As the chair of the Council’s Budget Committee I also chair the Seattle City Employees’ Retirement System (SCERS) Board. At the request of the 350Seattle.org which is fighting global climate change, SCERS asked our investment consultant NEPC (of Boston) to give its recommendation on how the city might divest from fossil fuel stocks, commonly referred to as the Carbon Underground 200 (CU200.)
Last June, the City Council passed Resolution 31525, which I sponsored, adopting investment policies for the City. In that resolution, the City Council urged the SCERS Board to work towards divestment from fossil fuel holdings.
NEPC’s first report in November said divestment could not be done responsibly; however, it only presented a single scenario – complete & total divestment done all at once, which would result in massive costs and penalty fees. I wrote about this in Urban Politics Issue 359. That report failed to answer the original SCERS question: “…how divestment could be sequenced over the next 5 years”. Consequently, I moved that the board ask NEPC to address this question. The motion passed and last week NEPC presented its follow-up report, which once again recommended against divestment from fossil fuel companies.
The gist of their argument was that no other public pension fund had divested (though NEPC ignored the fact that public pensions outside the US had,) and that any screening of fossil fuel companies would invariably reduce investment performance and increase costs.
In response, I softened the divestment request by moving that:
“The Investment Committee recommends to SCERS the preference that, at natural points of transition, the active investment managers representing SCERS move out of fossil fuel investments with consideration of fiduciary responsibilities and that SCERS receive a review [of] this practice and report any available information on the current state of carbon by September 1, 2015.”
The new language would allow SCERS investment managers to determine if and when divestment was financially prudent. It also specified that any divestment be made at “natural points of transition”, which was done to address NEPC’s claim that executing any changes would trigger additional transaction costs. However, despite the cautious nature of the new proposal, NEPC’s assertion that there would be higher costs, lower returns, and that Seattle would be the first to take the divestment step – though none of these assertions were conclusive or perhaps even accurate – created enough concern among the SCERS board that they accepted NEPC’s recommendation.
Regrettably, my motion did not receive a second from the board members, so it could not be discussed. Certainly I was disappointed; however, I was struck by how adamant NEPC had been in opposing any consideration of shifting the City’s investments out of fossil fuel companies – regardless of how measured or systematic the proposal. NEPC’s apparent bias – they appeared to ignore studies, cherry-pick evidence, and adopt narrow-minded financial theories in their effort to create a narrative against divestment – seemed like a dogma which rational thought could not penetrate.
At least one NEPC client has rejected NEPC’s approach. The University of Maine System, which has close to $600 million (SCERS is just twice that, at $1.2 billion) rejected NEPC’s advice against divestment. Glen Cummings, president of the University of Maine at Augusta, clearly described the State System’s decision to divest from coal as a rational one: “From a pragmatic point of view, moving to more sustainable sources of energy is a good financial investment.”
A number of other institutions have come to a similar conclusion. The United Methodist Pension Fund with $21 billion (17.5x the size of SCERS) and Stanford University with $18 billion (14.5x the size of SCERS) have both opted to begin divestment from coal. Outside this country, AP2, Sweden’s National Pension Fund with $36.7 billion (30.6x the size of SCERS,) is divesting.
These institutions, each of which is significantly larger than SCERS (which multiplies their level of their fiduciary duty,) recognize a likelihood that is referred to as “stranded asset risk” whereby fossil fuel companies will be stuck with assets under the ground -coal or other fossil fuel assets that cannot be extracted because of changing laws, regulations, or market demands. Already we have seen a marked decline in fossil fuel valuations and the market place is changing dramatically. Even NEPC, in its report to SCERS, noted that fossil free indexes – indexes that screen out the CU200 – performed 30 points better than the S&P 500 over the last 10 years. Just in 2014, the Fossil Free Indexes US (FFIUS) outperformed the S&P 500 by roughly 1.5%.
Other major institutions and retirement funds around the globe have recognized the financial risk and the devastating environmental impact that looms if we continue to expand carbon fuel consumption. I believe SCERS missed a unique and important opportunity – both to avoid risk and to help secure a better future for us all. However, the City’s Finance Director, Glen Lee, did introduce and the Investment Advisory Board unanimously passed the following motion:
“Upon the motion by Glen Lee, seconded by Robert Harvey, Jr., the Investment Committee recommends that the Seattle City Employees’ Retirement System (SCERS) pursue corporate engagement on climate change and other environmental issues, as presented by staff in their January 26, 2015 memorandum; and pursue, as appropriate, investments that are expected to produce investment results consistent with SCERS’ fiduciary duty to its members and, if possible, also positively address climate change and other environmental issues. The Board recognizes that these types of investments (e.g. renewable energy, cleantech, and green bonds) are relatively new and limited in availability and will need to be considered prudently as SCERS pursues investments in its asset classes (e.g. real assets, private equity, fixed income.) SCERS’ staff and advisers will provide quarterly updates regarding ESG investment issues and treat ESG issues as a strategic goal of SCERS.”
The Lee motion does not divest from fossil fuel companies; however, it does encourage investing in alternative energy sources and practicing active engagement to improve companies’ behavior. Perhaps most importantly it requires NEPC to report back quarterly on the state of the fossil fuel market, the progress of institutional divestment, and related ESG (environmental, social & governance) issues. Since it takes steps in the right direction I support it. However, it fails to address stranded assets and a potential carbon investment bubble that could threaten our retirement funds, and it fails to acknowledge the City’s responsibility for contributing to global warming.
The next meeting of SCERS is February 12th at 9am in room 900 of the Artic Building (720 Third Ave,) there is a limited time set aside at the beginning for public comment. Since my more beneficial motion did not receive a second it will not be discussed, and instead the Lee motion will be formally voted on at this meeting.
Thanks to Bruce Herbert, Chief Executive of Newground Social Investment, SPC and Alex Lenferna, South African Fulbright & Mandela Rhodes Scholar at the UW