What fossil fuel divestment could mean for city’s pension fund
Written for the Pittsburgh Business Times, June19, 2017,
After the US left the Paris Accords, Pittsburgh committed to reaching numerous climate goals — including divesting the municipal pension fund of fossil fuels by 2030.
When it comes to his duties as the City of Pittsburgh’s finance director and head of the city’s pension fund, Paul Leger knows he has a “legal and fiduciary responsibility to gain the highest return on the fund possible.”
But if an order comes down from elected officials to make a change — say divest the city’s pension fund from fossil fuels — he’ll have to find a way to balance that command with his legal duty to protect the city’s investments.
After President Donald Trump decided to put Pittsburgh on the political map with an alliterative announcement against the Paris Agreement — an international treaty meant to push back on climate change — on June 1, Mayor Bill Peduto laid out the groundwork for a green decree.
“President Trump’s decision is disastrous for our planet, for cities such as Pittsburgh, to the commitments the United States made to the rest of the world, and to our responsibility to save the globe for future generations,” Peduto said in a statement that evening.
The next day, Peduto confirmed the city’s commitment to the Paris Agreement and its 2030 climate objective — including a commitment to divest its pension fund of “fossil-based companies.”
The executive order simply reiterated the city’s eco-friendly aspirations and had no real effect on Leger’s duty yet. For the divestment to be a priority for Leger, both City Council and the Comprehensive Municipal Pension Trust Fund board have to agree to the change.
Personally, Leger sees divestment as “good public policy.” And as “Pittsburgh tends to be a leader” in green technology and innovation, he sees no reason to stall.
“It’s just a good thing to do, and if you’re going to do it, why wait until 2030?” Leger said.
By Leger’s estimate, about 5 percent of the $415 million invested in mutual funds is invested in fossil fuels.
But even taking that 5 percent out could be harmful to the fund as a whole, according to a recently released study by Compass Lexecon, a Chicago-based economic consulting group.
Co-author Chris Fiore, vice president of Compass Lexecon, said the study found in every situation that divestment hurt pension funds. Compass Lexecon took 11 separate municipal retirement funds and compared results from the past 50 years of their portfolios with and without fossil fuels.
The study was sponsored by the Independent Petroleum Association of America, which Fiore said did not influence the outcome.
Instead, according to Fiore, the result mostly comes down to risk. Because energy stocks tend to move the least with the economy as a whole, they are more risk resistant than other industry’s stocks that move with the economy.
“If you want the highest amount of returns, you actually can’t earn the same returns as you can with disinvestment as you can without divestment,” Fiore said. “You actually have to take on more risk.”
On a whole, the study found that the pension funds they measured lost .15 percent or .2 percent of their value depending on how strictly defined divestment was.
For Pittsburgh, Fiore said that meant they could lose $358,000 to $478,000 a year.
However, Leslie Samuelrich, executive director of the Boston-based investment group Green Century Capital Management Inc., has made a career out of green investing and sees the numbers cited by Fiore as “insignificant.”
Instead, she points to Green Century Equity Fund — which she says has consistently topped the S&P 500 average for “many years” — as well as other studies by groups like MSCI Inc. (NYSE: MSCI) that show thinking about finance ethically doesn’t necessarily mean monetary loss.
In fact, the reaction of Pittsburgh — to doubling down on divestment after the Paris Agreement pull out — is a reaction she has also seen from private citizens, not just municipalities.
“The imaginary wall between what you do in your personal life and what you do with your money has been eroding, and I think the climate accords punched a hole in that wall,” Samuelrich said.
Even if Samuelrich saw the percentages cited by Fiore as puny, when Leger looks at the city’s pension, he is cautious — and besides, he says that he “can’t afford to waste the city pension fund for any reason.” But with a 2030 deadline, he seems confident that there is a green path for the city’s pension.
“We have to be careful we do not remove well-performing funds to accomplish this goal,” Leger said. “If you did it recklessly and started dumping funds that had any fossil fuels you probably would [lose money]…[but] by careful management, I might be able to accomplish divestiture at the same time.”
Pittsburgh Business Times