Today, nearly $4 trillion is held in defined-benefit pension funds in our country on behalf of American workers for their retirement. Amassed by these hard-working employees through their deferred wages, the funds and the benefits that come from these pension accounts represent a social promise that when individuals are ready to retire, they will have the financial security to live in dignity the rest of their lives.
Increasingly, the trustees who govern these funds are finding ways to match their beliefs and values with the investment of workers' capital, while ensuring a sufficient return for the benefit plans. For example, Cerberus Capital made news recently when it announced its intention to sell Freedom Group, the gun company whose rifle was used in the shooting spree in Newtown, Conn. One of the events precipitating this announcement was a public statement of concern by the California State Teachers' Retirement System (CalSTRS) over Cerberus' stake in Freedom Group. CalSTRS' announcement arose from its fiduciary responsibility to act in the best interests of the more than 856,000 educators and school personnel participating in the plan.
CalSTRS' action rested on its policy for mitigating environmental, social and geopolitical (ESG) risk." Among 21 risk factors to be considered before making any investment decision is "the risk to an investment's long-term profitability from business exposure to an industry or company that makes a product which is highly detrimental to human health." The policy notes that the fund has a social and ethical obligation to require that corporations in which it invests "meet a high standard of conduct and strive for sustainability in their operations."
The policy also directs the fund to engage with corporate management and complete due diligence before any decision to divest.
A separate risk factor examines "the investment's long-term profitability from management and practices globally in the area of workers' rights; specifically the right of association, the right to organize and bargain collectively, prohibition of forced or bonded labor, status of child labor practices and minimum age for employment, acceptable work conditions, or human trafficking."
CalSTRS' decision to act in the fund's long-term interests represents a greater readiness by banks, insurance companies and other institutional investors to recognize their growing exposure to ESG risks. According to a recent study, insurers are taking a far more active role in responding to the risks of climate change by advocating for changed corporate behavior and better public policy.
A new study published in Science Magazine details that insurance companies are now staunch advocates for reducing carbon emissions and minimizing the risk of severe weather events, especially after paying out tens of billions of dollars in claims. The insurance industry now pays an average of $50 billion a year in weather-and-climate related insurance losses.
Separately, despite tens of millions of dollars in fees, Cerberus Capital Management LP has struggled to find investment banks to help sell Freedom Group. Banks, including JP Morgan and Credit Suisse among others, have decided the long-term reputational risks are too costly to participate in the deal.
Teachers devote their careers to improving the lives of children and our society as a whole. Investing teachers' money in companies that make products damaging to our children and our society would fail to honor the special duty of trust placed on the stewards of workers' capital.
February 28, 2013