Pension fund should keep fossil fuel investment

The San Francisco Employee Retirement System has once again delayed a vote on a proposal to divest the fund from fossil fuels, a costly and empty gesture that SFERS is clearly avoiding. Yet proponents of the proposal continue to argue that divestment is a “moral obligation,” ignoring the men and women who stand to be impacted by the decision: the retirees who rely on their pensions for returns, not politics.

Supporters of divestment lean on the idea that divesting over the past five years would have shielded an investor from a drop in energy commodity prices. What they fail to acknowledge is that divestment creates significant investment risks and that a five-year investment history does not paint a full picture. Instead, divesting now would simply mean selling low, giving up the gains of future rebounds in the market.

Even the head of research at investment analytics firm MSCI — a firm with a large focus on environmental and social investment opportunities — explains that “(Divestment) is not optimal from a financial perspective … because it can create significant short-term risk by potentially deviating sharply from market risk and returns.”

What would this risk look like for San Francisco? According to research conducted by professor emeritus Daniel Fischel of the University of Chicago Law School, SFERS stands to lose nearly $150 billion over 50 years and millions of dollars annually if it divests from fossil fuels, and up to $200 billion if you add in the utility sector. These losses are driven in large part to reduced diversification benefits that the energy sector provides for a portfolio, not to mention increased management fees to keep a fund “fossil free” and new transaction costs for selling investments. In fact, SFERS estimates that the fund holds $473 million in investments of the Carbon 200 (a list of the 200 publicly traded coal, and oil and gas companies globally), representing 4 percent of its total public equities.

These impacts are not lost on SFERS employees. In a memo to the retirement board released just days before the intended Aug. 9 vote, the executive director and chief investment officer recommended voting against the divestment proposal, writing, “Divestment from Carbon Underground 200 fossil fuel companies will materially reduce the potential risk-adjusted return from the SFERS public markets portfolio.”

SFERS’ independent investment consultant, NEPC, also urged the fund against divestment, stating, “divestment reduces the opportunity set for our active managers to earn excess returns” and “incurs additional transaction costs that would be borne by the Retirement System,” and that divestment has “not been adopted broadly by U.S. public pension systems for many of the same reasons.”

Beyond any financial impact, divestment has no tangible impact on targeted companies or the environment; it is merely a transfer of shares from one investor to another. This point is even acknowledged by SFERS staff who noted that “SFERS’ divestment from fossil fuel holdings will not reduce carbon emissions.”

Some people may be willing to play politics with their own investments, but SFERS obligation is to its retirees. Divestment would only impose new costs, with no gain.

Jeff Eshelman is the senior vice president of operations and public affairs at the Independent Petroleum Association of America (www.ipaa.org).