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City tackling climate change by making changes to retirement fund investments

Charlottesville’s leadership is clear with its desire to tackle climate change.

One place the city is quietly making strides toward that goal is in its retirement fund.

While a plan to remove retirement investments from companies associated with fossil fuels seems easy on paper, it’s a little more complicated in practice.

Charlottesville’s Retirement Commission, which oversees the city’s retirement plans at a policy level, has been figuring out that process since the City Council voted in June 2019 to support removing operating investments from companies associated with fossil fuels and weapons manufacturing.

The resolution says that the council “declares its support and encouragement” of anyone acting on behalf of the city’s investments to “divest all City operating funds from direct security investments in any entity engaged in the production of fossil fuels or the production or upgrading of weapons and weapons systems.”

The resolution did not contain a mandate, it just broadly supported the effort.

Treasurer Jason Vandever said the action resulted in about $750,000 of operating investments being divested from fossil fuel companies. But it wasn’t so easy for retirement investments because the commission has a “legal mandate to act in the exclusive interest of their plan beneficiaries,” he said.

“Primarily, it needs to be a financial investment motivation,” Vandever said of changes to the portfolio. “If we’re able to do that and meet some of our social goals, we can do that. We have to prove that these steps will meet and exceed what our expected rate of return would be without taking them.”

The city’s retirement fund totals about $177 million across 16 accounts with 11 managers.

At its November meeting, the commission approved divestment for its large cap investments. Large caps refer to the biggest companies on the market and cover 32%, or $58 million, of the city’s total retirement fund.

The commission was able to make the move when portfolio managers compared the return on investment of the current investments with a fossil fuel-free index.

The fossil fuel-free index includes all but 15 of the same companies. The excluded companies include Exxon Mobil Corp., Chevron Corp. and ConocoPhillips. Managers then redistribute more money to the remaining companies.

Because of the nature of retirement investments, it’s unclear exactly how much money went to the 15 fossil fuel companies.

Over the past five years for one account, the retirement fund has a 12.46% return on investment in its current state. If the city had used the fossil fuel-free index, it would have a 14.84% return. For 2020 through the end of September, the current investment had a 0.89% return, compared with a 7.16% return that would have occurred on the fossil fuel-free index.

“This seems to be a no-brainer,” commission member David Hughes said. “The comparison is compelling.”

In making its determination, the commission approved a resolution to remove companies with a “proven and probable” fuel reserve from the investment portfolio. Vandever said the limited definition was easy to support while managers and the commission consider gray areas. For example, a company may manufacture drills, but they can’t be used exclusively for fuel production.

“It is a limited definition, but it was one the commission was able to wrap their arms around and have a clear understanding of what that means,” Vandever said.

While the commission was able to take action on the large investments, the rest of the money is tricky because of how it is invested. Some of it sits in individual funds, while other lumps are commingled in larger funds with multiple investors.

In the meantime, the commission has approved changes to policy to focus on ESG investing, which involves environmental, social and corporate governance factors to determine the sustainability of investments. The investment strategy is often used by companies focused on combating climate change or tackling issues of equity.

When the commission meets again in January, it will consider proposals for the other 68% of the portfolio. That money is invested in several ways, including smaller companies and international funds.


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