REPORT: Fossil Fuel ‘Divestment’ Hurts Pension Fund Returns

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(Michael Bielawski, Watchdog.org) A study conducted for the Vermont Pension Investment Committee gives fresh ammunition to opponents of divestment from oil and gas in state pension funds.

The 63-page report, conducted by independent consulting firm Pension Consulting Alliance, finds that injecting climate change politics into state worker retirement funds harms fund performance and does nothing for the environment.

Last year, Gov. Peter Shumlin pushed for VPIC to divest Vermont’s state pension fund of Exxon Mobil and 200 other energy stocks. That agenda was strongly opposed by Treasurer Beth Pearce and VPIC Chair Thomas Golonka.

The report highlights five key concerns about divestment, the first being that divestment imposes high costs and fees.

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As of June 30, 2016, about 3.6 percent of Vermont’s $3.74 billion pension fund was invested in fossil fuels. Pearce’s office reported in 2014 that the costs to divest would be $134 million, including an initial $8.5 million and another $10 million in lost returns annually.

“The largest measurable explicit costs of divestment to VPIC would be ongoing increased management fees,” the report states.

“Management fees would increase under each of these three divestment scenarios because VPIC commingled funds, where the bulk of VPIC’s fossil fuel were held, would have to be restructured into materially higher-cost SMA [Separately Managed Accounts] funds.”

In fact, one of the conclusions of the report states: “Given the financial and governance costs that come with fossil fuel divestment, in PCA’s opinion, divestment of fossil fuels, thermal coal, or Exxon has not been shown to be in the best interests of VPIC pension beneficiaries, and conflicts with VPIC governance structure.”

But the authors also looked at how divestment might affect fossil fuel use and impact on the environment. They found that divestment does not reduce demand for, or dependence on, fossil fuels, nor does it impact the financing of targeted companies: “Publicly held equity divestment only transfers ownership of fossil fuel securities; it cannot provide fossil fuel alternatives with any new financial resources.”

Divestment in Vermont has powerful supporters and opponents.

Support for divestment is championed by 350.org, the Vermont Public Interest Research Group, and Shumlin, among others. Groups lined up against divestment include the Vermont Troopers’ Association, Vermont Retired State Employees Association, Vermont League of Cities and Towns and Vermont State Employees Association.

The authors note that divestment from fossil fuels is “a sparsely used strategy among U.S. public pension plans,” and recommends against the strategy: “We believe that VPIC’s significant proxy voting and engagement efforts on climate risk issues at fossil fuel companies, including ExxonMobil, and investment strategies other than divestment, are better suited than divestment for VPIC to manage risks and opportunities posed by climate change within its role as fiduciary of a U.S. public pension fund.”

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