By Brett Fleishman
Last Friday, the brilliant campaigners working to divest the city of Seattle’s pension fund, SCERS, received a report from the pensions’ consultant, NEPC, recommending against divestment. Investment consultants have presented a significant barrier for divestment campaigns both on and off campuses with statements about high transaction costs, loss of returns, and limited fossil free options. Pomona College received one of these reports in the summer of 2013, Vermont’s pension received one in 2012, and countless other reports have gone under the radar.
In general, trustees count on the blessing of their consultants to make big shifts in their divestment strategy. Investment consultants provide a shield which institutional investors can use to defend their manager selection decisions – fiduciary cover. Here is a great research paper about the true value a consultant adds to a portfolio.
When a consultant lands a report on the desks of trustees with a recommendation against divestment (no matter how off their assumptions or misleading their empirical backing) those trustees lose their shield for a “yes” vote. It is a showstopper, and it doesn’t seem to matter what’s in the report.
For example, NEPC’s recent report for SCERS says “There are currently no fossil fuel-free real estate benchmarks available in the marketplace.” And goes on to say the fund, by divesting from fossil fuels, would no longer be able to invest in real estate. A bizarre assumption. Obviously, divestment is less attractive if you define it as knocking out an entire asset class. It doesn’t matter what they say, if their recommendation is “no,” the trustee is stuck.
But wait! there is some good news. The largest consultant for university endowments, Cambridge Associates has recently committed to digging into their extensive list of investment managers to expand the catalogue of firms who are willing to work with an institutional investor on going fossil free. Cambridge Associates has also committed to encouraging their manager list to “create more environmentally sensitive products.”
These commitments will blast open the investable universe for institutions taking on a fossil free strategy. These commitments will essentially unfreeze what the investment community calls “the chicken or the egg” problem – a market paralysis where supply is waiting for demand and demand is waiting for supply. Now, institutions, like American University, can look at a much larger pool of managers and put their fiduciary concerns to rest. But most importantly, these commitments reestablish the fiduciary shield for institutional trustees.