April 19, 2017

*UPDATE* CalPERS Scraps Divestment in New Policy

UPDATE (4/20/17, 2:00 pm EST): This week’s CalPERS meeting was another heavy blow to divestment activists. At the event, four pro-divestment speakers addressed the board in protest of the proposed policy to all but ban divestment at the fund.  In response, California State Controller Betty Yee acknowledged their concerns but resolutely defended the fund’s divestment stance, reemphasizing the fund’s fiduciary duty.  As she stated:

“We are fiduciaries of this fund.  And our sole focus is and must continue to be how we are going to pay the benefits to our public sector workers and our educators who have earned these benefits during their work life.”

Watch more of Controller Yee’s comments here:

— Original Post, April 19, 2017 —

The California Public Employees’ Retirement System (CalPERS) just voted unanimously to drastically curtail its divestment policy, stating CalPERS “generally prohibits Divesting in response to Divestment Initiatives” due to its cost and ineffectiveness in achieving social goals.

As the nation’s largest pension fund, CalPERS is a frequent target of the divestment movement and has faced several campaigns over the years.  The fund, which has more than 1.8 million total members, has recently struggled to meet investment targets while simultaneously fending off attempts from the California State Legislature to mandate various forms of divestment.

As CalPERS, like many other funds, faces difficulty achieving its financial return goals, the pension’s new policy centers around its fiduciary duty to its million-plus members.  This legal responsibility is especially important when the scope of divestment goes beyond the mission of the fund—maximizing returns for its beneficiaries.  From the new policy language:

“The Board and Staff also have a fiduciary responsibility under the California Constitution to ‘diversify the investments of the system so as to minimize the risk of loss and to maximize the rate of return, unless under the circumstances it is clearly not prudent to do so’ …These fiduciary obligations generally preclude CalPERS from sacrificing investment performance for the purpose of achieving goals that do not directly relate to CalPERS operations or benefits.” (Emphasis added)

For years, CalPERS has preferred the approach of engagement over divestment, and has reaffirmed this preference in its new policy.  The pension acknowledges that divestment hinders financial performance and is costly for the fund, all the while doing nothing to impact the environment.  From CalPERS:

“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. This Policy, therefore, generally prohibits Divesting in response to Divestment Initiatives, but permits CalPERS to use constructive engagement, where consistent with fiduciary duties, to help Divestment Initiatives achieve their goals.” (Emphasis added)

The fact that CalPERS has essentially rejected the strategy of divestment should come as no surprise. Earlier this year, CalPERS responded to a legislative divestment initiative by explaining how selling off securities relating to the Dakota Access Pipeline would hurt the fund financially:

“AB 20 would impede CalPERS ability to maximize risk-adjusted returns, and minimize risk through diversification, potentially imposing additional costs on California’s public employers and agencies, civil servants, and impairing CalPERS’ ability to pay promised benefits.”

The Los Angeles Times agreed, pulling no punches in a recent editorial in opposition to the proposed divestment bill:

“Even those who opposed the Dakota Access pipeline, such as this editorial board, must recognize that AB 20 is a flawed and dangerous bill. For one thing, it is overly broad, requiring divestment from a company that operates multiple oil and natural gas lines as well as from major national banks that finance not just the pipeline’s construction, but also many of California’s businesses… given the potential cost, lawmakers should wield this power sparingly and in a precisely targeted way — and never when it would just be an empty gesture.”

The CEO of the Hispanic Chambers of Commerce of San Francisco echoed the same sentiments when he wrote this in a recent San Francisco Chronicle Op-Ed:

“The small but fevered movement to divest California public monies from companies involved with the Dakota Access Pipeline project is ill-conceived, and if successful, will prove injurious to pensioners, retirees and state taxpayers… Taxpayers will have to pick up for the tab to meet promised pensions that the investments don’t cover. Additional pension-fund shortfalls that divestment would cause are precisely what businesses owners don’t need.”

Divestment advocates have not had success in convincing universities to sell fossil fuels and they continue to strike out with targeted pension funds.  And now, the nation’s largest fund has all but slammed the door on this flawed campaign. As more and more schools and funds reject divestment, it’s time to acknowledge that it is all cost and no gain