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April 7, 2016

The Nation’s Largest Public Pension, CalPERS, is Fighting Latest Divestment Push

The California Public Employees’ Retirement System (CalPERS) is pushing back against lawmakers’ latest calls to further divest the near $300 billion pension.  On March 31, Representatives Ted Lieu (D-CA) and Mark DeSaulnier (D-CA) wrote a letter to CalPERS CEO Anne Stausboll calling for the fund to sell its ExxonMobil holdings.

As the nation’s largest public pension fund, CalPERS has been a favorite target of divestment activists.  Late last year, California Governor Jerry Brown (D) signed SB 185 into law, which, on the surface, directed CalPERS and The California State Teachers’ Retirement System (CalSTRS) to sell off all direct coal holdings.  However, as we pointed out previously, the legislation left an opening, only forcing the funds to divest if the move falls in line with the fiduciary duty of financial managers.  Meaning, if implementing divestment loses the fund money, then it can, and, by law, should be reversed.

Additionally, the legislation only targets “thermal” coal companies generating 50 percent or more of their revenue from the act of mining coal.  Most companies are more diverse than that, thus falling outside the purview of the legislation.  So, despite being heralded as a victory by environmentalists, the passage of SB 185 was more a means of appeasing activists than actual policymaking.  It also does not significantly address climate change—or even really force divestment.

Having just complied with SB 185, CalPERS is now again resisting outside pressure to influence investment decisions.  The pension recently rejected the congressmen’s call to divest and instead emphasized the importance of engagement.  In a statement, CalPERS said divesting would be a mistake and that the fund’s managers would lose their “ability to influence companies if we divest…Divestment will therefore leave us exposed to the effects of climate change.”

So essentially, the largest public pension fund in the United States is saying that divesting will have the exact opposite impact being sought by proponents of selling off energy stocks.

Leading climate and economic experts throughout California agree that divestment doesn’t work.   UCLA professor Ivo Welch dismantled the initial arguments for divestment—that it would hurt energy companies financially—in a New York Times Op-Ed.  Referencing Stanford’s futile attempt at divesting, Professor Welch put the anticipated impact in perspective:

“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.”

So even if Stanford’s endowment—one of the largest in the country—were to fully divest (which it didn’t) it would have no impact on the finances of these fossil fuel companies.

But consequently, divesting could backfire in a real way.  Caltech Professor Brad Cornell analyzed how much money the endowments of prestigious universities like Harvard, Yale and MIT would forego if they were to divest.  The answer: hundreds of millions.

His study found that these five schools alone would lose $195 million per year—with Harvard suffering an annual loss of $108 million.  Therefore, if endowments divested they would be sacrificing millions that could be distributed to students for scholarships, or used to pay professors.  And for what purpose?

The other claim put forward by activists is that divesting will help reverse climate change.  This argument has also been refuted by countless climate experts, including Frank Wolak, director of the Program on Energy and Sustainable Development at Stanford, who had this to say about the divestment movement:

“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.”

Economic experts say divesting will not impact financials of energy companies, and will only lead to monetary losses for those selling shares.  Climate experts argue divesting will not affect sustainability.  Environmentally-conscious pension fund leaders are fighting off calls to divest.

And yet, activists continue to push over-exaggerated numbers—like like the ones seen in this report from Arabella Investors alleging $2.6 trillion (with a “t”) has been divested, or this even more egregious claim from 350.org that no, actually, $3.4 trillion has been divested—to justify their campaign.  To understand how questionable these numbers are, look no further than here and here, but a quick summary: Arabella and 350.org count all of a portfolio’s assets as being divested, ignoring the actual amount sold.  I.e., Arabella considered the entirely of the University of California’s $98 billion as being divested, even though the fund only sold about $200 million of coal holdings.

It’s clear this is all a desperate attempt to present their fledgling movement as effective and growing.  Instead, high profile pensions like CalPERS and universities like MIT are seeing right through their attempts, recognizing the campaign for what it really is—an empty political statement.