In the wake of recent U.N. and U.S. government reports on the catastrophic environmental damage already attributable to climate change, the City of Charlottesville has been challenged to divest from investments in the fossil fuels industry.
Local activist Michael Payne proposed several steps the city could take to address climate change, including divestment from holdings in oil, natural gas, and coal at City Council’s October 15 meeting. And at the monthly meeting of the city’s Retirement Commission on November 28, he urged its members to consider divestment for both moral and financial reasons—claiming that, long term, the fossil fuels industry is not a sustainable financial investment.
There is precedent: City Council divested from companies doing business in South Africa in 1984 and 1988 and in Sudan in 2008.
Climate change divestment would put the city among a growing number of individual and institutional investors getting out of fossil fuels. Three years ago, divestment by small cities and colleges and universities accounted for about $50 billion in investment funds, according to the New Yorker. That figure has grown to about $60 billion, and divesting governments now include New York City and Ireland.
In 2016, a student group pressed the University of Virginia’s Board of Visitors to divest, but the BOV declined.
Charlottesville has a significant amount of money under investment. Its operating fund ranges from $60 million to $100 million. And the city’s retirement fund holds around $150 million and is overseen by the Retirement Commission.
In making investment decisions, City Council, the Retirement Commission, and city treasurer Jason Vandever share a legal and fiduciary responsibility to the fund’s beneficiaries—the citizens of Charlottesville and retirees from city employment. Their primary charge is to protect the principal, but the second priority is to generate as much of a return as feasible within legal guidelines and professional financial management standards.
That means they can’t make investment decisions that would result in less money for the beneficiaries, even for a good cause. Socially responsible investment trends, however, have generated a wealth of investment options which use environmental/social/governance—ESG—criteria and still make money.
How much money are we talking about divesting? As of November 2018, Vandever estimates the operating fund held about $1.4 million in energy company bonds.
Calculations for the retirement fund are more difficult, as its holdings include index funds or mutual funds that might have large energy companies in their portfolios, but his rough estimate based on portfolio holdings in various energy sectors was well over $1.6 million.
A total of $3 million may seem like small potatoes next to the $5 billion that New York City has pledged to withdraw from energy holdings by 2023, but proponents of divestment say the moral leadership shown is just as important as the financial pressure.
“Divesting sends a signal,” says Payne. “What I’m trying to do is start a long-term conversation about how we as a city respond to climate change.”
Conservation is a start, he says, but efforts shouldn’t stop there. (Charlottesville has a goal of 10 percent reduction in greenhouse emissions by 2035 from 2000 levels, according to climate protection program manager Susan Elliott.)
Payne’s remarks at the council meeting got a positive response from Councilor Kathy Galvin, who cited the city’s sustainability programs, including a switch to hydrogen buses. But so far, the Council has taken no action to consider divestment.
The Retirement Commission, which is in the process of hiring a new investment consultant, agreed the issue merited further discussion, and Vandever confirmed the group “will be including questions in the request for proposal around divestment strategies and the consultant’s experience in working with plans who want to pursue ESG strategies in their investment approach.”
The other part, about $40 million, currently is managed by a vendor, PFM Asset Management LLC, chosen by Vandever, who oversees and approves its activities. Virginia Code sets guidelines for city investments—for example, the fund cannot own stocks in individual companies, although it can hold company bonds—as well as a fund balance policy. Because the city counts on the operating fund to pay its bills, Vandever explains, “We manage the fund on a short-term strategy.”
The retirement fund is far larger—roughly $150 million. About 75 percent of eligible city employees participate in the city pension plan, and its fund is overseen by the Retirement Commission. Five of the commission’s nine members are elected officials, including the treasurer. The other four represent retirees, employees, and citizens and are appointed by City Council.
While this fund does have to pay out current benefits, it is managed for a much longer term, and so can accommodate more volatility—and hopefully earn higher returns. Inflation, increases in city employment, and much longer payout spans as retirees live longer means the fund needs to generate a large enough return to stay solvent.
The city has two major funds under investment.
The operating fund, which holds the income from city taxes, licenses, fees, etc., ranges from $60 million to $100 million depending on the time of year. Part of this fund is managed by Jason Vandever, the elected city treasurer under guidelines set by City Council, and held in local banks or through a state-run investment pool.