The divestment of various “undesirable” companies and industries held by government investment portfolios has been all the rage in recent years, but politicizing investment decisions is bad news for taxpayers.
The California State Teachers’ Retirement System voted this month to get rid of all of its stocks in U.S. coal companies, and the University of California system acceded in December to students’ demands to sell off about $30 million of its investments in companies that operate prisons.
Despite the latest divestment fads, such investment activism is hardly new. The California Public Employees’ Retirement System has prohibited investments in gun manufacturers, tobacco companies and any company that might compete with state or local employees for contracts. After CalPERS lost 9.7 percent on its environmentally-sensitive “green” energy and “clean” technology portfolio from 2007-13, its chief investment officer quipped that it was “a noble way to lose money.” After all, it wasn’t his money.
CalSTRS also has a history of politically-motivated divestments, and the results have not been good for taxpayers, who have to make up the difference when pension funds underperform in order to cover employees’ retirement benefits. The pension fund lost between $600 million and $750 million after a 1987 law required divestment of companies doing business with apartheid South Africa, and it lost another $1 billion after divesting from tobacco companies in 2000.
“I’ve been involved in five divestments for our fund,” CalSTRS chief investment officer Chris Ailman told the CalSTRS board last year as the board was considering the divestment of its coal company holdings. “[On] all five of them we’ve lost money, and all five of them have not brought about social change.”
Once the Pandora’s box of politicizing state public investments has been opened, where does it stop? “If you start going down the list of Fortune 500 companies, I’m sure we can come up with reasons we should divest from each one,” Ivo Welch, a finance professor at UCLA’s Anderson School of Management, told the Los Angeles Times when asked about the UC private prison divestment. “I’m almost left speechless by how we pamper student whims.”
The same could be said of other environmental and social justice warriors who want to play politics with government workers’ retirement funds. Of course, this could all be avoided by switching public employees to 401(k)-style defined-contribution retirement systems. Activists would be able to put their money where their mouths are by investing their own retirement funds in “green” energy, or avoiding gun manufacturers and private prison companies, and others would be free to try to maximize their nest eggs.
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Pension funds put activism before investment returns
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