Paul Hodgson: The slow-burn radicalisation of a public pension fund

In February 2013, the Vermont legislature passed Bill H.271 which required the £3.6bn Vermont Pension Investment Committee (VPIC) to divest from fossil fuel companies with effect from 1 January 2014; with divestment occurring over five years.
NEPC, the Boston-based investment consultant with a long-standing relationship with VPIC, provided an initial report to the committee later in February 2013 that recommended against divestment because of the damage to future ‘alpha’ (market outperformance) and the costs involved. This report, however, came in for some criticism by members of the legislature, primarily because the analysis was based on the performance of fossil fuels over the last 10 years; a very different performance than might be expected over the next 10.
But Vermont State Treasurer Beth Pearce, a Democrat, and other VPIC staff, also argued against divestment, noting that they were already engaging fossil fuel companies to effect change and were working on a number of different ESG initiatives. Vermont was a co-filer of the ‘Aiming for A’ resolution at BP and of the climate risk report at ExxonMobil in 2015.
NEPC and VPIC staff recommended against divestment for a second time in July 2015, when the subject was raised again. But, that November, Pearce requested authority from the committee to co-file on a whole range of ESG shareholder resolutions for the coming year, including carbon asset risk, greenhouse gas reduction goals and proxy access.
Following the passage of another bill by the Vermont House (H.R. 13), in February 2016, which again urged the state to remove coal holdings and, specifically, ExxonMobil stock from its holdings, another flurry of activity occurred.In April 2016, a VPIC sub-committee was set up to further investigate the issue of divestment. At around the same time, Vermont co-filed the ‘Stockholder Proposal Regarding Report on Climate Change Impact Assessment’ at Exxon. Also in April, NEPC provided a report recommending the integration of ESG criteria into the investment process. To go along with this, the sub-committee received a host of presentations from lawyers experienced in advising public pension funds and on duties under ERISA (the Employee Retirement Income Security Act), as well as from Adam Kanzer of Domini.
In May, the sub-committee reported to the legislature in May on its stakeholder consultation exercise – to around 20 groups – as well as on its recent consideration of the integration of ESG factors into investment processes.
Treasurer Pearce also noted in this report that, because of coal stocks’ declining value, divestment was occurring naturally through market movements. She also announced that the sub-committee would be commissioning another consulting group to produce a report on divestment and other potential ESG avenues with NEPC. She stressed that this would be a collaborative report rather than competing ones.
The consultant chosen was Pension Consulting Alliance (PCA), based in Portland, Oregon. Around this time an ESG intern was hired. And during meetings in August and December, the sub-committee heard presentations from SSgA, Wellington, Aberdeen Asset Management, Ceres and ISS on ESG integration.
Publication of the report is expected in the first quarter of this year.