Column: Weighing the cost and benefit of divestment

Divesting from the coal industry is one thing, given CalPERS’ and CalSTRS’ relatively small investments. But losing out on oil and gas profits raises such issues as the public pension funds’ fiduciary duties.
Divesting from the coal industry is one thing, given CalPERS’ and CalSTRS’ relatively small investments. But losing out on oil and gas profits raises such issues as the public pension funds’ fiduciary duties.
(Max Whittaker / Getty Images)

Silicon Valley and the entertainment and biotech sectors have secured California’s reputation as an investment nirvana. Here’s the other side of a coin: the state is a national leader in divestment actions too.

California initiatives aimed at stripping socially unpopular industries out of institutional portfolios include Senate Bill 185, signed by Gov. Jerry Brown last October, effectively mandating that the state’s two giant public pension funds, CalPERS and CalSTRS, divest from the coal industry.

The University of California system last year sold $200 million in endowment and pension fund holdings in coal and oil sands companies. Stanford University divested from coal companies in 2014, and in November agreed to consider dropping investments in oil and gas after students staged a sit-in protest.

These moves build on a longer tradition. Tobacco companies, firearms makers and companies doing business in Iran and Sudan have all been targeted for divestment over the years by CalPERS and CalSTRS — the California Public Employees’ Retirement System and California State Teachers’ Retirement System. Just last month, UC moved to unload $30 million in holdings of private prison companies. Fossil fuel companies are the prime targets today. “On the global stage, California is seen as a bellwether on climate action,” says May Boeve, executive director of, an organizer of the fossil fuel divestment campaigns and other climate change initiatives. “To have all this divestment happening here helps it take off in other places around the world.”

But the fossil fuels divestment movement raises broad questions about divestment in general and the fossil fuels campaign itself. Does divestment work? And if it does, can the lessons learned from the fossil fuel campaign be applied to other industries targeted by California activists, such as firearms and private corrections companies?


Many targets of divestment campaigns present easy choices: they’re small industries with insignificant weights in portfolios, or may be losing their investment allure anyway. Big industries with long-term prospective value — such as oil and gas — are a harder call for investment managers.

From a strictly financial perspective, divestment campaigns may not affect the target industries or companies. The most widely heralded divestment campaign of recent years, waged against the apartheid regime of South Africa in the 1980s, saw wholesale boycotts and divestment by pension funds and university endowments. Such big U.S. corporations as IBM, Exxon Mobil, General Motors and Ford withdrew from the country.

“Despite the prominence and publicity of the boycott and the multitude of divesting companies,” a 1999 study by UCLA finance professor Ivo Welch and two colleagues found, financial markets valuations of the targeted companies or South African financial markets were not “visibly affected.”

Welch told me by email the prospect is “extremely unlikely” that even “coordinated but voluntary boycotts will make a difference on large publicly traded corporations. There are too many ‘escape valves.’” Among other things, shares divested by socially conscious investors will merely be taken up by those without such standards.

Critics of divestment campaigns say they only harm the beneficiaries of investing institutions that give up potential profits by tailoring their portfolios to reflect social goals.

But the campaigns can raise public awareness. “People have a feeling of hopelessness about the scale of climate change,” Boeve says. “Divestment is something they can accomplish, so it builds movement power.”

Yet there are significant obstacles to achieving divestment of oil and gas companies because of their large footprint in the average institutional portfolio. Coal, where most of the successes have come in the California fossil fuel divestment movement, is a much easier proposition. It’s a small, declining industry. CalPERS held an $83-million stake in 24 thermal coal-related companies as of last October, representing just 0.03% of its $293-billion portfolio at the time. CalSTRS’ coal holdings were even smaller.

By contrast, oil and gas companies are still among the nation’s largest publicly traded enterprises, even if their value has shriveled in lock-step with falling oil prices. When oil prices are soaring, oil and gas stocks can handily outperform the broad market. That may explain why the state legislature tends to avoid demanding major divestments from the pension funds, and gives the funds an escape clause making its mandates contingent on a determination that the divestments won’t violate fiduciary responsibilities written into the state constitution. “CalPERS and CalSTRS have a very direct and legal responsibility to the beneficiaries, not to community activists or politicians,” says Senate President Pro Tem Kevin de León, D-Los Angeles, who sponsored SB 185. “That being said, our investments should mirror our values and if there are investments that violate human rights, that damage our environment, that harm the health of our children, then there should always be an opportunity to review whether they make sense for California.”

Investment managers hate being pressured to sell investments for a nonfinancial purpose such as “promoting social justice,” as CalPERS board’s official divestment policy puts it. The fund argued in a 2009 statement that it prefers “constructively engaging companies that fail to meet CalPERS standards of conduct.” The distinction between investment decisions based on “values” and those based on economic realities can be murky.

“The decision to divest has to meet a fairly high bar,” says Donald P. Gould, chairman of the investment committee of the Pitzer College board of trustees, which voted in 2014 to make Pitzer the first private institution in California to divest its fossil fuel investments. “We started with the recognition that no industry is pure.”

Climate change, he said, is “highly relevant to Pitzer because of its core values and one that affects everyone on Earth.” The college was able to reduce its fossil holdings from 5.5% of its $130 million portfolio to about 1% without incurring significant transaction costs or experiencing more than a “negligible” effect on returns, Gould says.

Eliminating oil and gas from the giant public pension funds or Stanford’s hefty $22-billion endowment could have much more than a negligible effect on those funds, especially once oil prices recover from their current slump. That’s when the morality of fossil investing will come face to face with the cost of being socially pure. How far is California really willing to go?

Michael Hiltzik’s column appears every Sunday. His new book is “Big Science: Ernest Lawrence and the Invention That Launched the Military-Industrial Complex.” Read his blog every day at, reach him at, check out and follow @hiltzikm on Twitter.