Can CalPERS Divestment Make A Difference In Controversial Projects?

As protests against the Dakota Access Pipeline were growing last November, San Jose Democratic Assemblyman Ash Kalra was winning his first term in office. He didn’t celebrate long.

Kalra traveled to North Dakota to hand out supplies to protesters camping at the Standing Rock Indian Reservation, near the pipeline’s planned route.

“I wanted to be there to help,” says Kalra. “I also wanted to be there personally to experience what was happening there, because I do think it was a very special moment.”

Once he arrived in Sacramento, Kalra handed in his first bill in the Legislature (“literally minutes after being sworn-in in December”).

It required the state’s two enormous public pension systems, CalPERS and CalSTRS, to divest their shares from companies involved in building the pipeline. Those pension systems for state retirees and public school teachers control hundreds of billions of dollars in investments.

“Our pension funds, in particular, have a significant impact on the economy and in sending a very strong message that there are some things that are worth fighting for,” Kalra says.”

California has seen a slew of calls for divestment this year, including against the pipeline, companies that could help build President Donald Trump’s border wall, and businesses with ties to Turkey.

This week, State Treasurer John Chiang has proposed CalPERS and CalSTRS divest from companies that sell firearms used in the Las Vegas mass shooting, and 12 Democratic members of Congress from California called on the funds to divest from Trump Organization properties.

But the most ardent opponent of these divestment efforts is often the funds themselves.

“Taking us out of a particular company has zero impact to that company,” says CalSTRS chief investment officer Chris Ailman. “Somebody else buys the shares. It’s literally like a boycott of two out of thousands.”

Economic studies generally support this argument. And, since 2000, CalSTRS has offloaded stock from tobacco, firearms and coal companies, which continue to do well.

“The financial markets within two or three seconds will very easily catch even the largest sell orders of institutions, pension funds, individuals,” says UCLA economist Ivo Welch, whose research into divestment is widely-cited by economists. “For this to have any effect you really would have to have not just California divest, you’d have to have all the world divest.”

But Janet Cox says that misses the point. She’s with Fossil Free California, a group that urges pension funds to divest from oil, gas and coal companies.

“The way we describe it as removing the moral license of the fossil fuel companies,” says Cox. “If you’ve got the biggest pension funds in the United States saying, ‘We’re simply not going to put our money in these companies,’ that’s a really strong statement.”

Even if it doesn’t immediately hit companies in the pocket book, Cox says it creates public stigma that can lead other shareholders and then even governments to pull out, too.

The common example is when divestments and mass boycotts in the 1970s pressured South Africa to end apartheid. Welch says it’s hard to measure the effect of that kind of pressure, but divestment in South Africa did not put financial stress on the country.

Opponents also say it’s not worth putting the funds’ recipients at risk. CalSTRS reports divestment has cost $5.4 billion in fund growth since 2000.

 “You’re asking our classroom teachers to pay for something that the state is deciding to do,” says Jennifer Baker, lobbyist for the California Teachers Association.

Here, too, Welch thinks the costs to pension funds are overstated.

“Including one more or one less security in the portfolio really isn’t going to make much difference either,” he says. “For the most part, it’s an unimportant idea. It might create a lot of record-keeping and keeping track of costs."

Pension funds and unions say there’s a better alternative: Remain as major stockholders and influence these companies from within.

“It’s a false narrative that somehow by selling your shares petulantly you have harmed the company somehow, and they’re worse off,” says former CalPERS senior investment officer Christianna Wood. “You by definition sell them to someone who cares less about your issue, and you really remove your ability to engage the company, because you’re no longer a share owner.”

After pressure from unions and the pension funds, Assemblyman Kalra changed his Dakota Access Pipeline bill to require engagement, rather than divestment.

“They’re saying that, ‘Hey we have more power to have our voice heard if we have a seat at the table,’” Kalra says. “Well, that’s what this bill is going to find out—is how we’re using that seat at the table.”

In its final form, the bill requires pension funds to tell lawmakers how they’ve used their influence to try and reroute the pipeline. Gov. Jerry Brown signed it last month. The measure is the only one related to divestment to pass during the legislative year.

Asked what he'll do if he's not satisfied with the response from CalPERS and CalSTRS, Kalra says only that all options are on the table.

Notable CalPERS Divestments* From 2000 To Present

2000 - CalPERS board votes to divest from tobacco stocks, totaling $525 million.

2006 – Gov. Arnold Schwarzenegger signs law requiring divestment from Sudanese oil companies complicit in the Darfur genocide. CalPERS ultimately divests from three companies.

2007 – Gov. Arnold Schwarzenegger signs law requiring divestment from Iranian companies with ties to terrorist organizations. CalPERS ultimately divests from seven companies.

2013 – After Sandy Hook shooting, CalPERS board votes to divest from $5 million in firearms manufacturers’ stocks.

2015 – Gov. Jerry Brown signs law requiring divestment from coal companies. CalPERS has divested from 14 companies, so far.

2016 – CalPERS reconsiders whether to continue ban on tobacco stocks, but rejects staff advice and maintains divestment.

*To protect the state from liability, divestment proposals typically require pension funds to only shed stock if they determine it will not interfere with their fiduciary responsibility to retirees. So, the funds may continue to hold stock in some companies, despite measures requiring divestment. Many recent proposals—including Sudan, Iran and coal divestment—allow the funds to first engage with companies, before off-loading their stocks.

Correction 11/2/17: This article has been updated to reflect the current calculation from CalSTRS about how much fund growth it has lost from divestment since 2000.