February 15, 2016

Vermont State Treasury Dept. Disproves Gov. Shumlin’s Claims on Divestment

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.