CalPERS' tobacco debate crystallizes sustainable investment dilemma

Following three months of troubled debate, the CalPERS Board of Administration (acting as the fund’s Investment Committee), will decide at its May 16 meeting whether to put to bed the possibility of reinvesting in tobacco after 16 years of divestment.

Smokers in the Amsterdam airport are isolated from other travelers

Smoking area in the Schiphol airport, Amsterdam

In spite of restrictions on advertising and a decline in smoking in the U.S., the big tobacco firms’ international marketing campaigns have been extremely successful, especially in developing nations. Increases in share value since divestment have led CalPERS staff and consultants to recommend revisiting the decision to divest—not only in tobacco, but in the other divested sectors: firearms, companies that do business with Iran or Sudan, and now (in the wake of SB185, passed last year), thermal coal.

CalPERS is the largest and most influential pension fund in the U.S. Deciding to reinvest in tobacco would put the lie to the fund’s vaunted leadership in “environmental, social, and governance” (ESG) investing, and potentially recast the debate on socially responsible investing and divestment for pension funds and fiduciaries nationwide.

Pushing back on staff’s recommendation, the Board at its April meeting delayed consideration of staff’s proposed revisions to CalPERS’ divestment policy, which would make ESG investing more difficult and  unlikely in the absence of certainty of improved financial returns to the fund. They then agreed, narrowly, to study tobacco finance and “consult with stakeholders” for up to two years—at an estimated cost of $500,000—before voting on reinvestment. Responding to a request from state Treasurer John Chiang, Investment Committee Chair Henry Jones has agreed to reopen the question in May.

In his public statement Chiang declared

No public pension fund should associate itself with an industry that is a magnet for costly litigation, reputational disdain, and government regulators around the world.”

Importance of the tobacco debate for fossil fuel divestment

Staff have repeatedly described divestment as a “failed experiment”—presumably, an experiment designed to increase returns to the fund. During public comments at the April meeting, I made the point that divestment is no “experiment,” but a values proposition a public fund adopts, on rare occasions, in the best interest of its members and beneficiaries, their quality of life, and indeed—the future.

Reinvesting in tobacco would repudiate any claim CalPERS might make to moral high ground.

CalPERS’ stated values are embodied in their Investment Beliefs, which one staff member has described as “our Constitution.” These tenets recognize that

  • As a long-term investor, CalPERS must consider risk factors, for example climate change and natural resource availability, that emerge slowly over long time periods, but could have a material impact on company or portfolio returns

The road to divestment from fossil fuels is long and bumpy. Let’s hope that CalPERS gets there while their actions still matter.

Watch the relevant parts of the April meeting (agenda items 8 and 9):



1 Comment

  1. Gregory Wright on May 11, 2016 at 11:00 pm

    Where there’s smoke, there’s carbon!