Environmental Management and Sustainability

Question:

You are the fund manager for a medium-sized public pension fund that provides retirement investment for 500,000 teachers and public employees, and their families. Your traditional fiduciary responsibility has been, within reason, to minimize risk of investment loss and to maximize growth of the fund.

Recently, your offices have been the focal point of several protests from a local environmental group. They are demanding that your fund divest from the 10 largest international oil companies on the grounds that those companies are contributing to climate change and are responsible for the five largest oil spills in recent history which caused billions of dollars in damage and took an ecological toll on marine wildlife.

In response to the protests and media inquiries, you asked a reputable accounting firm to analyze the financial impact if you were to follow the request and divest your fund’s holdings in the 10 largest oil companies. The accounting firm returned analysis showing that an immediate divestment would likely reduce expected growth in the fund over the next 20 years by 10 percent. However, if divestment took place over a 5-year period and was done strategically, the fund’s expected growth would be cut by 5 percent.

The environmental group is calling for immediate divestment as a way to send a moral signal to the oil companies that their actions are unacceptable. Further, the group believes that as governments internationally place regulations on the emissions of greenhouse gases, the oil companies’ profits will decline and that the loss to your fund will not be as dramatic as the accounting firm predicts.

You received a letter signed by 1,000 families who have their retirement investments in your fund calling on you to refuse to divest. They state that they rely on the fund to maximize growth so they and their families can have retirement security, and they are concerned about the financial impact of divestment. While they note that they support environmental protection, they would prefer that you simply offer an alternative socially responsible investment option for those public employees and teachers in the fund who do not wish to support fossil fuel companies with their retirement monies.

You have been called to testify at a legislative hearing in your state legislature, where they are considering a bill that would require public pension funds in the state, including yours, to divest immediately from the 10 largest oil companies internationally. The committee chair is a strong champion for environmental action and wants to show that divestment is a good strategy for addressing the responsibility to take action on climate change.

Write your testimony to the committee. In it, weigh the pros and cons of the following three options and consider how social responsibility factors and potential future regulation of greenhouse gas emissions play a role in each:

·         Divest immediately

·         Divest over a 5-year period

·         Refuse to divest and instead offer new socially responsible investment choices to those participating teachers and public employees in the fund who prefer that their money not go toward fossil fuel investments

Make a recommendation as to which option you believe the legislation should take. Evaluate how it is the right choice for your pension fund, the families you invest on behalf of, the global community, and for the environment.