RI Interview: CalSTRS’ CIO Chris Ailman on fossil fuel divestment, stranded assets and active ownership (Part 1)

The leading US pensions figure responds to the divestment debate

The California State Teachers’ Retirement System (CalSTRS), the $188.8bn (€166bn) US pension giant, has come under political pressure in recent weeks for its holdings in both coal and weapons. Californian senate president Kevin de Leon has introduced a bill that will require CalSTRS and its peer, the $301bn, California Public Employees Retirement System (CalPERS), to engage with their coal holdings and sell the shares if they are not convinced the companies are transitioning to a “clean energy” strategy. And California state treasurer John Chiang, who is also a CalSTRS board member, has written to its investment committee, asking that it “take all the steps necessary” to divest from the maker of the gun used in the Sandy Hook school shootings in 2012. In the first of a two-part piece, Responsible Investor speaks to CalSTRS’ Chief Investment Officer Christopher Ailman about these recent political interventions and recent meetings it has held with European pension funds on responsible investment.

The second part will look at the gun divestment issue, the ‘proxy access’ debate and infrastructure investment.

Californian State Senate President Kevin de Leon has introduced legislation that he hopes will move CalSTRS’ and CalPERS’ investments beyond coal to lower carbon energy. Is this political pressure affecting you in your role as a fiduciary?

At the end of the bill it says we are still held and bound by our fiduciary duty. While they are still telling us what to do and restricting our investments we still have to do it within the fiduciary standard.

What will be your reaction to the bill (SB-185) tabled by De Leon?

Neither us nor CalPERS have taken a position on the legislation. We are going to let it run through its process. If the legislation is adopted it will be by June 30, then the Californian governor would have by October to sign it, and it will take us through to January 1 to take effect.

CalSTRS has a divestment policy and our board voted last week to initiate that policy as it relates to coal investment. It means a three-step process. Firstly research, secondly engagement, and the third step would be to come to a decision on what to do about those particular securities. So we are in the process of putting the information together about the risk and return opportunities of coal companies, identifying the coal companies in the US and around the world and engaging them to understand what they are doing to address the risk. Some mining companies have shed their coal divisions, others have doubled down, so we want to understand that and talk to them about it. We are going to be a voice in the room.

I know some people don’t think much of engagement, but we think at least talking to these companies and making them aware one shareholder cares, and maybe letting them know that Stanford has already sold their stock and we may sell their stock and that may be the start of a lot of them doing it. Certainly making them aware of that, otherwise they don’t know who sells and buys their stock in a given day. So we think having a dialogue is important. Then after that engagement we would assess that information and bring it back to our board. The legislation requires the same steps. We are just starting the process nine months early.There has been increasing worldwide focus on divestment of fossil fuels by large institutions triggered mainly by student campaigns. And recently The Guardian newspaper in the UK launched a campaign calling on the Wellcome Trust and the Bill & Melinda Gates Foundation to divest from fossil fuels. What is your view on the debate?

I don’t support divestment as an investment strategy. I don’t think restricting our universe makes sense. I think the risk and return balance works, and the capital markets work. We only own these stocks in our passive portfolio, so that’s where you are getting into the philosophy of owning the market. And if you look at divestment purely as an investment strategy I don’t think it is effective. CalSTRS has divested five times in our history, and all five times we’ve lost money [a 1987 state law requiring divestment of firms doing business with South Africa under apartheid cost CalSTRS an estimated $600m to $750m; a voluntary switch to a tobacco-free investment portfolio in 2000 cost it an estimated $1bn in lost investment opportunities]. I don’t believe it has reduced our risk, and it is in my view certain that it has not brought about social change. It’s obvious to cite South Africa, but we have to realize that was 30 years ago.

Are your peers feeling the pressure?

We were in Europe a few weeks ago and met with a number of different pension plans, such as USS, Unilever, PGGM and APG. Some have mooted divestment, but every single one we talked with said they believe in active engagement and active ownership. We think that is a more effective position than just quitting and trying to exclude. We can’t explain enough to people that when you sell a company, the company isn’t hurt. They don’t know, they don’t even really care, as far as they are concerned good riddance. People do not understand this, people in Europe are more aware of this. The Dutch have made exclusions in cases where they have felt morally about it.

Carbon Tracker’s argument on ‘stranded assets’ is also gaining attention.

The campaign organisation 350.org took the Carbon Tracker 200 list and they have been an active campaigner around the world to try and get funds to divest. But even if you talk to Carbon Tracker, they don’t believe in divestment, they believe in active ownership, they believe the risk and return opportunities in the market will take care of themselves. It is the difference between trying to improve a situation or just quitting and ignoring it, and I don’t understand how asking big institutions to ignore problems, how they can see that it will solve the problems.

I know that people feel that, with engagement, ‘how can we convince Exxon Mobil to do something different?’. They are the poster child as they are so stubborn. But, if you don’t like your city government is it better to engage, or sell out and move somewhere else? They are happy you have left. When it comes to responsible investment in the US we are one of the leaders in this country and the world. How would silence help the purpose? We are on your side. Universities in the US are looking at the issue due to pressure from students. Let’s look at the efficacy. Does it achieve goals and at what cost to the fund?