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Readers, I have been remiss.
I have been watching reports of major pension funds overseas divesting from fossil fuel corporations, and have been placing the topic on my to-do list, intending to share this development with readers “someday.”
Last year in Norway, for instance, the $1.6 trillion Government Pension Fund Global will divest from fossil fuel companies — though they’ve given themselves a loophole by permitting continued investment in oil companies with “renewable energy business units.” In Sweden, CNBC reported earlier this year that a major Swedish pension fund, one of five in the national pension system, announced it will divest from fossil fuel companies. In Denmark, the ATP pension fund, one of Europe’s largest, will not divest per se, but will make no new investments in oil and gas companies. And in the UK, the NEST, the pension fund into which workers are auto-enrolled if they have no employer-sponsored pension, announced this summer that they will “ban investments in any companies involved in coal mining, oil from tar sands and arctic drilling.
This is one element of what has been called “ESG” investing – investing based on a focus on environmental, social, and governance issues. Broadly speaking, the “S” considers social factors such as human rights and health and safety issues, and the G” cares about shareholder rights and executive compensation. But for the moment, the focus is squarely on the “E” part of the initialism.
But now this movement is making inroads in the United States, as Reps. Emanuel Cleaver, II (D-MO) and Rashida Tlaib (D-MI) have introduced a bill they’re calling the RESPOND Act, or the Restructuring Environmentally Sound Pensions In Order to Negate Disaster Act of 2020.
The first section of the bill sounds innocuous enough — it calls for the Board of Governors of the Federal Reserve System and the Securities and Exchange Commission to issue an annual report “projecting and accounting for the economic costs directly and indirectly caused by the impacts of climate change.” So long as those charged with this task fully reflect the relevant risks and probabilities and model the risks stochastically (that is, taking into account all potential outcomes and their likelihoods) rather than deterministically (looking at a single possible outcome), this is not unreasonable.
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But the second section?
It calls for the establishment of a “Federal Advisory Panel on the Economics of Climate Change” to advise the Federal Retirement Thrift Investment Board on “how, consistent with their fiduciary duties, the Board can further decarbonize their portfolio” as well as provide other decarbonization recommendations. Then,
“If the Board, after examining the report issued by the Advisory Panel under paragraph (4), determines that pension yields would be both financially profitable and still consistent with the Board’s fiduciary duties if low-carbon investment strategies were implemented, the Board shall set a plan in place to transition the Board’s investment practices accordingly.”
Now, as a reminder, the Thrift Savings Plan is the 401(k)-equivalent plan for government workers. Participants can choose Lifecycle funds with predetermined asset mixes based on when one expects to begin drawing down assets, or can set their own asset allocation based on individual funds, which are all based on indices, matching the Standard & Poors 500, the MSCI EAFE (Europe, Australasia, Far East) Index, or the like. The funds do not have fund managers aiming to “beat the market” by selecting specific stocks.
What’s more, the Department of Labor recently ruled that pension plans have a fiduciary duty to maximize investment returns, rather than pursue other goals such as environmental ones, though it offers the loophole that an investment manager which believes that environmentalist asset choices are the path towards maximizing returns may take that path. This is a bit of a surprise to me, as it seems the more sensible path is to permit activist retirement funds as alternatives so long as standard options continue to be available and default selections. For example, in the UK, in addition to the target-date funds, participants may choose an “ethical fund” or a Sharia-compliant fund; in the U.S., of course, for investors in IRAs (which are, of course, a “second-class” retirement choice in the U.S.), there are a myriad of options from which one can choose, including those with a pro-environmental screening process as well as those with a religious approach, such as the Catholic Ave Maria Mutual Funds, which screens investments “to eliminate any company engaged in abortion, pornography, embryonic stem cell research, or those that make corporate contributions to Planned Parenthood.” (And, believe me, I’d prefer that the tax preferences for IRAs and 401(k)s to be equalized and access opened up so that savers who want some alternative to their employer’s options, have it.)
But this new rule, as well as one on pension fund managers’ proxy voting decisions, came from the Trump administration. Will Biden seek to reverse this, and determine that mandating TSP funds divest from fossil fuels is indeed keeping with fiduciary duties, abandoning the principle of index investing? Will those TSP investors be offered a choice of traditional index funds or managed anti-fossil fuel funds, or will traditional funds be removed from the menu entirely, as this bill envisions? And what impact would this have on public pensions at the state level, statewide auto-IRA programs such as OregonSaves, or even a nationwide auto-IRA program if it comes into being as Biden promises?
This is something to keep a careful eye on.
As always, you’re invited to comment at JaneTheActuary.com!