Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: New York State’s retirement fund to divest from fossil-fuel companies (and other miscreants), Bitcoin as strategy, bubble fun with SPACs and food, not seeing the wood for the trees, and wealth taxes.

Divesting other people’s money

A key characteristic of today’s corporatism — stakeholder capitalism, “socially responsible” investing (SRI), and all the rest of it — is a somewhat high-handed attitude toward other people’s money, whether it’s shareholders, taxpayers, savers, or pensioners.

It seems that New York State’s pension fund (“the Common Retirement Fund”) is going to take a similar approach:

The New York Times has the details:

New York State’s pension fund, one of the world’s largest and most influential investors, will drop many of its fossil fuel stocks in the next five years and sell its shares in other companies that contribute to global warming by 2040, the state comptroller said on Wednesday.

With $226 billion in assets, New York’s fund holds sway over other retirement funds and its decision to divest from fossil fuels could accelerate a broader shift in global markets away from oil and gas companies, energy experts and climate activists said.

The announcement comes months after the fund moved to sell its stock in 22 coal companies. New York City, San Francisco, Washington and several smaller cities have also committed to fossil fuel divestment plans, but New York State’s commitment to such a sweeping step is more significant, especially given the state’s centrality to the global financial markets.

The state comptroller, Thomas P. DiNapoli, had long resisted a sell-off, saying that his primary concern was to safeguard the taxpayer-guaranteed retirement savings of 1.1 million state and municipal workers who rely on the pension fund.

But on Wednesday, Mr. DiNapoli signaled that the main goal was to set up the fund for long-term economic success in a world moving away from fossil fuels. “New York State’s pension fund is at the leading edge of investors addressing climate risk, because investing for the low-carbon future is essential to protect the fund’s long-term value,” he said in a statement.

DiNapoli had been right to resist, and it’s a shame that he changed his mind (even if this decision “only” affects, as I assume, the fund’s actively managed portfolios). His earlier understanding was correct. His job is to safeguard those taxpayer-guaranteed retirement savings. And that (basically) is it. That means the fund’s criteria for investment ought to be focused on generating as high a return as possible for its beneficiaries so far as it’s compatible with the law, basic prudential standards and, of course, funding needs.

That appears to have changed:

[DiNapoli] said the fund could drop stocks that do not meet its new standards requiring them to show “future ability to provide investment returns in light of the global consensus on climate change….

New York’s fund, the New York State Common Retirement Fund, has historically invested about $12 billion in fossil fuels. Now it is committing to sell its investments in any oil, gas, oil-services and pipeline companies that do not have clear plans to abandon the fossil fuel business. Few companies have disclosed such plans.

Looked at that way, unless DiNapoli believes that the fossil-fuel sector is going to be put out of business all over the planet (spoiler: it’s not, for a very long while) there is good reason to think that there were will be times in which the shares in such companies will be priced sufficiently cheaply to represent an attractive buy, something that will be all the more likely if their prices have been knocked down by the unwillingness of politically motivated investors to hold them.

There’s also an idea from Warren Buffett’s 1989 letter to Berkshire Hathaway shareholders worth recalling:

If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the “cigar butt” approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the “bargain purchase” will make that puff all profit.

That said, I still think we’re quite some while from fossil-fuel companies being at the cigar butt stage.

Equally there will be times when “investing for the low-carbon future” will generate a good financial return. And there will be times when it does not.

Put another way, DiNapoli’s decision is too broadly drawn to be defensible on investment grounds. That only leaves a political explanation. That’s even more the case when it comes to his commitment that the fund should “sell its shares in other companies that contribute to global warming by 2040,” a commitment that could, if the logic of the climate warriors is to be followed to where it currently leads, end up eliminating a large percentage of almost any conceivable stock index in the years to come.

And if his rationale is political rather than economic, that raises the question whether funds of this nature should be drafted into a political cause. The answer ought to be no, but we live in an era when SRI and stakeholder capitalism have made a mockery of traditional notions of what fiduciary duty should be. And so drafted such funds will be.

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