On Nov. 7, 2018, the California State Teachers’ Retirement System (CalSTRS) announced that it will be divesting from two U.S. publicly-held companies that operate private prisons.

Then, on Nov. 14, 2018 CalSTRS announced it is part of a coalition representing $4.83 trillion in assets that joined together to promote five principles for a responsible firearms industry. These principles are intended to be a framework for institutional investors who want to engage on gun safety with companies that are part of the firearms’ supply chain.

So how does CalSTRS decide when to engage and when to divest?

“Our policy documents state very clearly: our Board first and foremost actively believes strongly in engagement and divestment is only a last resort,” says Christopher Ailman, chief investment officer of CalSTRS.

The CalSTRS fund is estimated to have lost approximately $5.9 billion US from investment restrictions and divestments from the first restriction in 2000 through to June 30, 2018.

“I’ve been very public to say that I can’t find an example where it’s brought much social change,” Ailman says about divesting.

In the case of private prison companies, CalSTRS made the choice to divest, although Ailman says that they did try engagement first.

Ailman says that CalSTRS has a clear fiduciary responsibility and this was an investment decision about the risk of these investments, the harm to the trust of its members and the fact that these companies were basically immaterial to CalSTRS’ overall portfolio.

“Our active managers did not own these companies, they were really only in our US passive index fund, which holds almost 3,000 names and these two companies were very immaterial to that,” he says.

Randy Bauslaugh, partner at McCarthy Tétrault, says Canadian plans that are grappling with whether to divest should be careful because the primary purpose of a registered pension plan in Canada must be to provide lifetime retirement income.

However, he says trustees or fiduciaries can consider environmental, social and governance factors if they relate to financial risk or reward.

Bauslaugh says divestment all comes back to the issue of motivation. He says it is problematic if plans make the choice to divest due to moral purposes or pressure from plan members. However, if they are motivated by avoiding adverse economic risks for the pension fund that is a different story.

“Park that pressure on the side and start looking at whether divestment makes sense from the financial perspective and, if you can justify that it does, go for it, but don’t be motivated or pressured by those outside concerns,” he says. “Those outside concerns might tune you into an issue that you hadn’t really been focusing on and that’s a good thing, but if you start focusing on it in order to make a decision to divest or not to divest you really need to think of it using a financial lens.”