The Vermont Pension Investment Commission, the overseer of Vermont's three largest pension funds, is fighting to beat back a bill that would require it to divest any holdings in fossil fuel companies — and so far its efforts appear to be working.
After airing its concerns during public meetings in February and March, VPIC managed to persuade lawmakers in the Senate to consider a compromise, one that VPIC views as the best way to get companies to address climate change without jeopardizing the pension benefits of current and future retirees.
The compromise calls for a legislative amendment that would exclude index funds and private equity investments from having to be carbon-free. VPIC argued that these exclusions would help maintain the low cost and stability of the state's pension funds for teachers, municipal workers and state employees.
"I think you really need to exclude index funds from the mix because it would put Vermont at a significant disadvantage if we weren't able to access traditional indexing products," said VPIC Chairman Thomas Golonka during his testimony in February.
Mr. Golonka explained that carbon-free index funds are "twice the price" of traditional, broad-based index funds and have more volatility.
Mr. Golonka also pleaded with lawmakers to exclude private equity investments from the divestment requirement, saying that such investments are key to hitting VPIC's assumed rate of return for the three pension plans that make up the $5.5 billion Vermont State Retirement Systems — Vermont State Employees' Retirement System, the State Teachers' Retirement System and the Municipal Employees' Retirement System.
If VPIC were forced to lower its assumed rate of return because it could not invest in private equity, it would put its pension plans in significant jeopardy, he said. Mr. Golonka explained that ESG restrictions on private equity would prevent VPIC from getting into long-term contracts with "top-tier" private equity managers.
"You don't want to be in private equity unless you feel you can be at the top tier," he said. "There's no reason tying up your money if you can't do that."
Mr. Golonka and other VPIC members also reminded lawmakers of VPIC's strong track record in working with companies to enhance their environmental, social and governance practices through proxy resolutions, an approach they argued was more effective than divesting.
Simply selling the shares of carbon-intensive companies would only put them in the hands of a less responsible shareholder unlikely to apply the kind of pressure that VPIC applies on fossil fuel companies to adopt friendlier environmental practices, said Eric Henry, VPIC's chief investment officer.
Less responsible shareholders are not "going to go head-to-head with the board of directors of an energy company" nor are they going to "not back off until they show clear metrics and clear plans for reducing their emissions," he said.