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San Francisco board split on staff-opposed measure to divest fossil-fuel companies


The investment staff of the San Francisco City & County Employees' Retirement System and its general investment consultant, NEPC, have come out in opposition to a plan to divest fossil-fuel company holdings, including industry giants like Exxon Mobil, Royal Dutch Shell and Chevron Corp.

Meanwhile, the retirement board is split on how they will vote, four years after the San Francisco Board of Supervisors passed a resolution calling on the $23 billion pension fund to divest of fossil-fuel company securities. The issue was expected to be voted on Wednesday, but was later removed from the agenda due to the absence of two board members.

The retirement board, which operates independently from the board of supervisors, approved divesting of a small portion, $446,000 of its $40 million-plus thermal coal holdings on May 16, but up to now had taken no action on its larger $442 million stock holdings and its $31 million in fixed-income securities in oil companies. Fossil-fuel stocks make up 4% of the pension plan's equity portfolio.

William Coaker Jr., chief investment officer, said in a memo posted on the system's website that staff is "aware and concerned" about the "potential negative effect" fossil-fuel holdings in the portfolio could have on the environment and climate change.

But Mr. Coaker rejected divestment. "We recognized that SFERS divestments from fossil-fuel holdings will not reduce carbon emissions — it simply changes ownership of these securities. With divestment, SFERS will forfeit its standing as a shareholder to engage these fossil-fuel companies to transition their business plans to a low-carbon economy in line with the Paris agreement."

In a 164-page report, Mr. Coaker argues that while alternative energy sources are growing, fossil fuels still account for 84% of energy usage and that rate will still be 78% in 2040. He said "fossil fuels make modern life possible" and the fuels are used to make a broad range of devices including cell phones, toothbrushes and perfumes.

In a separate report dated Aug. 9, consultant NEPC said that fossil-fuel stocks have been one of a limited pool of assets that have performed well in environments of higher inflation. "For example, during the most recent period of high inflation from 1973 to 1981, the S&P 500 index returned a cumulative -26% in real terms whereas equities in the energy sector returned +154% in real terms."

The NEPC report also says that divestments have not been broadly adopted by U.S. institutional investors. "While a select number of U.S. foundations and endowments, non-U.S. institutions (including the Swedish AP7 fund), and a few U.S. corporate pensions have pursued a fossil-fuel divestment strategy, broad action on fossil-fuel divestment has been avoided by public funds."

SFERS board member Victor Makras, who introduced the resolution to divest of fossil-fuel companies on May 17, called Mr. Coaker's and NEPC reports "dishonest." In a phone interview, Mr. Makras said no analysis was done by either the investment staff or NEPC as to how fossil-fuel stocks performed compared to a broader stock market index over recent time periods of one, three, five and 10 years.

He said the analysis could help the board determine from a historical perspective whether eliminating fossil-fuel companies from the portfolio hurts investment performance or not.

Mr. Coaker and NEPC officials could not be reached by press time for comment on Mr. Makras' statement.

The seven-member retirement board is split on whether to divest. Board member Leona Bridges seconded Mr. Makras' May 17 resolution; and board member Malia Cohen, who is also a San Francisco city supervisor, is supportive of the measure. Board members Joseph Driscoll, Brian Stansbury and Wendy Paskin-Jordan are expected to vote against the divestment measure.

That would leave the deciding vote in the hands of board member Al Casciato, who has not indicated his position.