IPFI in Finance et Investissement: Tobacco reportedly cost CalPERS $ 3 billion

Are environmental, social and governance (ESG) criteria generating alpha? Not always, says the US Institute for Pension Fund Integrity (IPFI) according to which the institutional manager California Public Employees’ Retirement System (CalPERS) would have lost more than US $ 3 billion in potential returns following its withdrawal from the sector. tobacco in the year 2000.

IPFI considers that the institutional investor’s decision to leave difficult sectors such as tobacco and hydrocarbons is above all of a political nature. In doing so, pension funds would fail in their “fiduciary duty” vis-à-vis their contributors.

“Although CalPERS staff encouraged the board of directors to end its divestment strategy, in 2016 the board voted to renew this ESG investment orientation for political reasons,” says IPFI.

IPFI was created by Christopher Burnham, former vice-president of PIMCO, former state secretary for the state of Connecticut and former deputy secretary-general for management of the United Nations. He is currently head of Cambridge Global Capital, an investment firm in Virginia.

The basic mission

Jacques Lussier is President and Chief Investment Officer of Ipsol Capital, an investment firm for individual and institutional investors.

He explains that there are two approaches to sectors that generate moral or ethical questions: the exclusion or the limitation of the investments reserved for the “best of class” so as to reinforce their weight and to reward their good practices .

In principle, some sectors such as hydrocarbons lend themselves to selective investments in firms with best practices. “With the tobacco companies, it’s almost impossible. This sector is very concentrated and the product is pretty much the same from one company to another, “says Jacques Lussier.

Should pension plans, for ethical or moral reasons, leave this kind of sector where there are no better class?

“The question arises in the case of organizations dedicated to the health and well-being of the population, such as pension funds of hospitals or pharmacy chains,” says the co-author of the book Rational Investing: The Subtleties of Asset Management (New York, Columbia Business School Publishing, 2017).

“We must see if the investments are in agreement or in contradiction with the basic mission of pension funds,” says Jacques Lussier.

Where to invest?

Former economist at the International Monetary Fund and co-founder of the Sustainable Market Strategies research firm, François Boutin-Dufresne considers the question from another angle.

“What did CalPERS do with the money it took out of the tobacco industry? Has it invested in more efficient sectors or companies like PayPal, for example? Studies like IPFI do not say it, “he says.

On the other hand, boards of directors must also consider reputational and regulatory risks.

“Institutional investors have a reputation to defend. At the limit, there is sometimes a price to pay! These investors are also trying to predict the future actions of governments to adapt to them. At one point, the outright ban on tobacco was being considered in some influential circles in California. It had to be taken into account, “says François Boutin-Dufresne.

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