Before the committee's vote on the policy revision, members of the public and CalSTRS beneficiaries asked the investment committee to add divestment to its toolkit as a way to persuade companies to reduce CO2 emissions. Harry M. Keiley, investment committee chairman, replied that the transition to a low-carbon future is a top priority in CalSTRS' fiscal year 2020 work plan. "The members of this committee and myself as the chair of the committee … all care deeply about this issue. Individually and collectively, it's a matter of serious concern and focus for us," he said. He added that CalSTRS officials disagreed that divesting immediately from fossil fuels was the right approach. "Because we haven't taken that action today does not mean we don't take this issue seriously. We do," Mr. Keiley said. "As a group, we are making inroads on this issue and we do have a sphere of influence that we're exerting strategically and at certain periods of time." In a written statement, CalSTRS said it supported policies such as cap and trade, engagement with companies and investments in sustainable businesses over divestment in light of its fiduciary duty to act solely in the interest of providing participants. During a discussion on CalSTRS' ongoing asset-liability study, a trustee asked whether staff and consultants considered possible future divestments. CIO Ailman responded that it depends on the size of the divestment. So far, the divestments have been small, but they have had an effect, he said. The last time the board voted to divest was in November when it decided to sell its investments in two private prison operators, CoreCivic and The GEO Group Inc. As of Nov. 6, 2018, CalSTRS had a combined $12.1 million invested in the companies from its global equities and fixed-income portfolios. There's a point that small divestments can add up to increased costs and lower returns, albeit slightly, Mr. Ailman said. When CalSTRS divests from a major industry, it has a much larger impact on returns, he said. Allan Emkin, managing principal at Meketa Investment Group Inc., CalSTRS' general investment consultant, added that since the pension plan's total divestment has been fairly small, it would not impact the implementation risk of its investment programs significantly. Even so, the impact of past divestments is far from trivial. Since January 2000, CalSTRS' portfolio has underperformed by about $5.8 billion as a result of its divestments, with the majority of that underperformance coming from tobacco divestment, Mr. Emkin said. In terms of asset allocation modeling for its asset-liability study, divestment could increase the volatility and decrease the diversity of the public equity asset class, which would change the risk-return characteristics, he said.
Certain institutional investors are showing a reluctance to divest from portfolio holdings as part of an ESG-focused strategy. While divestment can be a powerful tool to influence corporate behaviour, exiting stocks means these investors no longer have influence over companies. Additionally, divestment can hurt returns. An investment consultant to the California Public Employees Retirement System, for example, said its portfolio has underperformed by nearly $5.8bn since 2000, mainly attributable to divestment from tobacco. Additionally, the investment direct of the California State Teachers' Retirement System said engagement, rather than divestment, is the plan's preferred strategy. Japan's Government Pension Investment Fund also hasn't cut tobacco or alcohol stocks over concerns doing so would eliminate the plan from discussions with these companies.