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CalPERS considers tobacco reinvestment

The US' largest pension fund believes divesting from tobacco resulted in $3bn of losses by the beginning of 2015.

The California Public Employees’ Retirement System (CalPERS) will reconsider its tobacco divestment programme, as it reviews its entire divestment policy within the next two years.

The $293 billion pension fund believes tobacco divestment made a $3 billion dent in its balance sheet by 2015, and therefore presents a conflict of interest with its fiduciary duty to provide returns.

CalPERS blacklisted tobacco from its portfolio in 2000. Overall, divestment decisions were calculated by CalPERS’ consultant Wilshire Associates to have led to $8 billion in losses by the end of 2014.

“Divestment as an investment strategy presents a challenging conflict for CalPERS, as it often pits social responsibility against our fiduciary duty,” said CalPERS board vice-president and investment committee chair Henry Jones said in after the pension board decided to review all divested asset types yesterday.

When CalPERS divested $525 million in tobacco company stocks in 2000, it said an “unprecedented amount” of litigation and regulation made the tobacco industry a bad investment.

Now, given the size and possible impact of tobacco divestment on CalPERS balance sheet, the process for reviewing it will be different to other divested sectors. An internal study will conclude in one or two years.

“The [board] will consider reinvestment in tobacco after thorough review, study, and stakeholder input,” said a statement. “All non-tobacco divestments will be reviewed according to a new loss threshold policy, to be developed during the same time period.” The statement says it took three months of debate to come to the decision.

CalPERS is not the only fund to review its losses because of exclusions, although it appears to be alone in reconsidering investment in tobacco. The California State Teachers’ Retirement System, the Netherlands’ €161.7 billion Stichting Pensioenfonds Zorg en Welzijn and New Zealand’s sovereign wealth fund have confirmed they will not reinvest in the commodity.

Norway’s NKr7,475 billion ($878 billion; €800 billion) sovereign wealth fund has calculated that between 2006 and 2015 divesting from the tobacco industry reduced returns by 0.68 percent, or $1.94 billion. However, the fund has no power to consider reinvesting. Norway’s Ministry of Finance, which decides the fund’s ethical boundaries, decided to blacklist tobacco in 2010.

“We operate on a mandate given by the Ministry of Finance, [and] this mandate is a result of deliberations in Parliament,” a spokeswoman for the fund told Agri Investor.

CalPERS will review its divestment threshold policy in terms of excluding particular emerging market countries, the impact of divesting South African securities during apartheid and firearms-related companies.

However, board members warned that the decision to review the fund’s finances did not reflect an appetite for reinvestment. “No one should read into this any interest in reinvesting in tobacco,” CalPERS board member Bill Slaton told a meeting.