Playing God with Other People’s Retirement Money

Last week, Arabella Advisors released a new report, claiming worldwide divestment from fossil fuels had doubled to $5 trillion. Even setting aside the number (which has been thoroughly debunked), or the sticky question of how modern economies and lifestyles would function without carbon-based fuels (given that electricity, transport, and literally millions of consumer goods depend upon fossil fuels and their derivatives), there’s the issue of whether institutional fund managers are abrogating their fiduciary duty by falling prey to activist rhetoric.

A paper released last month by the Center for Retirement Research at Boston College took a look at this issue, examining whether public pension funds should engage in social investing. The authors concluded that while “social investing may be worthwhile for private investors, lower returns and fiduciary concerns make public pension funds unsuited for advancing [environmental, social, and governance] goals.”

The authors identified the following problems with politically-driven divestment schemes:

  • Lower returns. The authors compared environmental, social, and governance [ESG] mutual funds with comparable unrestricted Vanguard funds and found "In most cases, the Vanguard funds outperform their ESG counterparts, often by a considerable margin. Part of the reason is that the fees in the ESG funds are roughly 100 basis points higher than their Vanguard counterparts, which may reflect the additional resources required to perform the screening." Since pension managers have a fiduciary duty to maximize returns, this is a huge problem. As the authors concluded, “The effectiveness of social investing is limited, and it distracts plan sponsors from the primary purpose of pension funds – providing retirement security for their employees.”
  • Decision makers are not stakeholders. As the authors point out, social divestment/investment “involves a principal-agent problem since decision makers do not bear the risk of potential losses; rather, any losses will accrue to future beneficiaries and/or taxpayers.”
  • Difficulty of pricing preferences. Some of the pension recipients might be willing to give up (some) potential returns in order to have investments that exclude fossil fuels, but many would not. As the authors state, “Given different preferences, it would be difficult for public pension funds to fully incorporate the value of ESG factors of all beneficiaries. Additionally, these preferences may change over time as social values and political views shift.”

And as a survey from the Independent Petroleum Association of America found earlier this year, 64% of pensioners said that they were not willing “to divest from any company or industry for political or personal reasons if it meant the possibility of lower returns.” Almost two-thirds also agreed that “they want their pension fund manager to invest in a way that is solely focused on ‘maximizing returns.’” A majority of pensioners seem to feel strongly that pensions are a retirement vehicle, not an advocacy venue.

These issues make it clear that institutional divestment from fossil fuels puts politics before people. It risks the pensions of firefighters, nurses, and teachers in order to fulfill the extremist agendas of activists who won’t be the ones left facing the consequences of their decisions.