Mayor’s Divestment Pledge is Political, Fiscally Irresponsible
While clean natural gas is broadly viewed as a safe, reliable, and affordable energy source – in addition to the local industry providing hundreds of thousands good paying union jobs across the Commonwealth – Pittsburgh Mayor Bill Peduto continues to throw politics into places where they don’t belong.
Recently, Mayor Peduto joined twelve other mayors in a politically-motivated “divestment pledge” from city governments’ fossil fuel investments in public pension funds.
Divestment not only ignores the significant environmental and economic benefits of shale development, but it also goes against a trust’s fiduciary duty to its shareholders in making responsible, apolitical investment decisions to maximize returns.
As the Pittsburgh Post-Gazette’s editorial board commented back in March: “The pension board has a duty greater than supporting the mayor’s political agenda. The board has a fiduciary duty to protect pensions funds for retirees from city employment and future retirees.”
Peduto’s actions come around the same time the University of Pittsburgh tasked an ad-hoc committee with evaluating plans to divest its endowment fund. Pitt’s Chancellor, Patrick Gallagher, requested the board of trustees explore divestment in response to student-led activist groups – a small, vocal faction of Pitt students – pushing the University to escalate sustainability efforts.
Universities, expert financial advisors and public pension leaders around the country have rejected divestment efforts due to their purely political nature and adverse impacts to those invested in the fund.
The City and University of Pittsburgh would do well to listen to its peers before making decisions in the name of climate change that would hurt students, retirees, and jeopardize the strength of both the University’s endowment and the City’s public pension funds.
As Pitt’s SRI Committee gathers to make a uniform and unbiased recommendation to the board – despite one committee member being an employee at the very openly biased, anti-energy organization the Rockefeller Family Foundation – here’s five key things to know about divestment:
- Divestment creates significant losses for interested parties
Divestment trims a portfolio’s investment diversification, which is considered the most important component to achieving long-term financial goals. The energy sector carries the largest potential diversification benefit for investors because it has the lowest correlation with all other major industries in U.S. equity markets.
Portfolios that divest from energy companies also realize lower shareholder returns compared with funds that chose not to divest. In fact, over 50 years, a divested portfolio is expected to be 23 percent lower than one that included fossil fuels, professor Daniel Fischel at the University of Chicago Law School concluded.
This negatively impacts retirees and other beneficiaries who have placed trust in the fund to maximize returns for shareholders. For example, a CalTech study found that Harvard, Yale, NYU, Columbia, and MIT would together lose nearly $200 million per year if they decided to divest fossil fuel equities.
More, the risk associated with less diverse investment portfolios also leads to increased management and transaction costs for endowments and pension funds. Dr. Hendrik Bessembinder at the University of Arizona quantified these costs, and calculated endowments face a potential loss of 12 percent in just 20 years based on management and transaction costs alone.
Should Pitt’s Board of Trustees adopt divestment procedures from the university’s endowment fund, students could see a rise in tuition and fees, or faculty and staff reductions in order to mitigate loss.
Concerns surrounding the health of Pittsburgh’s pension funds came to light in 2017 when Mayor Peduto, again, went against the grain and issued an executive order to divest the city’s pension from “fossil-based companies.”
But that didn’t work three years ago, either. Economists calculated that Pittsburgh’s pensions could lose upwards of $500,000 a year, damaging Pittsburgh’s already underfunded pensions while also not doing anything to change the behavior of fossil fuel companies.
“We have a philosophical basis for wanting to do it, but it’s going to take time to find replacements…that don’t damage the health of the fund overall,” former Pittsburgh City Finance Director Paul Leger said of the order.
- Divestment jeopardizes fiduciary duty
Leaders of some of the most socially and environmentally responsible funds and financial managers have denounced divestment decisions because it stands in stark contrast to the fiduciary duties’ trustees are required to uphold. Pension funds and their advisory boards are required to act in the best interest of stakeholders, not make decisions to further one’s political agenda.
Take the example of New York State Comptroller Tom DiNapoli, trustee of the New York State Common Retirement Fund – which is nationally and internationally recognized for incorporating climate change risks in investment strategies. Despite political pressure from activists and some lawmakers, he has stood firmly against divestment because it would stand in contrast to his duties:
“Investment decisions must not be based on slogans or political agendas. To have the state Legislature micromanage the investments of the state pension fund would be a dangerous step that would threaten the independence of the comptroller’s office to make investment decisions solely in the interest of retirees, current and future.”
Anastasia Titarchuk, interim Chief Investment Officer of N.Y.’s State Common Retirement Fund, has also called out divestment efforts:
“All attempts by the legislature to mandate specific investment decisions have been struck down for violating the Comptroller’s independent discretion. Because this legislation, in requiring divestment from 200 specific companies, mandates very specific investment decisions, it would be vulnerable to legal challenges and likely found unconstitutional.
- Divestment efforts have no adverse financial impact on target companies
“Individual divestments, either as economic or symbolic pressure, have never succeeded in getting companies or countries to change,” Ivo Welch, a finance and economics professor at UCLA, wrote in the New York Times.
Divested shares do not simply disappear after an endowment or pension fund decides to divest. Rather, the shares are quickly acquired by others in the market, meaning targeting the “Toxic 100” companies by encouraging divestment would have little influence because those shares will likely get picked up by other equity investment funds.
While climate activists claim divesting shares is the best way to deprive the energy industry of capital, a report issued a few weeks ago by Moody’s Investor Service stated “divestment is not yet a significant factor for oil and gas companies.”
As Moody’s report explains: “Divestment alone would not halt oil and gas financing, since companies continue to seek out large-scale investors for financing needs. Oil demand will continue for many decades, regardless of when it peaks, and companies will still seek capital, even if their financing costs rise.”
To put it simply, “it’s not only not the best form of action, it’s a counterproductive form of action…advocating for [divestment] is distracting people from measures that would actually be effective,” John Holdren, a former science advisor during the Obama Administration and a current environmental policy professor at Harvard, said earlier this year.
- Divestment efforts do not help the environment
The invisible hand behind groups pushing divestment action, such as “Fossil Free Pitt,” is the drive to move our nation away from abundant and reliable domestic energy resources – like natural gas and oil – and instead rely on intermittent and costly “green” energy. Not only is the idea of 100% renewable energy extreme and unrealistic, divestment is not the fiscally nor socially sensible way to achieve broader climate goals.
Kirsty Jenkinson, director of corporate governance for the California State Teacher’s Retirement System (CalSTRS), points out that the best way to achieve climate progress is by leveraging the knowledge and expertise of energy companies to collectively adopt cleaner energy practices and advance low-carbon technologies:
“I firmly believe it is this collective action, which is happening at a scale that we’ve never witnessed before amongst global investors, will actually be more effective in reducing emissions and will more impact than divesting our shares of the world’s largest fossil fuel companies.”
“I, like my predecessors, believe that engaging with industry to confront the challenge of climate change is ultimately a sounder and more effective approach for our university,” said Harvard University President Lawrence Bacow.
Harvard’s director of environmental economics program, Robert Stavis, put it frankly: “The concerns of the students are understandable but the message from the divestment movement is fundamentally misguided. We should be focusing on actions that will make a real difference.”
- Divestment is not easily attainable
Funds will typically invest in various sectors and products to enhance the portfolio’s investment diversification, meaning complete divestment would entail selling a much larger share of assets than typically thought. For example, if NYU were to divest its $139 million in fossil fuel investments, the university would have to terminate relationships with 39 other funds that together make up 38%, or $1.3 billion, of the endowment.
This makes it difficult for advisors to offer divestment tactics without threatening the durability of the fund, which is all but guaranteed to fail if divestment efforts succeed.
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