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Are Pensions Finally Fed Up with Social Divesting?

In the past, pension funds have pulled their investments as a way of spurring change. But they’re changing their strategy when it comes to oil, coal and gas companies.

Stanford University became the first major U.S. institution last month to begin pulling its investments in companies reliant on coal in response to a global movement called Fossil Free. The group, founded in the United Kingdom, is calling on major investment funds like universities, public pensions and churches to divest from oil, coal and gas companies as a way of spurring them toward more environmentally sustainable business models.

Public pension funds have heard the social divestment call before. In the 1980s, as a reaction to apartheid, funds began divesting from companies that were doing business in South Africa. California's pension fund alone pulled $9.5 billion. Since then, trends have hopped from one cause to another. In 2013, a number of pension funds, including the California teachers and New York City pension funds, divested from gun manufacturers as a reaction to mass shootings in Aurora, Colo., and Newtown, Conn.

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This time, however, is different. A number of cities are looking at the issue -- indeed, some, like Ann Arbor, Mich., have even voted for their pension funds to divest from companies like Exxon Mobile and Lukoil within five years -- but no pension fund managers have actually taken action. Instead, 70 of the world's largest pension funds have adopted a strategy of engaging directly with companies as a means of public pressure. The funds, which include New York's and California's, have formally asked the world's top oil, gas, coal and electric power companies to conduct detailed studies on how they will manage the switch to cleaner energy.

Alicia Munnell, director of the Center for Retirement Research at Boston College, has spoken out against social divesting in the past and says there are a couple reasons for this apparent shift. One is that there is less of a moral stigma attached to fossil fuels, which was not true of prior movements. In 2013 it was guns; before that, it was a push to divest from companies doing business in the Sudanese region of Darfur because of ongoing human rights violations there. "In 2007 it was a little harder to be against social divesting because genocide was the issue," says Munnell. "So it's almost like you have to come out pro-genocide if you are against divesting."

Another reason for the shift is that there's no proof that divesting actually effects change. In fact, a 1999 study concluded that apartheid-related pension divestments had no significant financial impact on companies doing business in South Africa. What's worse, targeting investments based on social causes has proven to be dangerous for pension plans. In 1983, a study found that 10 states that had targeted investments in mortgage-backed securities as a way of encouraging homeownership either inadvertently or deliberately sacrificed returns. In some cases, they gave up as much as 2 percent in returns all for the goal of making homeownership more accessible. In 1990, Connecticut's pension fund bought a 47 percent interest in Colt Industries in an attempt to protect Connecticut jobs. The firm went bankrupt two years later and the fund lost $25 million.

Still, proponents of Fossil Free call Stanford's announcement a big win for the movement. And the idea remains attractive to politicians. In Massachusetts during the past year, eight cities and towns supported Fossil Free with resolutions. Now Brookline and Natick are now considering similar resolutions and activists are campaigning in Boston and other eastern parts of the state.

The availability of so-called fossil fuel-free portfolios is also increasing, according to a fossil fuels divestment survey released by First Affirmative Financial Network. Over the past year, the number of such portfolios has jumped by more than half, from 22 percent to 36 percent. Pension fund managers, meanwhile, have reiterated their strategy of engaging directly with the companies to effect change. Aside from the easier moral stance, there's a very practical financial reason: The appetite for making social statements via public trust funds, Munnell says, is waning. With so many funds under pressure to increase their investment returns (thanks to losses during the Great Recession), the idea of dumping potentially well-performing stocks like oil or energy companies just isn't palatable. "They need to keep their eyes on the prize which is higher returns with minimum amount of risk," Munnell says. "They owe that to current workers, retirees and to the taxpayers -- all who aren't part of the decision-making process."

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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