Earlier this month, board members on the employee pension fund for Montgomery County introduced legislation that would force the fund to divest over $65 million from fossil fuel companies. The Board argued that it has a “moral and political obligation” to the fund. However, as pointed out in a recent Washington Post editorial, Montgomery County “is a bastion of liberalism whose do-gooder instincts occasionally trump common sense.” A case in point was their recent pursuit of divestment, which would be a costly mistake to Maryland’s workers and retirees.
According to The Washington Post, the idea behind this divestment action is not to help the pension fund, but to actually strike a symbolic blow against fossil fuel consumption. In fact, the editorial lays out a blow by blow argument against Montgomery County’s reasoning for divestment:
- “The problem with such symbolism is that it’s no more than a feel-good gesture — a hypocritical one — that would achieve no actual reduction in carbon consumption while imposing very real costs on the county’s pension fund, on which tens of thousands of retirees depend.” Montgomery County would not cease consumption of fossil fuels. It’s impossible. The editorial emphasizes our daily use of fossil fuels from driving in our cars, police cars or ambulances or in our daily chores such as mowing the lawn. Not to mention the homes, offices, schools, and other buildings that use heating and cooling. Divestment does not impact carbon consumption – just the fund that retirees depend upon.
- “Purifying an investment portfolio of such positions — and determining which positions merit divestment, and according to what criteria — would be a nearly eternal project.” As the newspaper points out, this sort of endeavor is nearly impossible since pension funds would continue owning shares in other funds or firms that also have holdings in fossil fuels. The search to determine whose benefits from direct or indirect use of fossil fuels would be endless, and quite frankly, not the responsibility of a pension fund. Instead pension funds should be working to maximize the return on investments, not arguing about their opinions on the “philosophical or scientific examinations of corporate fossil fuel consumption.” And, as The Washington Post also highlights, if funds were to attempt such a plunge into financial numbers, they would notice that fossil fuel companies are actually investing in developing alternative sources of energy.
- “Divesting the funds of fossil fuel holdings would cost much more.” Accomplishing divestment is actually not an easy process. It’s costly, time consuming, and takes away from the real issues at hand. When Montgomery County participated in divesting from stocks tied to Sudan – a relatively small endeavor – the transaction fees, alone, cost the fund $230,000, according the editorial. Dr. Hendrik Bessembinder, Professor of Finance at Arizona State University, actually conducted a study that concluded that research, transaction and management cost related to divestment could “rob endowment funds of as much as 12 percent of their total value over a 20-year timeframe.”
Bottom line: divestment should not be prioritized over a pension fund’s fiduciary duty to maximize returns to investors. Divestment causes serious financial repercussions that affect everyone, but most directly, the many civil servants that help local towns, cities, counties and states every day.
Find the full article by The Washington Post Editorial Board here.