Amidst Divestment Rhetoric, Taxpayers Foot Bill
Having just attended the World Taxpayers Associations’ Conference in Berlin recently, I was curious about divestment, an issue which has directly affected taxpayers on both sides of the Atlantic. Across the world, multi-million dollar environmental groups, such as 350.org, have exerted public pressure on local municipalities, cities, states, and countries to divest from fossil fuels. There groups often incite outrage and generate waves of public outcry in the hopes that their targets will support divestment.
What these groups are not admitting is the simple truth: divestment carries adverse financial repercussions for millions of pensioners, which will negatively affect taxpayers.
Most recently, this contentious debate, pitting ideology against fiduciary responsibility, has emerged in the United Kingdom, with the national government poised to restrict individual funds’ ability to “pursue municipal boycotts, divestments and sanctions.” Greg Clark, the UK’s Secretary of State for the Department for Communities and Local Government declared, “divisive policies undermine good community relations, and harm the economic security of families… [a pension fund’s] predominant concern should be the pursuit of a financial return on their investments, including over the longer term.”
This may be a current debate, but it’s not the first of its kind in the UK. Accordingly, there is ample data with which to determine the success or failure of past campaigns to inflict damage upon the industries themselves. Those data make clear it is not the corporate interests who suffer. More likely, it is the retired schoolteacher, police officer, or nurse.
The University of Oxford published a report in 2013 entitled, “Stranded assets and the fossil fuel divestment campaign: What does divestment mean for the valuation of fossil fuel assets?” That study determined, “Divestment campaigns are a poorly understood phenomenon…the maximum possible capital that might be divested from the fossil fuel companies represents a relatively small pool of funds.”
In the United State we have for years engaged in similar public battles, often with the same environmental organizations leading the charge. While some local cities and municipalities have divested, only California has made a formal divestment from coal.
Still, studies persist in discovering financial drawbacks of divesting a portfolio from fossil fuels, including shrinking returns on investment, an increase in management fees, and undermined endowments.
A 2015 study by University of Chicago Law Professor Daniel Fischel found portfolios divested of energy equities produced returns 0.7 percentage points lower than ones that invested in energy on an absolute basis, representing a 23 percent loss over 50 years. To put that in context, it could be the difference between millions of dollars for university endowments and pensions. Similarly, a 2011 study by former Clinton Administration Undersecretary of Commerce Robert Shapiro, found that fossil fuel stocks, on average, provided a seven times greater return on their investment.
Underfunded pensions, both here and in the United Kingdom are a huge liability to taxpayers, who often bear the brunt of this burden. As a result, taxpayer money is reallocated from public services and public works projects to cover pension shortfalls. One way to counter this problem is to have a diverse, well-balanced pension investment portfolio, which cannot come by removing high-performing investments from pensions. Environmental organizations, like 350.org, are driven by ideology, which may not be in the best interests of local residents and pensioners.
Pension boards, both in the UK and US, have a fiduciary responsibility to generate the highest possible financial returns for their pension holders. Lose sight of that, pursue myopic political agendas through divestment, and they have failed the millions of hard-working pensioners and retirees relying upon them to safeguard their future.