In 2000, California's two state pension funds -- the California State Teachers' Retirement System (CalSTRS) and the California Public Employees' Retirement System (CalPERS) -- made history by voting to dump their $800 million investment in the tobacco industry. As California State Treasurer and a member of the board of CalSTRS and CalPERS at the time, I proposed the divestment from tobacco and led the hard fought effort to sell the pension funds' stock in companies whose products had poisoned and killed millions of people, whose deceitful practices had resulted in enormous public health costs, and whose corrupt business models had caused hundreds of millions of dollars in stock losses at the pension funds. I am as proud today of the decision of CalSTRS and CalPERS to divest from tobacco, as I was when the funds voted to do so in the summer and fall of 2000.
Now, some sixteen years later, there is a move afoot at CalPERS to revisit its tobacco divestment decision. On Monday, April 18, the CalPERS Investment Committee will discuss if and when to re-consider its tobacco divestment policy. CalPERS should resoundingly reject a recidivist move to once again become a major shareholder in companies that damage the health and economic well being of our society, impose significant budget costs on California and the nation, target our children for addiction, and remain unworthy of public investment.
A decision by CalPERS to re-invest in tobacco would make a mockery of all that we tell our children about the dangers of tobacco products. As importantly, for CalPERS, it would represent poor investment policy.
There are those who argue that, in making investment decisions, pension funds like CalPERS should make no moral or ethical judgments about the companies in which they invest, no matter how odious their products and practices or how detrimental their impacts on our economy, our environment, or our people may be. Their argument is fundamentally flawed because it ignores the fact that the long-term financial soundness of pension funds such as CalPERS depends on a healthy economy, not one weakened by predatory corporate practices. Their argument is also an intellectually shallow and lazy one because it assumes that, in a vast world of investment choices, there are insufficient opportunities to make investments that provide a positive financial return without creating significant damage to society.
In this vein, a 2015 report by Wilshire Associates, a consulting firm hired by CalPERS, claimed that CalPERS had foregone about $2 to $3 billion in investment earnings as a result of its decision to divest from tobacco. Yet, this analysis was deficient because it failed to examine whether and how CalPERS could have made investments with an acceptable risk return profile to replace its tobacco investments, which represented only about one-third of one percent of its investment portfolio at the time of divestment. Given the universe of investment options, there is no question that suitable investments to replace tobacco were and are available.
The same arguments raised against tobacco divestment were raised against divestment from companies doing business in South Africa during the brutal apartheid era and from companies aiding the genocide in Darfur. Make no mistake about it: the world of big finance and big business will continue to fight against divestment by institutional investors to close off any consideration of unethical or damaging corporate conduct in the making of investments, lest those considerations begin to curtail loathsome activities that produce big profits and big bonuses at the expense of the larger society.
As the nation's largest public pension fund, CalPERS has a particular responsibility to continually strive to invest in ways that not only unequivocally meet its fiduciary obligations, but also strengthen our economy and society. That notion should hardly be considered novel. After all, as a society, we have an expectation that corporations should not only be profitable, but also should produce products of quality and conduct themselves well. Indeed, the ideal business enterprise is one that excels on both fronts. We value the real estate development firm that builds profitable, quality projects that enrich our communities. We respect the successful technology company that creates value for shareholders and innovations for the future. Why should we hold investors of capital -- including CalPERS, the nation's flagship pension fund -- to a lesser standard?
Felix Rohatyn, the investment banker best known for saving New York City from bankruptcy in the 1970s who also served as the U.S. Ambassador to France under President Clinton, put it best: "There is no contradiction between the fiduciary responsibility of a pension fund manager and the social responsibility of a public official."
CalPERS should remember his words and firmly reject re-opening the debate on tobacco divestment.
Phil Angelides served as California State Treasurer from 1999-2007. From 2009-2011, he was Chairman of the Financial Crisis Inquiry Commission, which conducted the nation's official inquiry into the 2008 financial crisis.