testimonials on the high costs of divestment. A recent study by Prof. Daniel Fischel of the University of Chicago Law School finds divestment could mean millions in losses for pensioners. Looking at 11 of the nation’s top pension funds, Fischel and his colleagues find the average cost of divestment from oil, natural gas, and coal companies is 0.15 percent and that the average portfolio would have lost 7.1 percent due to divestment over the past 50 years. Applied to SCERS, Fischel’s findings would mean the Seattle fund could face over $17 billion in losses for its beneficiaries due to divestment.
These high costs are exactly why funds from across the country have said no to costly divestment measures. At the nation’s largest state pension fund, the California Public Employees’ Retirement System (CalPERS), the board recently voted unanimously to curtail its divestment policy, stating CalPERS “generally prohibits Divesting in response to Divestment Initiatives.” According to the fund:
“Divesting appears to almost invariably harm investment performance, such as by causing transaction costs (e.g., the cost of selling assets and reinvesting the proceeds) and compromising investment strategies. In addition, there appears to be considerable evidence that Divesting is an ineffective strategy for achieving social or political goals, since the usual consequence is often 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.”
CalPERS also recognizes the ineffectiveness of divestment in supporting the environment, an argument this week in the Baltimore Sun by the President of the African American Environmentalist Association. From the piece:
“You can divest pension funds one day, and the next, you’ll find yourself using the same amount of fossil fuels as the day before. Divestment is not a miraculous remedy that will reduce fossil fuel consumption. Even activists who support the idea of divestment readily admit that the move is more symbolic than practical. Officials in Maryland and elsewhere should focus their attention on exploring and implementing clean energy solutions that provide real steps to reduce our carbon footprint, unlike futile divestment measures.”
The ineffective and costs of divestment is well understood, but to no one’s surprise 350.org Seattle is encouraging people to protest outside of the vote this morning. But if fiduciary duty wins out, Seattle can expect a strong rejection of this ineffective, costly campaign.