Pension execs encouraged to develop divestment policies

Pension funds facing demands to divest holdings in response to specific issues could take a more strategic approach by developing a divestment policy statement in the same way their standard of practice calls for adopting an investment policy statement, according to a fund official and consultant.

The New York City Employees' Retirement System is exploring development of a comprehensive policy on divestment for its $42 billion fund, at the request of Scott M. Stringer, president of the borough of Manhattan and a NYCERS trustee.

“We are seeing some funds interested in a strategic approach to responsible investment,” said Craig Metrick, principal and U.S. head responsible investment, Mercer LLC, New York. “I'm not going to call it a divestment policy, but it seems like these types of investors are being asked more and more about sustainability, environment and social issues,” Mr. Metrick said.

“I think that's a good idea long term ... toward having some response. ... It may not result in action, but (a policy would serve to) having some response to these requests for divestment or investment.”

“Divestment can be a slippery slope,” Mr. Metrick said.

In a Feb. 1 letter to other NYCERS trustees about a divestment policy, Mr. Stringer said: “Establishing such a policy would help ensure we employ a consistent and rigorous approach to all divestment decisions and that, subject to fiduciary responsibility, such decisions are based solely on financial and economic considerations.

“NYCERS and many other large public pension funds in the U.S. have been requested to consider several divestment campaigns in recent years and will certainly encounter more in the years to come,” Mr. Stringer wrote.

The NYCERS board directed Callan Associates Inc., its general consultant, to research existing policies and best practices related to divestment at other pension funds. The board expects Callan to report back as early as the Feb. 26 meeting of its investment committee, which is composed of all trustees. No timeframe has been established for a vote to draft a comprehensive policy.

The December Newtown, Conn., school shooting was the catalyst for Mr. Stringer's recommendation to the board to consider adopting a divestment policy.

The California Public Employees' Retirement System, Sacramento, adopted a divestment policy statement in February 2009. It sets a policy for its $253.2 billion in assets for “responding to external or internal initiatives to cause CalPERS to sell investments or refrain from making additional investments (divesting) for the purpose of achieving certain goals that do not appear to be primarily investment-related, such as promoting social justice (divestment initiatives).”

The CalPERS policy goes on to state it “generally prohibits divesting in response to divestment initiatives but permits CalPERS to use constructive engagement, where consistent with fiduciary duties, to help divestment initiatives achieve their goals.”

The California State Teachers' Retirement System, West Sacramento, adopted a divestment policy statement for its $157.8 billion in assets in March 2009, setting an approach “for responding to external or internal initiatives to divest of individual or groups of securities for purposes of achieving certain goals that do not appear to be primarily investment-related.”

The policy states CalSTRS will not exclude or include any investments, except in cases where one of its defined 21 risk factors — accounting, environmental and health, among other issues — “is violated over a sustained time frame to the extent that it becomes an economic risk to the fund, a potential for material loss of revenue exists, and where it weakens the trust of a significant portion of members to the system.

“When pressured to divest, CalSTRS firmly believes that active and direct engagement is the best way to resolve issues.”

In January, the board ordered divesting CalSTRS' holdings in firearms manufacturers unless they stop making certain types of guns. In 1987, the system divested holdings of South Africa-related investments. The system also divested holdings in Sudan and Iran as a result of state divestment legislation enacted in 2006 and 2007.

Officials at other funds offered a different perspective.

“I think one of the challenges all institutional investors encounter, and certainly in the public sector, maybe because we are more high profile, is the issue where virtually everything you invest in, somebody will likely oppose,” said Gary Findlay, executive director of the $8 billion Missouri State Employees' Retirement System, Jefferson City.

“I don't know what a general divestment policy would look like,” Mr. Findlay said. “Perhaps it would stipulate what a fund would not do under certain circumstances.

“As a general matter, if there is a compelling economic case for divesting, you would think it wouldn't be an issue,” Mr. Findlay said. “If it appears that whatever this particular company is engaged in is going to fail or not perform as well as the market in general, you would expect investors to shy away from it without the need for a specific policy.”

Among other pension funds, Florida State Board of Administration, Tallahassee, observes divestment policies enacted by statute for the $162.9 billion it oversees.

“All our prohibited investments are done through state statutes,” said John Kuczwanski, communications manager, adding the board has not considered adopting a divestment policy.

“Because it is done by changes in statutes, (we aren't) making decisions on investment in gun manufacturers” or other issues, Mr. Kuczwanski said. “We don't get drawn into discussion on whatever the issue of the moment is. (We) understand political motivations. But we don't do that for our investments.” n