It’s been a hallmark of CalPERS policy for 15 years: no tobacco stocks.
Now the California Public Employees’ Retirement System is considering ending its 15-year-old ban on tobacco company investments after a consultant said the ban has cost the pension fund roughly $3 billion in lost profits.
CalPERS’ deliberation raises questions about public pension funds’ adherence to principles of socially responsible investing. Besides holding considerable investments in health care stocks, CalPERS also is a major provider of health insurance to its 1.6 million members. It has been a strong proponent of reducing smoking.
At the same time, CalPERS is significantly underfunded, has been imposing rate hikes on state and local governments in recent years and is looking at ways of improving its investment performance.
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“That is a rock and a hard place,” said James Hawley, a St. Mary’s College professor who studies institutional investors’ fiduciary duties. He said other institutional investors are constantly trying to reconcile fiduciary duties with their desire to be socially responsible.
“This is hardly a unique CalPERS problem,” he said.
News that CalPERS is rethinking the tobacco ban stirred immediate controversy among anti-smoking groups Monday.
“We applaud CalPERS’ previous decision to divest from tobacco companies and are disappointed with any discussions to reverse this policy,” the American Lung Association in California said in a prepared statement.
The reconsideration of CalPERS’ tobacco prohibition comes as part of a broader re-examination at the big pension fund’s divestment policy. CalPERS spokesman Joe DeAnda said Monday that the fund hasn’t specifically focused on any one investment category, but the tobacco ban looms as potentially the largest issue.
“The only significant divestment has been tobacco, the size of the divestment, the size of the losses,” DeAnda said.
A study last fall by Wilshire Associates, which advises CalPERS on its investments, said the fund has forfeited an estimated $3.04 billion in profits since it sold off its tobacco holdings in 2001.
DeAnda said the 2001 ban came as the tobacco industry was under repeated attack in the courts and elsewhere. The industry has been surprisingly resilient.
“The thinking was, ‘Hey, maybe we should get out now, ahead of further decline in the industry,’ ” he said. “That (decline) didn’t happen.”
The CalPERS board is also examining bans on investing in the coal and firearms industries, as well as companies doing business with the governments of Sudan and Iran, he said.
DeAnda said CalPERS has “an obligation to review our divestment policies.” Asked if reinvesting in tobacco would be controversial, DeAnda said, “The board hasn’t set a direction yet.”
The issue is set for discussion at the CalPERS investment committee meeting April 18.
The CalPERS prohibition on tobacco stocks hasn’t been absolute. Although the pension fund no longer owns stocks in its own internally managed portfolio, it does hold about $75 million worth of stocks indirectly through funds managed by outside investment managers. Those stocks include about $58 million in one company, British American Tobacco.
By contrast, CalSTRS is totally tobacco free. The California State Teachers’ Retirement System divested its internal tobacco holdings in 2000, and nine years later did away with tobacco stocks in funds run by outside managers.
“We have no plans to revisit the divestment in tobacco,” said CalSTRS spokesman Ricardo Duran.