The WSJ's "Calpers’ Dilemma: Save the World or Make Money?" reported on increasing opposition to or discomfort with social concerns-based investment decision-making - particularly mandatory or self-imposed divestments from certain industries, geographies, or companies with specified attributes or practices - by public pension funds, an approach that has proven to generate lower returns than more balanced portfolios. The article notes a November 2016 study by the Boston College Center for Retirement Research that purportedly revealed 40% lower average annual returns in states with divestment requirements compared to plans in states without such requirements.
Not surprisingly, the concerns about the implications of divestment strategies on financial returns are becoming more prominent in the context of increasing transparency on huge pension fund shortfalls. Illustratively, based on its liabilities as of June 30, 2017 (the latest figure available), Calpers reportedly is $139 billion short of its funding needs. But Calpers isn't unique in its assets/liabilities gap:
Calpers isn’t the only system wrestling with these new doubts. Rising funding deficits are prompting public officials and unions across the U.S. to reconsider the financial implications of investment decisions that reflect certain social concerns. The total shortfall for public-pension funds across the U.S. is $4.2 trillion, according to the Federal Reserve.
The article observes that Calpers' directors have indicated a preference for engagement with target companies (in lieu of divestment) to effect change, which presumably would advance the fund's desire to address social concerns without sacrificing potential financial returns.
See also the Institute for Pension Fund Integrity's "Divestment - The Impact of Political Decisions on Public Pensions" and our recent report: "Benefit Corporations: Explained & Timely Revisited." This post first appeared in the weekly Society Alert!