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December 19th, 2016:

CalPERS votes to broaden ban on tobacco investments

By Robin Respaut

The California Public Employees’ Retirement System voted on Monday to broaden its restrictions on tobacco investments, opposing a recommendation by the pension fund’s staff to reinvest in the controversial asset.

CalPERS staff had recommended that the board remove its 16-year ban on tobacco investments in light of an increasing demand to improve investment returns and pay benefits.

But the board voted to remain divested and to expand the ban to externally managed portfolios and affiliated funds.

The nation’s largest public pension fund embarked on an extensive review of tobacco earlier this year, after a Wilshire Associates report estimated the exclusion of tobacco had cost the fund about $3 billion between 2001 and 2014. That was a considerably larger portfolio impact than CalPERS’ other divested assets, such as Iran, Sudan and certain firearms-related companies.

California State Controller Betty Yee, who voted in favor of the ban, said on Monday that CalPERS should be mindful of the declining tobacco sales volumes, despite the recent surge in tobacco stocks. Yee also expressed concern about the ongoing threat of tobacco litigation on the industry.

In the 10 years to November 2016, the MSCI World Tobacco Index rose 12.3 percent compared with just 3.8 percent on the MSCI World Index. The tobacco index includes Philip Morris International Inc, Altria Group Inc , British American Tobacco Plc, Japan Tobacco Inc and Imperial Brands Plc.

Board member Dana Hollinger said she was “not a fan of smoking” but did not support the tobacco ban, because “every time we divest, we are chipping away at the diversity of the portfolio.”

“I see the fiduciary here as maximizing and securing benefits to our beneficiaries,” Hollinger said.

CalPERS decision to reconsider its tobacco divestment has caught the attention of health groups, industry shareholders, institutional investors and many of CalPERS’ beneficiaries.

“It is clear that there is abundant, compelling and strong public policy arguments to stay out of tobacco,” said board member Priya Mathur. “The tobacco industry is facing a structural decline in terms of the volume of sales and their ability to gain revenues for a number of reasons.”

State Treasurer John Chiang announced in a statement late Monday that the board had “not only successfully fought back misguided efforts to lift CalPERS’s 16-year-old ban,” but also now prevented outside partners from making such investments.

“Generations of Californians will reap the health, economic and ethical benefits of today’s bold decision,” Chiang said.

(Reporting by Robin Respaut in San Francisco; Editing by Lisa Shumaker)

Background brief – Proposals to amend the health warnings on packets and retail containers of tobacco products

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Proposal to Amend Health Warnings on Tobacco Product Packets and Retail Containers

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Tobacco is — still — a bad investment for pension fund

The California Public Employees’ Retirement System’s board of administration took a stand in 2000 when it voted to divest from tobacco companies, which profit from a product so toxic that it kills or disables millions of the people who use it. It was the right decision at the time, and remains so 16 years later.

It was also a fairly easy decision back then for the nation’s largest public pension fund. Not only was tobacco killing people, it was costing the state dearly in healthcare expenses and lost productivity. The final nail in the coffin, so to speak, was that tobacco didn’t appear to be a great investment in 2000. The value of tobacco investments had plunged in the previous two years, smoking rates were continuing on a long downward trend and potentially pricey litigation against the industry was pending.

In other words, divestment looked like a classic win-win. CalPERS could take a moral position and not jeopardize its primary duty to make money for the 1.8 million people who rely on it for their retirement. And though there’s no evidence CalPERS divestment affected smoking rates (which were already dropping) or blocked tobacco companies’ access to capital, it was part of successful effort, along with strict regulation, high taxes and ubiquitous anti-smoking campaigns, to “denormalize” tobacco use.

Divestment is a difficult call for governmental pension funds. They have a clear fiduciary duty to maximize the returns on their members’ investments.
Turns out, though, that tobacco investments didn’t tank as expected, in part of because of expanded marketing in Third World countries. Investors who retained their tobacco holdings realized significant revenue. Analysts estimate that CalPERS lost out on as much $3.68 billion in earnings over the years — about a quarter of what CalPERS’ investments have earned annually over the last decade.

That’s not great news for a severely underfunded pension fund whose poorer-than-expected performance may lead the board this week to lower its expected earnings from investments — again. If the board votes to do so, it would force the state and local governments and school boards in CalPERS to increase their annual pension contributions by millions of dollars, leading them to cut services or raise taxes.

On Monday, the CalPERS Investment Committee is also considering a proposal by staff to allow the $300 billion fund to reinvest in tobacco companies. It must be tempting to chase the revenue that may have been lost from not investing in Camels or Kools, but if there is a return to be made on tobacco (and that’s not even a sure bet), it wouldn’t be worth the moral cost. The board should reject this proposal.

Divestment is a difficult call for governmental pension funds. They have a clear fiduciary duty to maximize the returns on their members’ investments. But in our view, these public agencies also have a responsibility not to support evil, corrupt or destructive forces whose ill effects far outweigh any good they may do. That can take the form of products, like tobacco and firearms, or regimes. The decision by pension funds and U.S. companies to divest from South Africa in the late 1970s and 1980s, for example, is credited by many with helping to raise awareness about apartheid, which led to its ultimate demise.

Yet such moves also increase pressure to divest from more businesses, products and countries for purposes that aren’t necessarily as morally imperative but are politically popular. For example, a bill introduced this month in the state Legislature would restrict CalPERS’ investments in the construction of the Dakota Access Pipeline. It’s not a stretch to imagine a push to divest from soda companies or industries that use genetically altered organisms for food or farming.

That’s a slope CalPERS can’t afford to slide too far down. (The board’s own policies state that it will not divest unless required by valid state or federal law, which seems disingenuous in light of its history on tobacco.) The more constrained the fund becomes, the harder it will be to generate the big returns it’s relying on. And every dollar it falls short will have to be made up by the state and participating local governments, leaving them less money for public safety, anti-poverty programs, educating children and other priorities.

Admittedly, there’s a solid, if heartless, case to be made for reinvesting in tobacco. It’s a legal product, and users can’t credibly claim they didn’t know about the dangers listed right on the pack. And while ever-dwindling smoking rates may eliminate that habit within the next two decades, tobacco companies have found a new source of profits in the growing market for electronic cigarettes.

But doing the right thing often costs more than the doing what’s easy. That’s true for individuals, for groups and for organizations. It’s true too when it comes to socially responsible investments. Yes, there may be big money to be made investing in this poison product. If individual investors can live with that, fine. But public institutions such as CalPERS shouldn’t.