Vermont became a battleground state for the issue of divestment after then-Governor Peter Shumlin (D) called for state pension funds to sell off fossil fuel assets in his 2016 State of the State address.
Fast forward 15 months, and Vermont Watchdog is now reporting that for the second year in a row the divestment initiative will not be taken up during this legislative session, having failed to survive “crossover week.” This marks the effective end of state mandated divestment of Vermont’s public pensions.
Safe to say, this outcome is an extreme disappointment for divestment activists since they could not notch a victory in a deep-blue state like Vermont. But, it shows that when divestment is evaluated on its merits then if fails to pass muster.
Opposition to Shumlin’s divestment proposal was swift, and came from a large number of groups that represent Vermont’s pension beneficiaries. Democratic Treasurer Beth Pearce was one of the most vocal opponents of divestment:
“From our end, legislating investments is bad practice…My first priority is to protect the 49,000 active, vested and retired members of the system, the beneficiaries, and the taxpayers who put dollars into that system. For me, I don’t think [divestment] is the best approach.” (January 17, 2016)
Instead of letting politics dictate such a decision, Pearce and the Treasury Department commissioned a non-partisan economic report to understand the financial impact divestment would have on public funds. The study unsurprisingly found what we have known all along: divestment would increases costs, reduce diversification, fail to impact targeted companies, and introduce a “slippery slope of potential for other restrictions” on future investments. Ultimately, the study found that divestment was not in the best interest of retirees. From the report:
“Divestment conflicts with VPIC governing policies: Given the financial and governance costs that come with fossil fuel divestment, in PCA’s opinion, divestment of fossil fuels, thermal coal, or Exxon has not been shown to be in the best interests of VPIC pension beneficiaries, and conflicts with VPIC governance structure.”
The study was definitive and after it was released, State Representative Robert Bancroft declared that it was the end of the road for divestment in Vermont.
It seems voters agree, as Beth Pearce easily won reelection despite running against a pro-divestment candidate who made the issue front-and-center in the campaign.
Luckily, facts prevailed for Vermont retirees who depend on strong returns for their financial well-being. Even in the home state of Bill McKibben, the founder of the divestment movement, officials made the economically responsible decision not to divest instead of bowing to pressure from activists.
This is a trend we have seen nationwide. As Divestment Facts has reported recently, the divestment movement has faced roadblocks in Democratic strongholds like New York, Massachusetts and California. Despite friendly politics, state officials and heads of pension funds have consistently opposed divestment because of its immense costs and lack of any environmental benefit.
Vermont was unwilling to go through with the empty gesture of divestment. Others facing similar pressure should follow their lead.
Today, the Democratic Vermont Treasurer expressed a strong opinion against fossil fuel divestment telling a hearing, “I’m going to be blunt. We talked about divestment. It doesn’t work in this portfolio.”
The comments from Beth Pearce were part of a presentation to the state’s Pension Investment Committee (VPIC) on a groundbreaking report on the costs of divestment. The report, conducted by the Pension Consulting Alliance (PCA) on behalf of the VPIC, confirmed that fossil fuel divestment is a “slippery slope” that conflicts with good governance and hurts pension fund returns. The lead author of this definitive report, Head of ESG and Sustainability at PCA Sarah Bernstein, Ph.D, discussed her findings with VPIC members at today’s committee hearing and, to no one’s surprise, Vermont’s leaders once again agreed with the report’s findings.
Here is what the report’s lead author had to say at the hearing:
“Divestment doesn’t reduce any greenhouse gases, in my opinion. It transfers ownership from one owner to another. It can be a big symbolic gesture, but it doesn’t work on government policy or a corporate policy to transition to another [fossil-free] structure.”
“Divestment hasn’t come to the fore as a method for addressing concerns on climate change.”
“To get out of fossil fuels, you’d have to dismantle VPIC’s management strategy, which is to use co-mingled funds.”
The report’s findings reiterate previous comments from Treasurer Pearce and VPIC chair Tom Golonka on the costs and ineffectiveness of divestment. As the PCA report definitively concludes, “Given the financial and governance costs that come with fossil fuel divestment, in PCA’s opinion, divestment of fossil fuels, thermal coal, or Exxon has not been shown to be in the best interests of VPIC pension beneficiaries, and conflicts with VPIC governance structure.”
This report shuts the door on divestment in Vermont, and its conclusions should be considered by any pension fund or endowment facing pressure from divestment activists. For leaders of the divestment movement like Vermont’s own Bill McKibben, today’s report is another heavy blow for an already dwindling campaign.
Vermont’s Gov. Peter Shumlin continues to urge state pensions to divest. Central to Gov. Shumlin’s argument is a claim he made in an Op-Ed following his State of the State speech which said, in part:
“In fact, had Vermont divested from coal assets in September 2012, our state pension funds would have an extra $11.5 million, according to testimony to the Legislature from Eric Becker of Clean Yield Asset Management.”
In her testimony during Thursday’s Vermont State Senate Government Operations Committee hearing, Treasurer Pearce systematically disproved this claim with a report the State Treasury Dept. put together that showed the Governor’s reasoning to be flawed. The entire report is available here, but below are some of the highlights.
First of all, Gov. Shumlin uses an indiscriminate timeline to prove his point. We’ve seen the same tactic used before by 350.org activists claiming fossil fuels are a bad investment. The fact of the matter is, stocks go up and down. As the Treasury report put it:
“The time period chosen was arbitrary. One could take a similar approach and argue that there should be legislation prohibiting technology stocks or financial stocks or biotechnology stocks from the portfolio.”
In fact, a recent study (also submitted to the committee) actually found that for the country’s largest state pensions, investments in oil and gas “significantly” outperformed other assets held in the fund from 2005-2013. As the study points out, this was a pretty volatile timeframe that included expansion, a deep recession and economic recovery. Still, investments in oil and gas had returns “twice as great as their share of the funds’ assets.”
Second, the $11.5 million figure Gov. Shumlin cites ignores “small cap” companies and portfolio weighting. It also excludes commingled funds, or funds with assets drawn from different accounts that are blended together. When we’re talking about pensions and endowments that fact alone essentially makes the economic analysis moot. One of the main reasons divesting is so difficult is precisely due to the fact that large portfolios invest in index funds, private equity, mutual funds, hedge funds, etc. which, therefore, may add exposure to fossil fuels in a variety of different ways. Eliminating all fossil fuel exposure would mean reinvesting a sizable portion of the entire portfolio. For example, Wellesley calculated that if it fully divested from all fossil fuels, 58 percent of the endowment would be affected. It’s not as simple as selling a few stocks.
Third, Gov. Shumlin assumes that “Re-investment options are assumed to be practical (e.g. a $100 trillion portfolio can be rebalanced into “green” companies where the market in totality is less than $100 trillion).” Despite increased investment in renewable energy, fossil fuels will continue to supply nearly 80 percent of the world’s energy through 2040. Quite simply, the renewables market is not equipped to produce enough energy to keep up with our use, and the sector size from a financial standpoint is not comparable to the overall fossil fuel sector.
In addition, the State Treasury report found some incorrect data so she recalculated performance using corrected inputs. In so doing, Pearce discovered that “the Decarbonizer framework would indicate a loss of $1.0MM to $1.3MM versus the initial assessment of $11.5MM.” So even with all the assumptions and the flawed model used, Gov. Shumlin’s claims are still grossly exaggerated.
The report concluded by calling the Clean Yield Asset Management’s analysis “suspect.”
“In summary, for the reasons noted above, Staff believes the Decarbonizer framework as currently implemented and utilized has significant flaws and that results derived from its use are similarly suspect.” (emphasis added)
A common argument for divestment is that it makes financial sense. However, as Treasurer Pearce has highlighted, this claim is highly suspect. Indeed, Prof. Fischel and others have completed comprehensive studies and reports on the contribution of fossil energy assets to a well-diversified portfolio. These investments help reduce risk and improve overall performance. Given that, it is clear that selling off these assets will not fulfil the state’s fiduciary duty to pensioners and retirees in the long run.
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