on are tobacco, sudan the most recently, we did south africa, but those restrictions that policy is now gone. >> why do you think that the city decide that the retirement board decided to take onto and sudan and formally apartide. >> i was here with sudan and it was a group of folks that approached the board members and they requested that it be calendared and directed the staff to do the due diligence to the companies that were identified in the portfolio and the board's responsibility and staff's responsibility is to give the board information as to how any of these actions, in particular, the third action, restricting investment in those companies would impact over all portfolio structure, diverse amation and return, and i am the similar situation with

tobacco. >> do you think that the fact that last year, was the hottest year in recorded history that the fact that the past three months was the driest month that we have ever had in the bay area. the fact that we have the worst oil spill in the gulf of mexico because the oil companies are drilling deeper and deep tore get at harder to find oil. we are looking at tar sands oil which is dirty because that is what we had left. the fact that we had a dramatic hurricane that affected new york that many people believe was the tipping point for the presidential election and that all of these things could be considered as real evidence that investments in fossil fuel companies is a dangerous thing? and that we should be looking at other ways of investing our dollars would that be important to the members and i know that

you can't always speak to them? >> as the policy states that is a discretionary of the board and the staff does not make a recommendation on that because it is within the board's policy that that is the authority of the board and the discretion of the board. >> we know that the board in the past has seen the real threats to human survival through tobacco and that the conditions in the sudan are important to work on. i think that when it comes to the real dramatic impact that we will see in decades, ahead if not in the immediate future, the human habitat its will be something that could move the retirement board and i hope that is the case. >> i cannot issue an opinion on that. the board has engaged tobacco and the companies who are aiding and abetting the situation with the government of sudan in the past and so i think that they have a record of being, you know, willing to consider those issues.

and again, i would have no way of knowing how or what the out come would be of the board. >> okay. >> and you don't think that the fossil fuel companies have a big deal of influence over the retirement board members either? >> i would have no knowledge of that. >> yeah. >> just a question, i had we originally got the rough estimates about what the over all funds for the retirement board were in fossil fuel companies and we got a number that was 1 billion dollars. and what you said here is much less than that. so if you were able to actually go through and do some analysis and get some real numbers? >> the numbers that reported initially to the board when we first got the list was it was over a half a billion dollars, $500 million and we just completed the research and in fact, in our public holdings there could be other interest that we hold in the private asset side. but, again, the social investment policy only addresses the public side of

the portfolio and that is the 500 and roughly $530 million. >> so is there any way that we could have any impact on applying social investment policies to the other part of the portfolio? >> no, we have legal restrictions and limited partner and we have fiduciary protection and we do not have an ability to influence the management decision whens we are a limited partner in a general partnership and so we have contractual obligations and legal requirements that would prevent us under this policy to engage the private equity side or the private holding side of the portfolio. >> and you said under this policy? >> well, the policy recognizes that in fact we have legal obligations as to the contracts and the nature of our investments that would be under mind if in fact, we tried to influence management as a limited partner withholdings in

the general partnership. and then, and in terms of what you have identified under the social responsibility investment policy and the investments in the fossil fuel companies here and how does that compare to the investments that we had previously under tobacco investments and with the sudanese investments. >> i don't have that information with me and i would be happy to provide that to the committee. >> could you estimate? >> no, i have not looked at that. >> that is something that we could follow up on. >> i think that if it is comparable it seems like the decision has been made in the past to actually make the decisions around the divestment. and for a large amounts of money, if it is large amounts of money that was divested from in the industries in the past. just from the consider that and follow that up off line. thank you. >> thank you. >> mr. huish?

>> sorry. >> no problem. >> thanks. you talked about $524 million in terms of, this direct equity in these two companies? >> right. >> so, the resolution and some of the other dialogue has been around coming the assets and the mutual funds and have you analyzed that you hold and parcel that out? >> we have not because the board's policy would not also, it would rule that out because of the nature of our holdings as a member of the commingle fund would preclude us from engaging in the engagements of trying to influence the management of those funds. >> okay. >> you have identified what you have said in terms of 41 positions. those are direct holdings? >> those are public debt holdings. >> okay. >> and of the 81? >> those are public equity,

actual ownership of stock. >> thank you. >> in the companies. >> great. >> so, okay, so this resolution, i'm reading from the words here, urges the retirement board to seize in the investments and the commingle. >> the board does not have a policy and there would be legal restrictions for us exercising it against our holdings and commingle funds. >> okay. >> so, of the $524.8 million that you have identified in equity and debt, how does that compare against and we are not, so if we are going to compare apple to apples we are not talking about the commingle funds at all and what is that as a percentage and how much direct debt holdings do you have as an over all portfolio? >> $8.6 billion and these

holdings represent 8.7 percent. >> the only comparison is that the index that we have to bench mark, the holdings of these two companies represents, let me get the number correctly. 13.2 of the index and so we are under weight in these companies verses the index and the bench mark index that we use to measure. >> what bench mark are you using? >> it is the msci, acwi. >> so, not russell or anything? >> no. >> any other subtext? >> yeah. a custom index. >> right. >> okay. so 8.7 percent of holdings and let me take a step back to thank supervisor avalos for this hearing as well as to agree with all of the comments about the fossil fuel companies and i could not support those statements any more. my questions are more around the responsibility of whether the retirement board should be doing this and the impacts on

what this might be for the retirement board members. and so 8.7 percent of your holdings, you know, have you ever divested in a class of stock or equities or debt that comprised that amount? >> it is 8.7 percent of our public holdings. >> which is roughly a little more than half of the total portfolio. >> right. >> sudan is the only one that i was here when the board considered it and the sudan divestment was not in it, in tobacco, obviously would have been more significant in sudan but how it compares as far as the holdings that we had and the values of those holdings back and i will provide that to the committee but i don't have those with me today. >> i have articles seattle do this and is urging to do this and their holdings is $17 million out of 2 billion which is obviously, you know wha, is it 25 percent, we are talking about 8.7 percent and so in terms of if you were actually

to go forward and divest, i am sure that there would be it would take a lot longer to do it and also i know that there is a five year built in here but it would take also, the risk of taking hits on that divestment and it would be a lot great and her harder to do i would imagine and that is ten percent of our portfolio. >> the staff has not undertaken that evaluation, we would need to be directed by the board to evaluate. what that would mean as far as time wise. >> i could tell you that sudan, the process to get to a level three with sudan took approximately nine months of engagement at level one and two. and like i said, relative to these holdings it was a significantly smaller amount of holdings. >> okay. and now in terms,... >> the resolution does call for the retirement board to make that assessment. >> that is part of the resolution. >> and my understanding is that this is a non-binding to the

retirement board resolution. we take our direction from the retirement board the staff does. >> that is right, that you just said the board of supervisors directed you. >> i meant the retirement board. >> very good. >> i mean, i misspoke, i meant the retirement board. >> i think that you said the board and you meant to say the retirement board. >> okay. >> and so they are my board. you are my board too. >> i understand. >> so let me ask you this, in any given portfolio, i mean, do you in your best judgment think that the board and the portfolio can perform as well as it has traditionally without investment from the sector? >> without a complete analysis i really would not venture to answer that. >> okay. >> i mean that there are a lot of things where these are positioned and the alternative types of investments comparable risk investments and return, there is weight, and we engage our consultants when we do that

evaluation and so i really would not feel comfortable giving you my best estimate. >> okay. >> thank you very much. >> so, some other questions and that i will do with in the past, have we ever tried to make reeninvestments in different divestments in tobacco, and we have divested it from companies that deal with sudan, and moving money from those investments to other investments what is the process and how has that played out in the past. >> well, we have, almost most of our stock investments are obviously through the discretionary investments and we have contracts that we hold them to the performance bench marks in order to retain the contract. so the process would be the instructions would be to find a replacement holdings, that would be of the same profile, both risk and return profile,

and that they would use that as an opportunity to replace the holdings that we would have for example in these companies, withholdings that would not violate the terms of their contract giving them the discretion against the bench mark but would return the same risk and the same return to the portfolio, so, the process of 500 million dollars being replaced, you know, i recognize that you had a five-year horizon, but the issue is as fiduciaries they cannot automatically unless there was something that they could go into immediately, you know, remove the existings hold ings that we have. in addition to the purchasing of the stock is the instruction that we can give to all investment managers once the board directed us to do that and that would preclude any additional purchase of shares. the other would be on the index

side if we were going to be bench marking and there were 200 companies that were excluded, the industry sort of cooperated on the tobacco side and they do have indexes that were recognized ex-tobacco and sudan they don't have index and so we would have to work to try to come up with a measurement in our contracts, against a bench mark where we had indexes that included these, and we would have to figure out how to measure the index with those excluded. >> do we have any ex-... i don't want to call it fossil fuel companies indexes at all? >> not that i am aware of. >> to reiterate for folks, the retirement board, benchmarks performance against the indexes and that is how you do the measure performance. >> and that is how the managers stay engaged with us to make sure that they are meeting the benchmarks. >> and you think that five years is not enough time to figure that out. >> without the analysis of the

extent of where these holdings are and what alternatives might be out in the markets, the public markets to replace these i really could not say. >> i have asked you for to ask about your opinion of retirement board members and i am going to ask you for your opinion now. >> do you feel that climate change is real? and do you feel that fossil fuel companies have had an impact on the climate change that we seem to be experiencing? >> i will say me opinion that is my opinion and i will not play a role in the decision however, there is clear evidence that in fact, there is impacts to the environment based on activities of these companies. >> thank you. >> and do you think that our investments that we have in fossil fuel companies have the power to hold fossil fuel

companies accountable? >> i would say that san francisco employment retirement holdings, probably not. and i don't think that they will necessarily miss our investment in those companies. but, i think that if we were to engage in other plans across the united states and the california plans and then our voice becomes stronger. >> i think that is kind of what is happening in seattle, san francisco, college campuses, seems to be building. and that is exactly how this sort of unfolds, and that is, we can at a level one, vote appropriately on anything that comes before the share holdings, if that is not successful in changing the behavior, and i mean the policy for a reason has three steps and the policy is stated that they, the board wants it to go through the three steps, because divestment, they recognize back in 1988, and

today, it is not necessarily drastic in the sense that it cannot be done but it is drastic in the sense of the impact or the potential impact of signaling to a market that we are going to be selling off $500 million of public holdings in these companies puts the retirement system at a disadvantage in the market. but, also, they have shown that they are not as, they make a determination that there is a social concern that warrants the policy, and they are not afraid to go through the policy. >> thank you. >> okay. >> thank you, for your presentation. and answering my questions. we could continue on with public comment. and i have, other speakers that i would like to call up first before going to the cards. patrick gettis, from the emp erial group and followed by garben yabush. >>

>> and sorry if i am not getting people's names quite correctly. >> hello. >> actually i'm paul solo patrick could not be here he thought that the meeting was next week and so he is in new york and i am taking the place so you did get the name wrong but for the wrong reasons. >> in order to keep in the time limit em going to read my remarks. >> i am a partner with a group and investment group in california. we specialize in quantifying the impact of social screening on portfolio risk and return. earlier this year we did a study entitled do the investment math, building a carbon free portfolio, and we were tired of hearing arguments against the investment by veflment experts who offered no honest data or analysis to support the contention that the fossil fuel would harm the performance, the purpose was to quantify the risk and return impact of eliminating the fossil fuel companies from a

stock portfolio, the former cfo and director of research and research at morning star as well as ironically a former analyst with the oil industry who is with amaco which is part of bp and he likes to say that the oil industry did a really good job of teaching him how to do the math and wants to share that math and the analysis of the impact. i actually brought the handouts and i will give them to you afterwards. but i have two slides. do you want me to give them to you? >> i did not... they are hand outs so i apologize. >> we will ask you a few questions to extend your time. >> if you eliminate the fossil taoul companies from the portfolio and retract the markets the risk will increase by only one, 100th of one

percent, the theoretical return for that amount of risk if you go back historically is less than one-third of a basis point. okay? and so screening will impact your portfolio by a small amount we can describe it as immaterial. >> so, do you have any response to the comments made by the director of the retirement fund about the risks that would be involved in terms of pulling funds from fossil fuels, stock, he talked about how that would be, within the market and we are pulling that much money out in five years would be a great risk and lower our power in terms of using our retirement fund effectively. >> i think that one of the problems with this debate is that people are not measuring and in his defense he needs to study this and we are adding the study to the weight of evidence. but, no, i stand by the comment that it would, yes, it would increase risk by such an immaterial amount that it would

be insignificant. >> could you go over that slide one more time. >> sure. >> what you have got here is on the left side, you have got the, on the vertical axis, if you exclude all of the oils, gas and consumable fuel companies. >> from the universe of available investments and put the portfolio back together again in order to track the russell 3000 index and this is just for domestic. >> why are you tracking that? >> it is the bench mark that most of us use on the u.s. side and have done the same index for the all country world index which includes emerging markets. >> right. >> what you are seeing here is just for the u.s. and applies for the foreign and the analysis for that as well. >> okay >> what is says here is if you look on the first line it says that if you put hump ty dump ty back together again, you will track it (inaudible) per year

and it is a measure called tracking error and what is neat is that you can convert it to a standard deviation risk measure tha, is the measure that all money managers do to evaluate that. if you do that, it converts to one, 100th of risk. and you look at the right side of the chart here and the typical active manager in the united states incurs 5 percent of the risk relative to the bench mark to try to beat the market. that risk, adds 69 100th of one percent additional risk to the portfolio and so we have a industry, one of the most highly compensated grossly over, compensated, is tracking (inaudible) of its clients is not delivering any apha and so it is ironic that the industry

is saying that you cannot do this when it will increase, when in fact they are delivering a level of risk. >> if this is this tracking error, is this assuming that the entire investment industry excludes all carbon? i mean, part of my question is, understanding theory and so forth and all of the standard deviations, however, the implications to the san francisco retirement board when we have 8 percent of the assets in one class and spread out between that is equity. but, what is the implications for us if we are going to divest? >> the implication is not about actually about portfolio risk, it is not going to increase the portfolio risk, more than what the study demonstrates. >> how are you defining risk? >> standard deviation, the variability... the way, and it is an axium in finance that you

get paid for taking a risk and the main me trick is standard deviation, and you budget to spend your risk in order to get the highest return. so, point here is if you do this, it will not increase portfolio risk now there will be costs associated with the deinvestment and there is unwinding of existing positions and i would maintain that five years is way more time than people need for doing that. >> so, fully understanding, the risk management discussion, however, question about have you looked at and analyzed the historical performance of these stocks >> we have. >> would you like me to share? >> yes, i would love it. >> the second part of our study. so the second slide here summarizes a historical back test where we built a carbon free portfolio and looked at it for the 25-year period, 1988 to

2012, we eliminated all oil, gas and consumable companies from the investment universe and thes not on the slide here, but that was a total of 134 stocks out of 3,000. and what you can see here actually is the first lines that are above the 0 percent axis, those are the periods of time in the rolling ten-year periods where actually a fossil fuel, free portfolio, out performed the index. it is only been in the last five years that you have seen that the carbon portfolio has out performed and it was interesting to us when the american petroleum institute came out and issued a study to talk about how dangerous divestment was and they focused on this five year period and so they cherry picked. if you go out and extend this many more years, i don't know what it will show you, this is the period that we had data. >> you are talking about you took the entire russell 3,000? >> yes.

>> ex-ed these 134 companies? >> yes. >> is that right? >> yes. what does that look like if we bench mark against our index. >> the whole world and including emerging markets but not small camp we did the study for that too and it looks identical. >> okay, so where does this, i mean, how far are we looking back here in 97? >> we are looking back to 88. >> all right. >> okay. >> i can't read this slide as well. >> it is actually rolling ten-year period and so the period extends beyond where the axis shows. >> so you have... what is the average in the difference? >> well, what we are seeing here is that the average... >> please... >> the average annual return for the ten-year rolling period showed an 8 basis point out the market. >> what is interesting is that

in 73 percent of the ten-year rolling periods, the fossil fuel free portfolio out performed the market and we don't put a lot of stock in the back tests and we put a lot more emphasis on the risk, evaluation, forecasting the return is difficult if not impossible, forecasting risk if you talk to the academics seems to be doable and so we like the risk estimate and we showed this because of the industry wants to talk about it and the american petroleum industry came out with a five year cherry picked that it would hurt the endowment to the college and so on. >> how would you explain the five years in terms of the difference? >> i am not an analyst, i just would not go there, to be honest with you. >> i don't know what was driving the out performance of the companies and i think that we know that the (inaudible) price and problems in the mid east and that kind of thing.

>> thank. >> could i continue? >> so in summary, the fossil fuels will have an immaterial impact on risk and historically a carbon free fort folio would have out performed portfolio in the oil companies, how will it perform in the future? we have no idea. our best guess is that it will perform in line with the market sometimes higher or lower and no impact on risk. there is a question about tobacco. when the tobacco issue came up with the perspective to the investment, the expected tracking error was around 35, 40 basis points. and the the expected tracking error for this is 60. so that will give you an idea of the order of magnitude in terms of the impact on portfolio tracking not risk. >> very good. >> thank you. >> thank you. >> our next speaker, let me see

my list here. garben yarush? the committee member, rebecca solet and you each have three minutes. >> good morning, mr. avalos, did actually good, it is garben jay bush, for an unusual name you did good work. i am the co-founder and chief investment officer of greenhouse advisors founded right here in san francisco. i am the manager of the shelton green alpha mutual fund which is a fossil free portfolio and so i would like to advise me that i don't have too much additional risk for taking that position, although i think that i am going to try to argue here in the next couple of minutes that being engaged in fossil fuels whereas he takes a traditional modern portfolio backwads