Pensions: The high cost of ‘socially responsible’ investment policy

Calpers headquarters is seen in Sacramento, California, October 21, 2009. REUTERS/Max Whittaker

SACRAMENTO – A newly released report from the California Public Employees’ Retirement System confirms that, fulfilling the Legislature’s directive to divest from coal-related investments, the pension fund has now largely exited from coal stocks. But as news reports this week suggest, this “socially responsible” investment policy has come at a price, as coal stocks soar under the Trump administration’s fossil-fuel-oriented energy policy.

The Public Divestiture of Thermal Coal Companies Act of 2015 required CalPERS to “identify, engage and potentially divest from companies meeting the definition of ‘thermal coal companies.’” The pension fund was directed to do so “consistent with its fiduciary responsibilities,” providing some wiggle room for the fund, whose primary duty is to maximize investment returns to make good on its public-employee pension obligations.

Nevertheless, CalPERS promptly identified two dozen publicly traded companies that generate at least 50 percent of their revenue from mining thermal coal, as required by the law. As the recent report explains, three companies adapted their business model and redirected their investments toward clean energy. As such, they were exempt from divestment. CalPERS had no holding in eight other companies identified under the act.

But 14 companies “failed to indicate applicable business plan adaptations, or failed to respond to CalPERS engagement efforts and were subject to divestment,” according to the report. As the Sacramento Bee explained, “stocks for 13 of the 14 companies are worth more than they were a year ago when the pension fund was divesting from the industry.” The shares of one of those firms were trading at 15 times their April 2016 levels.

There’s little question that the act was designed to achieve a social goal, rather than one related to increasing CalPERS’ investment returns. “Coal combustion for energy generation is the single leading cause of the pollution that causes global climate change,” said the bill’s author, Sen. Kevin de Leon, D-Los Angeles, as quoted in the Senate bill analysis. He added that coal is “a leading cause of smog, acid rain, and toxic air pollution” and that “most U.S. coal plants have not installed these technologies.”

CalPERS’ investment staff tends to oppose socially oriented investments, but the CalPERS board has the final say. The issue was debated at the CalPERS Board of Administration meeting in May. The Sacramento Bee reported on union officials who criticized the policy at the board meeting. “We cannot afford to lose funding for law enforcement officers in exchange for a socially responsible investment policy,” said Jim Auck, treasurer of the Corona Police Officers Association.

This isn’t the first time that there’s been tension between the fund’s politically oriented investment goals and its desire to increase investment returns. At a board meeting last year, CalPERS investment officials argued for an end to a 16-year ban on tobacco-related investments made by the system’s own investment officers. (Tobacco investments by outside firms were still allowed.) Because tobacco stocks had rebounded since 2000, news reports estimated that the pension fund had lost about $3 billion because of that decision. The fund’s total investments are valued at more than $300 billion.

Instead of following the investment team’s advice, the CalPERS board continued to ban tobacco investments and also decided to divest about $547 million in tobacco-related investments handled by outside firms. That decision also was based on social goals. Advocates for tobacco divestment argued that CalPERS ought not invest in firms that sell deadly products.

At the time, the tobacco-divestment decision was particularly controversial because CalPERS faced investment returns of a measly 0.61 percent. Now, with CalPERS’ latest returns showing a robust 11.2 percent gain, it makes continuing with the coal divestment plan – and other socially oriented investment strategies – an easier option to pursue.

Regarding coal, CalPERS isn’t the only state agency to pursue divestment. Last summer, California Insurance Commissioner Dave Jones launched his Climate Risk Carbon Initiative, which called for any insurance companies that do business in California to divest “voluntarily” from most of their thermal-coal investments. The state vowed to publicize the names of companies that didn’t comply and ramped up mandatory reporting requirements.

Insurance commissioners regulate insurers to assure they have the resources to pay any claims. Yet the department’s divestment request clearly had a social (and some say political) goal. Jones justified it by arguing that such investments put the companies at risk. “As utilities decrease their use of coal and other carbon fuel sources … investments in coal and the carbon economy run the risk of becoming a stranded asset of diminishing value,” he said in a statement.

But critics of the policy, including a 2016 study by this writer, note that insurers are invested in extremely conservative positions, mostly in fixed-income bonds, and that even the insurer with the largest percentage of coal-related investments (TIAA-CREF) had only 1.76 percent of its total assets in such holdings. Furthermore, the value of the stocks already reflects the well-known uncertainties that the insurance commissioner raised. Jones’ office argued, in response, that “since 2011, coal prices, cash flows, and company valuations have fallen sharply thus adversely affecting and bankrupting numerous coal companies.”

The broad question, especially for CalPERS, is the one raised by the union officials at the recent board meeting: Are the political and social gains of divesting from these industries worth the costs in investment returns?

Chief investment officers “invest for value and don’t appreciate being hamstrung by legislators who don’t know how to manage a diversified portfolio,” said Sen. John Moorlach, R-Costa Mesa, who voted against Sen. de Leon’s divestment act. “I think I’m the only legislator who managed a $7 billion portfolio. And the studies I’ve seen have shown that social investing has produced lower returns.”

Despite the recent good-news returns, CalPERS has an enormous amount of unfunded liabilities – the shortfall in assets to make good on all the long-term pension promises made to government employees. The system is only funded at around 68 percent. This should be of concern not only to the agency, the Legislature and public employees who depend on a CalPERS retirement, but to California taxpayers. Ultimately, they are the ones who will pay for any pension shortfalls.

Steven Greenhut is Western region director for the R Street Institute. Write to him at [email protected]

The article was originally published by


  1. Gotta Gedada Displace says

    Why not put a check-off box on the CALPERS form to allow PARTICIPANTS to elect a “socially responsible” investment option (and bear its lower returns ) instead of having it unilaterally FORCED on them, by the Board members, who in some likelihood, will be immune from the effects of THEIR decision FORCED ON OTHERS ? The vote would also show the degree of acceptance of the Boards “agenda” by THOSE WHO BEAR ITS CONSEQUENCES.

  2. Does it really matter?
    Monies lost by CalPers is offset by the taxpayer.
    Monkeys could and would do better than the executives of this money bag. Just think! The loss today is offset by the guarantee of the public.
    So, Coal, cigarettes, cancer could be a safe bet for future investments

  3. J. Richards Garcia says

    Hey guys, we’re missing some really big points here.
    The courts have repeatedly ruled money-is-speech in politics. Socially responsibility investing is injecting politics into investing, in this case using taxpayers’ monies. This is a big fat juicy no-no.
    The democrats in the California legislature and retirement boards for government employees in California have repeatedly for decades decided THEIR POLITICS required certain investment behaviors, such a socially responsible investing—all at the enormously added expense to California taxpayers which pay 100 percent (workers and employers) contributions to the employee pensions and OPEB funds.
    Clearly this investment behavior is a large cause of pension deficits, therefore the public should not be forced to restore and cure pension deficits.
    The California governments (state, county and city legislatures and retirement boards) have and are illegally forcing the public to make political contributions against the public’s will, and depriving taxpayers of free speech.
    We know the retirement funds are very under-funded, and with near certainty, we can anticipate (1) the economic impossibility of funding the retirement plans, and (2) successful legendary court challenges that will find California taxpayers will not be forced to expend their wealth for a very large number of sniveling unproductive government bureaucrats. And California will likely be forced to end defined benefit plans. The deciding factors will be how the government and pension boards seized and wasted untold hundreds of billions of taxpayers’ wealth on their illegally-financed political goals and unconstitutional deprivations of free speech.
    Call Jeff Sessions, Howard Jarvis, every taxpayers’ organization in California, and the Republican Party to get organized for this legal challenge. This could bring back the California Republican Party and re-invigorate the national Republican Party.

  4. Shades of Willie Brown! Do you remember when he was head of the pension board? He put “political correctness” ahead of fiscal fitness when making pension decisions.

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