Invest or Divest? Public Pensions Face Tough Questions.

AuthorPetrini, Anna

Many Americans try to put their money where their values are. It's called "socially responsible investing" because investors consider social and environmental impact along with an investment's potential financial return. Such investments account for $12 trillion--or $1 in $4--of the $46.6 trillion in total assets under professional management in the United States.

State legislators, too, have protested certain environmental, social and political practices--from fossil fuels to firearms to foreign affairs--by divesting public pension funds from industries and countries they disagree with.

Critics argue that pension fund managers' first responsibility is to protect their obligations to retirees, not necessarily to be socially responsible with their investments. They warn of a host of possible problems, including lower returns.

California's $381 billion public pension fund, CalPERS, is the country's largest. It may have missed out on nearly $3.6 billion in investment gains over a 17-year period by dumping its tobacco stocks, according to a 2018 report. (The report also notes that, although tobacco divestment has had a negative effect overall on the CalPERS portfolio, other divestments have helped.) Other critics say that keeping a seat at the table and encouraging change from within is more effective than divesting.

Nevertheless, the California Legislature took a major step in 2015 by calling for the divestment of public funds in the thermal coal industry. Legislators in Massachusetts, Minnesota, New Jersey, New York and Vermont considered proposals this year to direct public pensions to study or abandon certain types of fossil fuel investments. Other bills introduced...

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