by Brian J. O’Connor (Winter 2018)
A recent article in the Los Angeles Times focused on certain recent “social investing” issues that have reached some of the largest public pension systems in the United States, imposed by current public opinion and values.
In the article, “Political Road Map: Trump and gun investments spark debate for California pension funds” (Los Angeles Times, November 5, 2017), a letter last summer from U.S. Representative Ted W. Lieu to the California Public Employees’ Retirement System (CalPERS) is highlighted.
In the letter, Representative Lieu requested that CalPERS divest its investment in the CIM Fund III which owns the Trump SoHo hotel and condominium development. Representative Lieu suggested that ownership in the development essentially creates a conduit from state pension funds to the President, thereby violating the Domestic Emoluments Clause of the U.S. Constitution.
Other individuals are also pushing CalPERS to cancel investments in the oil and gas industry, following a 2015 divestment in coal companies. In fact, according to the article, divestment decisions by CalPERS have already shrunk the fund’s investment portfolio by about $8 billion, the largest part being the fund’s divestment from tobacco companies.
Indeed, every few years there is pressure to use public pension funds to make a political statement or effectuate social change. Past examples include the aforementioned tobacco investments, as well as companies doing business in countries with a history of human rights violations. After the Sandy Hook shooting, teacher retirement systems across the country sought to divest from firearms companies.
The Illinois Pension Code imposes limitations on the types of investments that may be made by firefighter and police pension funds. However, these limitations generally do not address the recent phenomenon of investments based upon social or ethical considerations. Thus, fund trustees are left with little guidance as to how to balance their fiduciary obligations with the goals of social investing.
Nevertheless, in Illinois, some investment considerations that began as matters of public concern and values are now incorporated into law, including limitations on investments with the Islamic Republic of Iran (40 ILCS 5/1-110.15 and 1-110.16), the Republic of the Sudan (40 ILCS 5/1-110.6 and 1-110.16), and, more recently, companies that boycott the State of Israel (40 ILCS 5/1-110.16). While these provisions impose limitations on the statewide pension systems in Illinois, none of these provisions are applicable to Article 3 and 4 funds.
In any event, making a decision to divest based upon emotion and politics may cause the fund to lose money. Moreover, not every member of a fund’s board — let alone the fund — may have the same feelings on the topic. Pension fund trustees must remember that this is not a personal choice; their fiduciary obligations require that the choice be made for the benefit of the fund’s members.
So what should pension fund trustees do? First, and foremost, they must look at the economic consequences to the fund of a divesture. They must seek the advice of investment experts before making any decision. They should ask those experts what information the experts are using to make their recommendations, and then review the information themselves. Finally, they should document the process, and make a decision that is in the best interests of the fund and is separate and apart from their own personal interests and beliefs.
In summary, a board considering social investing would be well-advised to thoroughly research the potential impact each investment or disinvestment might have on the Fund (and provide for indemnification of the Board, consultants and employees (40 ILCS 5/1-107)) before expanding or contracting investment considerations beyond those imposed or permitted by law to those based on public opinion and values.