CalPERS & CalSTRS Report Lower Than Expected Returns – Is ESG One Reason Why?

CalPERS and CalSTRS – the two largest public employee pension funds in both California and the nation –just announced their annual investment returns for the 2018-19 fiscal year.  Once again, it’s not good news for California taxpayers.

Both funds reported that their respective net return of investments came in under projections.  CalPERS had a preliminary 6.7 percent net return for 2018-19, while CalSTRS fared a little better at 6.8 percent.  Each had forecast a 7 percent rate of return.

The lower-than-expected returns come amidst the backdrop of their state’s ongoing public pension crisis.  An October 2018 PRI report found that, using a more honest accounting method, California’s public pension debt stands near $1 trillion, while the funds are just 28 percent funded.

The pension funds blamed the lower-than-expected returns on volatility in the financial markets.  Yet, the Dow and NASDAQ are continually hitting record highs.  During the last fiscal year, the Dow grew by 9.43 percent, or more than 2,000 points (24,307.18 on July 2, 2018 versus 26,599.96 on June 28, 2019), while NASDAQ grew by roughly 500 points (7,567.69 on July 2, 2018 versus 8,006.24 on June 28, 2019).

I jump at the chance to check out my growing 401 (k) balance to review my growing retirement portfolio under the Trump economic boom.  So, why aren’t our public pension funds experiencing the same growth?  One reason may be their increased use of ESG investing.

Environmental, social, and governance, or ESG, investment criteria prioritize investment decisions on non-financial criteria, such as a company’s impact on the environment or commitment to social causes.  Bowing to pressure from political activists, more public pension funds are using ESG.

PRI’s research on ESG investing has shown that these funds have historically underperformed funds investing in the broader market over the long-term.  Analyzing 18 ESG funds with a 10-year track record, our analysis found that a $10,000 ESG portfolio would be 43.9 percent smaller compared to a $10,000 investment in the broader market.

Not surprisingly, CalPERS and CalSTRS are leading the way with increased ESG investing.

A recent report showed that the CalPERS board voted to divest from investing in tobacco stocks in 2016.  The report shows that the divestiture had cost retirees and taxpayers $3.6 billion in potential investment income.  It also found that CalPERS has about $3 billion in investments in ESG funds.

As PRI’s Dr. Wayne Winegarden recently wrote in the International Business Times of public pension funds investing in ESG funds, “public pension investment decisions must be guided by the funds’ prime directive – to meet its financial obligations to future retirees.”

When pension fund returns come in lower than expected, it’s taxpayers that make up the difference.  Naturally, taxpayers are spending more than ever before on pensions in this year’s state budget.

CalSTRS CEO Jack Enes said, “the $5.1 billion in additional pension payments in the 2019-20 state budget demonstrate the commitment and high priority California places on its teachers’ retirement security.”

Not exactly.  It shows that taxpayers are having to foot the bill for more of the state’s public pension debt at the expense of saving for their own retirement security, in part, because state pension funds are making investment decisions through a political lens by embracing ESG investments.

Tim Anaya is the Pacific Research Institute’s communications director.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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