In Whose Best Interest?

From aiCIO Magazine's February Issue: In a Letter From the Managing Editor, Paula Vasan explores why firearm divestment among institutional investors is gaining momentum following the December 14 Newtown, Connecticut massacre, and why that decision is also gaining scrutiny. 

During a board meeting at the New Jersey Division of Investments on January 17, a discussion on firearm policy arose to address the Newtown, Connecticut tragedy. Near the end of the discussion, one participant asked the scheme’s Director Tim Walsh, “So, what’s our policy on gun divestment?” Walsh, with deft elegance, replied: “As of now we have no investment in firearms.” And it was onto the next order of business.

Was Walsh wrong to not directly address the issue? Or was it clever politics in a situation that demanded it?

Walsh is not alone. Politicians across the country are pressuring firearm divestment. Yet the gargantuan deficit among public pensions in the US highlights the fact that politicians have, on the whole, not helped the public pension situation—they’ve ignored it. Many would argue that thus, politicians should not be spearheading investment decisions, and in fact, those decisions should be left to those who have devoted their careers to it. The bottom line to these anti-intrusion critics: Public funds should not be used to serve political agendas.

But the argument over who should make investment decisions for the nation’s retirees does nothing to obfuscate the pressing (and rightly emotional) issue of whether public union capital should be used to support businesses that manufacture weapons capable of mass murder. Long-term institutional investors can realize tremendous social and legitimate power over certain industries by cutting off ties with them—and at times like this, it is difficult to argue that they shouldn’t use this power.

As a supporter of good pension governance and as someone who watched the coverage of the Newtown massacre, it is hard to reconcile both sides of this debate. Is it the primary responsibility for institutional investors to generate profit through legal means while fulfilling their fiduciary duties? Or does their influence also entail a responsibility to serve as vehicles for social change?

There's no easy answer. By divesting from firearms, investors are making a judgment call about what their participants really want, Jack Gray—a professor at the Sydney-based University of Technology profiled in this issue—tells me. "Socially responsible investing is not always in the best interests of members because it limits investing options, which impedes on diversification and returns,” Gray says.

Take this example: Harvard University’s endowment is one major institution that guards itself against the threat of limited diversification by operating with a strong presumption against divestment from any industry. The university notes that the endowment must focus on its primary mission, while putting resources into academia and faculty to solve real world, social problems. But even mighty Harvard makes exceptions: The endowment has used divestment as a way to erode power from tobacco companies and certain oil firms in Sudan where they identified an unjustified risk of harm from investment support. Even Harvard, it seems, can’t stick solely to projected returns as the determiner of investment choice.

For CIOs, firearm divestment following the Newtown massacre will surely not be their last decision driven by ethical considerations—yet it might be the most pressing and political one of their careers. How they respond to this pressure will be fascinating to watch.

—Paula Vasan, Managing Editor, aiCIO