Last month, the California State Teachers Retirement System (CalSTRS), which manages the pension funds on which Californias educators rely, voted to divest the stocks of U.S. thermal coal companies. Many have praised the nations second largest public pension system for taking this bold action, including California Senate President pro Tempore Kevin de León, who specifically blamed the coal companies for causing global climate change.
But is a public pension fund that many California residents now and in the future depend on for retirement income really the right stage for a political climate battle?
Managers of pension funds, including CalSTRS, owe fiduciary duties to their clients, which means they must make decisions solely for the benefit of those clients. Other interests, including a pension managers own political views, should not interfere with pension-related decision making without the express consent of fund participants. CalSTRS managers seem confident that they are exercising that duty. Perhaps, in a legal sense, they are correct. But many financial professionals are skeptical of socially motivated asset divestiture decisions, such as University of Chicago professor of finance Steven N. Kaplan, who attests that Any time you mix social goals, there is a cost, [...] The question is simply how big that cost is.
Less than three years ago, CalSTRS seemed to understand this logic. In mid-2013, CalSTRS CEO Jack Ehnes wrote, regarding climate-motivated divestitures, that divestment bears the risk of adversely affecting an investment portfolio and severs any chance to advance positive change through shareholder advocacy. Even more recently, CalSTRS Chief Investment Officer admitted, Ive been involved in five divestments for our fund, [...] All five of them weve lost money, and all five of them have not brought about social change.
CalSTRS decision follows in the footsteps of many major fund managers who have chosen to purge their portfolios of any number of politically incorrect investments. Perhaps the best known campaign of that sort was the 1980s movement to divest from companies associated with South Africas apartheid governmenta move that has been lauded as a victory against racism. But an empirical examination of the actual effects of that campaign found that large-scale divestiture had no discernable effect on the financial health of any of the affected companies. If there was any effect, it was that stocks flowed from socially responsible to more indifferent investors and countries.
For the conscious investor, handing away voting rights and self-inflicting financial losses is not a recipe for forcing social or political change.
To make things even worse, it is not as if CalSTRS has any extra cash lying around for indulging socially conscious policy preferences. In fact, CalSTRS is dangerously underfunded. A recent book by Lawrence J. McQuillan, titled California Dreaming, details the extent of CalSTRS financial turmoil. Even by the agencys own generous estimates, the CalSTRS system is only 70.8% fundedand even that is an overestimate, considering that many of CalSTRS accounting practices would be criminal if done by a private organization.
Of course, any shortfall in CalSTRS funding will have to come from somewhere: California taxpayers pockets.
Climate change advocacy need not come in the form of ill-considered financial decisions that are unlikely to metabolize into real change. Particularly when these decisions affect the retirements of Californias educators and the pocketbooks of Californias taxpayers, public pension managers need to be able to look past their own political views and act solely in the interests of those whose retirement nest eggs are in their trust. Holding that money hostage to political whims is financially irresponsible.