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Monday, March 21, 2016

Strategic CSR - Pension funds

The article in the url below contains a piece of news that I did not see covered anywhere else. It seems to be that this could be something, but maybe not – as with all stakeholder constraint imposed on firms (and particularly with government regulation), it will depend on the extent to which it is enforced:
"The beauty of the stock market is that no one can tell you where to put your money—until now. [In October] the Obama administration's Labor Department issued Interpretive Bulletin 2015-01, which tells pension funds what factors to use when choosing investments, including climate change."
This follows-up on a 2008 guidance from the Labor Department regarding:
"… parts of the Employee Retirement Income Security Act of 1974, affectionately known as Erisa, that environmental, social and government factors—for instance, climate change—may affect the value of investments."
The difference is that, while the 2008 guidance is advisory, the 2015 guidance is a ruling that must be followed. Quoting directly from the Department of Labor's Bulletin:
"Environmental, social and governance issues may have a direct relationship to the economic value of the plan's investment. In these instances, such issues are not merely collateral considerations or tiebreakers, but rather are proper components of the fiduciary's primary analysis of the economic merits of competing investment choices."
As the article (which is skeptical – it is the WSJ after all) note, the key term here is the word "primary," meaning it cannot be subordinated to other investment criteria. This places fund managers in a bit of a tight spot:
"This government is essentially saying: Don't you dare invest in anything that causes or is hurt by climate change, or you'll be sued for failing your fiduciary responsibilities. Energy, utilities and industrials are 20% of the market. How can pension funds now own any of them?"
Not that I mind fund managers being forced to squirm a bit, mind you. Nevertheless, picking among the article's anti-climate change stance, the author does raise an important point about the ability of the government to dictate (as opposed to influence) market outcomes:
"Stock prices are a collective opinion on the prospect of a company. As reality changes, so do opinions. There are plenty of socially responsible investment funds; they rarely succeed. You can shun alcohol, tobacco and gambling stocks all you want, but many Americans enjoy all three, often at the same time. … Pushing politics on retirement funds will destroy returns. One little secret on Wall Street is that [pension] rules drive hedge funds to avoid pension money. It slows them down. As pension funds divest, hedge funds and other managers will gladly buy up undervalued climate-challenged companies."
The article also mentions that this latest notice will affect the whole U.S. pensions fund industry, which currently manages $9 trillion (which is why I thought it might be a big deal).
Take care
David Chandler & Bill Werther
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Forcing Green Politics on Pension Funds
By Andy Kessler
November 19, 2015
The Wall Street Journal
Late Edition – Final