The NYC Mayor Bill de Blasio puts progressive theater ahead of sound public policy is by now one of the basic truisms of American politics. Latest case in point comes from a NY Times report that de Blasio is trying to strong-arm trustees of NYC employee pension funds--who are supposed to be fiduciaries of their beneficiaries, not mayoral rubber stamps--into divesting from oil stocks:
Seeking to position himself as a national leader against climate change, Mayor Bill de Blasio on Wednesday announced a two-pronged attack against the fossil-fuel industry, including a vow that city pension funds would divest about $5 billion from companies involved in the fossil fuel business. ...
Mr. de Blasio said that a majority of the trustees on two of the funds — one for teachers and another for many employees not including police officers or firefighters — were ready to support divestment.
... The total amount managed by the funds is about $189 billion.
At least NYC comptroller Scott M. Stringer is sounding some cautionary notes, but since when has de Blasio put fiscal stewardship ahead of grandstanding?
As we have discussed on these pages many times before, social divestment is almost always bad news for fund beneficiaries:
A London Business School Institute of Finance and Accounting working paper called "The Effect Of Socially Activist Investment Policies On The Financial Markets: Evidence From The South African Boycott concluded:
"We find that the announcement of legislative/shareholder pressure of voluntary divestment from South Africa had little discernible effect either on the valuation of banks and corporations with South African operations or on the South African financial markets. There is weak evidence that institutional shareholdings increased when corporations divested. In sum, despite the public significance of the boycott and the multitude of divesting companies, financial markets seem to have perceived the boycott to be merely a 'sideshow.'"
Another paper, "The Stock Market Impact of Social Pressure: The South African Divestment Case," from the Quarterly Review of Economics and Finance in fact found:
"Using the South African divestment case, this study tests the hypothesis that social pressure affects stock returns. Both short-run (3-, 11-, and 77-day periods) and long-run (13-month periods) tests of stock returns surrounding U.S. corporate announcements of decisions to stay or leave South Africa were performed. Tests of the impact of institutional portfolio managers to divest stocks of U.S. firms staying in South Africa were also performed. Results indicate there was a negative wealth impact of social pressure: stock prices of firms announcing plans to stay in South Africa fared better relative to stock prices of firms announcing plans to leave."
In sum, divestment may make activists feel all warm and fuzzy, but the evidence is that (1) it has no significant effect on the target of the divestment campaign but (2) likely does harm the activists' portfolios.
As the Manhattan Institute's James Copeland explained in reference to an anti-semitic effort by the Presbyterian Chiurch (USA) to embrace the BDS movement, these results are entirely consistent with financial theory:
"Unlike a boycott in a traditional goods market, the sale of a stock or bond in a financial market in sufficient volume to affect its price makes it more attractive to a buyer who doesn't care about the divester's social cause. These buyers will bid the price back up to its equilibrium level, the risk-adjusted net present value of expected free cash flows from the instrument. So whereas a goods boycott can be effective under certain conditions, a stock divestiture never can unless there is insufficient liquidity on the other side, a highly dubious condition in our financial market. The Presbyterian Church may have $7 billion in financial assets, but that's hardly a sufficient sum to control financial market pricing."
In the NYC case, it's especially appalling because NYC's pension funds are so badly underfunded:
Mayor de Blasio presented a fiscal 2018 Executive Budget that called for pension contributions totaling $9.6 billion — another all-time high . Yet city pension plans remain significantly underfunded even by lenient government accounting standards, posing a big risk to New York’s fiscal future. ...
The city’s unfunded pension liabilities (i.e., pension debt) ballooned to an officially reported total of nearly $65 billion as of fiscal 2016, up from $60 billion just three years earlier. More than half of current pension contributions are required simply to pay down the pension debt instead of for new benefits for current workers.
Is that an environment in which one ought to be putting feel good grand gestures ahead of maximizing return?
The day may well come when NYC retirees have Bill de Blasio to thank for a default on their pensions.
