Pension Funds' Rush to Go Green Costs Retirees Their Green
It’s no secret that a number of state and city public pensions are in crisis. From Puerto Rico to Detroit to Illinois (and many other states, as we will soon come to discover), governments have made promises to their public employees that simply cannot be kept, which has already resulted in financial crises in several localities that have put enormous pressure on governments.
Recognizing this, some analysts have suggested that a switch from fossil fuel holdings to green energy technologies such as solar and wind might be prudent for pension managers, pointing to the strong performance of many of these stocks over the last several years in comparison with traditional oil and gas. Such a transition would also have the benefit of satisfying ethical concerns and social responsibility considerations many of these people profess. It’s worth asking whether these arguments stand up to scrutiny, or if they merely represent wishful thinking on the part of a set of policymakers and analysts whose political and environmental biases trump sound economic policy.
The responsibility of any public pension manager should first and foremost be to the shareholders. How best to accomplish this may be a matter of some debate; a pension manager may privately loathe the petroleum industry and wish for a rapid switch to biofuels, but his public duties demand that he do what is best for the pension holders, not for his conscience.
If we allow pension managers to substitute personal biases for fact-based investing strategies then any number of unintended long-term outcomes may result, with the retirements of public servants being frittered away on investments that might result in good optics, but not actual returns.
But what if more green energy production really does represent the sound actuarial choice? That perspective cannot be resolved merely by examining the recent past: while some green energy stocks have indeed performed well over the short term, it is a far from conclusive trend, and the reality--regardless of passive investor behavior--is that our nation’s reliance on petroleum and coal may slightly diminish over the near term it is not going to disappear anytime soon.
For index fund managers and pension fund leaders to push an environmental agenda on the companies they invest in potentially entails more risk and lower returns on the wealth of those whose money they hold. According to a report released this week by the American Council for Capital Formation (ACCF), the California Public Employees Retirement System (CalPERS) -- the nation’s largest public pension fund – has ramped up its focus on such ventures. The result: environmentally-driven funds made up four of the nine worst performing funds in the CalPERS portfolio and represented none of the system’s 25 top-performing funds this past year. As this focus on ESG-efforts has increased, CalPERS has moved from a $3 billion pension surplus in 2007 to a reported $138 billion deficit today. Yet those who manage the fund remain unwilling to put their own money on the line; the personal investment portfolios of the fund’s Chief Investment Officer and at least two other senior executives report no ESG-related investments at all. What’s up with that?
The ACCF report also highlights the role that CalPERS plays in convincing (some might say pressuring) other large institutional investors to join alongside it in attacking companies it invests in via the submission of shareholder proposals. BlackRock, which generates many millions in management fees from CalPERS each year, and which is currently vying to run the pension fund’s $26 billion private equity arm, voted alongside CalPERS on putatively ESG-related proposals for the first time in its history this past proxy season. According to Bloomberg, the combined assets of BlackRock and Vanguard alone are set to top $20 trillion by 2025. These two own basically everything in the universe. If activist funds like CalPERS are able to force passive funds like those controlled by BlackRock and Vanguard to join its ESG-masked-as-corporate-governance crusade, we’re in for a heck of a ride. And not in a good way.
It may be tempting to urge public pension managers to take a more proactive role and bet against companies whose products some of us, for whatever reason, disapprove of -- or for those managers to use their positions to influence the business decisions of firms in which they have a stake. However, it would be much better for government workers, retirees, and taxpayers today and in the future if the investors managing the money of public pensions prioritized sound financial policy above all else.
