everyone, thank you for coming here today, i know a lot of you have been waiting a long time. thank you for making the time to

be here today. will you please join us by rising and joining us in the pledge of allegiance. >> i allegiance to the flag of the united states of america and to the republic for which it stands, one nation under god, indivisible, with liberty and justice for all. >> mr. secretary, roll call. >> commissioner bridges? commissioner drig col? here. commissioner makras? present. we'll be starting off today by going right into staff presentation, and what we'll do is after they've had a chance to present we'll open up to public comment. we'll only be calling public comment once today. we have approximately 75 to 90 speaker cards here and if we were to call everyone and give everyone two minutes, it would

be three hours, so what we're going to do is limit it to one minute per person so everyone has a chance to hear what everyone else has to say. what i do ask, you please be respectful. not everyone in the room is going to have the same opinion, but core values is being respectful of everyone's opinion and have an intelligent discussion today. staff, go ahead and start off. >> before we get started, i wanted to acknowledge, thank you for being here, thank you for being engaged and active participants in democracy. i want to let you know in the interest of full disclosure i'm leaving this evening earlier than anticipated, i have a sick relative in the hospital that is being discharged, so i need to go pick him up. i will let you know, but i may have to ask for the vote to be

called before everyone has an opportunity to speak. i want to acknowledge, again, many of you have come, written, e-mailed, this body as well as the board of supervisors and the editorial pages of the local newspapers, your voice has been heard and i want to acknowledge that. >> president stansbury: i'd like to add one thing, i'd like to thank supervisor peskin for showing up today, it's important that our supervisors are here to add their opinion, because it's helpful for our commission to hear from them. so thank you. >> we have several invited guests, you know allan at the far left. stephanie ivy and john goldstein from goldman sachs, john will speak first. and then ofear second.

they'll be 15 minutes. third will be allan and i will go last and allan and i, we pledge total of 15 minutes of two, if he takes 8, i have 7. john, if you could. stephanie, please reintroduce yourselves. >> good afternoon to the board, thank you for having us. protecting the environment and thinking about esg, it's been a longstanding focus of our firm. we have a very large clean energy business, we've already deployed about $40 billion in capital to clean energy and have expanded that goal to $150 billion by 2025. we've held 89 companies scale up the clean energy and renewable efforts in 29 countries. our own building was built to the gold esg standard, so we focus a lot of resources thinking about this from an investment perspective as well as business. we worked with some of the largest institutions on ways to

think about reducing the carbon footprint because we agree this is a critical issue that needs to be addressed. we did partnership with the state of new york which was announced at the paris climate talk last year that helped them reduce carbon emissions by 70%. to address this issue more aggressively we acquired a firm with john goldstein, working with the largest foundations on how to think about these issues. we believe there is a way to reduce the carbon footprint, but also retain the power to engage with companies that have violators and high carbon emitters and organizations like san francisco, enable them to maintain and keep the portfolio focus as fiduciaries. i'm going to turn it to john.

>> i'm going to go over a couple of basic things. number one, about my background and context. number two, talk about the particular challenges of climate risk and integrating portfolios and the world is at a point of whether to think about it, but how. the third point is getting to how, what is a way to tackle the challenge and potentcy of climate change. and finally reflections on some of the materials we presented. my handy watch, i'm going to try to stick to the time, so everybody can go through what they need to say. i cofounded a impact investing firm back in 2007, focused working with u.s. foundations and other institutions on this question of changing world, value impact and capital.

made 125 investments across, worked with lots of institutions. and frankly, the sign this is important to investors across the world, we were acquired by goldman sachs two years ago, and help clients take concrete action on issues. that gets to the next -- i think have touched the questions around fossil fuel for many angles. we have clients that have taken a spectrum of approaches to low carbon to engagement to investing in solutions and all points in between. so we've deployed capital and worked with clients on the spectrum and can comment from that basis. i think the second thing is talk about climate change as an investment problem. huge societal issue as well documented and understood, but as investment, it's a potent one because it has these two characteristics. number one between policy

change, physical change and market change, it's pretty much unquestionable there will be pre-found impact over the next 20 years affecting every nook and cranny. the challenge, which ones of those will happen, when and where and how that relates to market pricing is really hard to figure out. the scenarios of how things unfold around physical change, policy response. it's certain the world is going to look different, but making bets on how that is going to look is really, really hard. back to approach, to tackle that, the approach is not to be paralyzed. it's thoughtful actions to take with the basis of knowledge one has today to really start on a path of action and improvement and engagement, as opposed to staying in the analytical phase, which a lot of companies do.

so back to the investment lens. this is laid out in a simple picture in the pact, but i can do a little word picture. against the backdrop of significant change, but uncertainty about the specifics of those change, what are things that make sense for action today? we found three general casts of things that generally make sense across portfolios. number one, risk management. if people can find ways to significantly reduce their risk posture, without otherwise affecting their financial exposure, kind of like getting cheaper free insurance. we don't know how the world is going to unfold, but if the insurance is cheap or free, it's a positive thing to do. they found a way with 25 basis points of tracking error, if you map the russell 1,000 and their portfolio, it doesn't look like two lines, it's one line, but it

reduces their carbon footprint by 72%. that allows to you say i'm not making a bet on how this is going to play out, but i'm getting really well priced insurance. if i can free or cheap insurance. the right tail. other opportunities that may benefit from a changing world, that can get a free option on. if you can find opportunities for example to invest in rooftop solar that gives attractive returns today, but even more at the transition. the materials have example of a client we're getting started with, they wanted to make active bet that the trends will accelerate faster than they think. there are investments you can make that will look better under those scenarios. a free call option on upside around transition. similarly, if the world doesn't change, you're fine. if it changes you're even better. those types of things.

asymmetry that makes sense from institutional perspective. the third thing is the middle. engagement, esg analysis, working to understand companies are going to take very different paths on this. and being an engaged owner can drive what path they actually take. i think the example is a good one, in addition to the low carbon portfolio, they were part of the 2° planning and having a different conversation with management at companies about what the future should look like and the seriousness of the issues. this is something shareholders want to have a significant conversation about to manage their risk. having a seat at the table, instead of opting out. because what is decided around that table, matters an awful lot what the world is going to look like in 20-30 years.

one thing that is interesting is carbon tracker, a great organization. ironically, and there is sort of a lot of the research is used around the divestment question. we sat down and said, we were never talking when we started di vesting from companies, has we wanted was to sit down with the companies and figure that the risk return on the high carbon assets was unattractive and the real lever was not to not own the companies, but talk to the management about the prudence of those projects. the question of having a seat at the table, the engagement works on multiple levels. shareholder of a publicly traded company, which is engaging around strategic planning. but with the investment managers. we've found we're spending more time talking to private equity firms about how are they working

with their company? they own these companies, they're controlled positions. they can drive carbon reporting, change in practices. this engagement can permeate a whole portfolio to drive improvement. if you own the assets and make the assets perform better, you can -- yeah? >> just to clarify, you're advocating don't sell the company -- don't sell the company stock, but look at the actual projects that are within that company and move down to that level? >> so number one, i'm not advocating -- >> or whatever. >> what i think the point is that as part of transitioning to a low carbon future, there is a lot of critical choices companies make about what they invest in, how they operate and how they're assessed. there is a fork in the road, do you want to be in the board room

as part of that conversation to push in a certain direction or opt out? there is no perfect approach, but there are pros cons and one of the cons is losing the seat at the table around the cap x decision. there are choices to be made and the world would be better off in the choices move in a more sustainable direction than less. and one of the questions is what role do you want or not want to play in the conversation? does that answer your question. and so the optimization, the nice thing, there is a great way for that to have real legs because the economic case matters a lot. in some ways it gets popped out in interesting ways. so we had our real estate team help us assess a real estate fund. we were excited to understand. they talked about the

properties. after we were debriefing on the conversation and you know, they told us what they liked and didn't like. but then there was a awkward silence. we said what are you not telling us? they said all the things they want to do around community engagement, we do more of that because it's good business. i think the world is changing in part because consumer attitudes are changing, and economics are getting better and better on being the right side, benefitting from the trends and driving the trends, at multiple levels with the companies you own, it's a powerful level. if you can invest in an asset manager that is skilled in a changing world, instead of one that has their head pointed down, from a risk perspective, i think generally we'd rather have

them staying in touch with the world as it will be, than stuck in the world as it was. how do you optimize that exposure? with whom you invest? we have slides. that broad question of not just in whom you invest, but how you invest, how you engage. i think there is a lot of opportunity. i don't know if there is a way to get -- >> i'm sorry, john, can you briefly just explain people that are engaging with you that want to reduce the carbon footprint, simply for the audience, why are they doing it and what are they able to accomplish? >> so, i would put the people who approach us to do that into two categories and there is overlap. so there is some people it is purely from a mission perspective. so one of the large foundation clients was in town, one of their key areas where they give around money is driving transition to a low carbon

economy, it's what they believe in, care about and to be giving money away to solve problems they feel like they're creating, there would be a distance. we see that with individuals we work with, we see it with investors. there is a distance between the world they want to see and certain ways of investing. and i'll talk about each model and what they tend to do. the second are fiduciaries, asset owners, money on behalf of someone else, generally pension. they see the world changing. 60% of new power generation in the u.s. was renewable. the world is changing. and they see it. and they want to be -- figure out if there is a smart way without making a bet, i'm putting it all on black. they want to position themselves for a future that is changing. new york state is a good example of what that looks like. i'd say that first category,

it's more value-aligned investors tend to take a spectrum. some of them will divest from fossil fuels because they don't want to see them from identity perspective. they want to have their voice added from a movement perspective. and others invest in solutions. we do a lot of conversation and the divest, but the invest piece is neglected in terms of what are things that may benefit from the investment. on the institutional side, i think, this is what is exciting about the conversation today, we've seen pension funds nibble at pieces of this. new york state low carbon index, the engagement around the 2° resolution, the climate 100 put together, we've seen bits and pieces in those, but what is exciting about the recommendation i read in the materials, i think overnight it

would put sfers at the leading edge -- >> that's what the current recommendations? >> yeah. hiring people to make it real, plug into partnerships to engage your reach, look at whether there are ways in terms of fossil fuels and clean energy, that kind of looks across the spectrum in a way that once again i think would position you more with the vanguard. we've seen individual actions along the spectrum, but to come out of the gate a little more powerfully across the tools is a big deal. >> why is that more powerful than new york? >> so, i mean, number one, for us, and you know, inability to move dollars, like to move money versus a broad process, that

makes a difference. >> how long was new york's process? >> new york city? so i haven't been involved in that. the release says they're going to go i think work with consultants to develop a set of options that they will then study and have reviewed by a fiduciary counsel that says that is prudent. >> so no set time line. >> i'm not the expert on that, but no guideline and it's not clear what would result, and it would be interesting to see the dynamic between how aggressive and what will pass muster in terms of the process they've set up, in terms of the legal bar. this is more me speculating having read the same materials you read. but i think it's important to note, what is significant, have a broad aspiration. the world is changing we wanted to be positioned for it.

make a down payment, move money away from the worst actors toward better, you're -- actions that take to move money, bodies and vote today while still having longer term aspiration. i think it feels like either, or. it's either aspirational statement that puts off action, or it's action. and a combination of those two seems potent. i think i've gotten to the 15 minutes. i think that kind of covers all of it. the question, it is important to recognize the profound challenge of climate change as investing question. the trick is to find -- not to get started and this if you can find ways to get cheap or free insurance, or free or cheap

options and optimize the performance of the middle, where you invest and how you invest, that is a way to allow folks to get started. and it's an on ramp, not a conversation, but an actual way to get started. so much comes down to good execution. back to being an example, the example that has action, aspiration, but good implementation, because when we talk to institutions that are intrigued but skeptical, they have questions about will this be implemented well? this is going back to the days, are we manufacturing models of success or cautionary tales. do we reinforce those by stubbing our toe, or do we show people that can work in a methodical way that gives its legs. there is a desire to have a leadership position not just for your own pensioners and what you're trying to do, but impact

and extend. i think not to be really boring, but good execution is innovation. and i think it's important to not lose sight of that. >> one of the things we as a board, it's really easy to take things out, but we have to find things to put it in, and we have to find things with a bogey, so i think finding those clean renewables, enough of them, everybody around the world is chasing those kind of companies now. where can we find them? and so our fear is always something that happened to cal feres and others, they put their money in things and they lost money. we need the help to identify the good projects. when you're saying implementation, we need to -- that's a key for us. >> yeah. i'm a few minutes over,

apologies, but hopefully that was useful. with the 15 minutes i had and i'm going to caveat it that the presentation i prepared is longer than that, so i'm going to try to cover the most important points. but i'm going to spend a couple of minutes on my background. it's relevant to folks in the room. so in 2012, as a student uc berkeley, during that time i was divestment fellow at 350.org and spoke in favor of sfers divesting at the first council hearing in 2013. thereafter, i passed the resolution. after graduating i went on to

work at shareholder advocacy nonprofit where i basically supported divestment campaigns nationwide and also worked connected research that underpinned shareholder proposals, targeted fossil fuel companies. after that i went to work at the university of california investment office, where they manage the $100 billion for the uc system and i basically spent my time helping them develop a framework for responsible investment and specifically had to tack the question of climate change. so during that time, uc, you know, we came out with -- the uc came out with a multi-pronged approach. they joined the principles for responsible investment where i work now and something sfers did a few months ago. the uc sold off the investment in the coal and oil sand companies in a short time frame. they committed a billion dollars

through private market vehicles. and they committed to active ownership, so where they had a seat at the table, they joined climate-related engagement initiatives. and they hired staff to implement all this. so it's probably -- you can see the similarities there with the proposed plan. in my opinion, the staff proposal standalone goes above and beyond that. i joined the principles for responsible investment. we've got just under 2000 constitutional investor and service provider signatories or members that represent 70 there will, over half of the world's wealth. and you know, it's become abundantly clear that the climate change is sort of a top issue for the vast majority of the signatories, of our members, so the pri has prioritized

climate change within our 10-year strategy. we spend a lot of time thinking about it. and advising our signatories on it. and what i'll say through the whole journey, you know, if i didn't think divestment was a powerful tool, i wouldn't have been an activist for years. and this journey broadened by perspective. i worked in an institutional investment office that had the responsibility to manage the pension assets of tens of thousands -- hundreds of thousands of people indefinitely. and so that journey has -- you know, helped me understand that divestment is powerful and if it is undertaken, it shouldn't be standalone, it should be part of a thoughtful multi-pronged approach. because there are many levers to

address climate change. and i think the conversation needs to be had around not isolating one lever at the expense of all of the others, let's talk about how each lever can be thoughtfully executed in the way that has the most impact on the issue we care about, while fulfilling the fiduciary duty this board is charged to execute on behalf of pensioners. so how do you balance all those differing approaches? and create a really holistic approach that can certainly include divestment if that's the way the board wants to go, and at the same time, doesn't stop there. so, you know, i think each of the proposals that are on the table that have been discussed, each have their own merits and i think there is a path forward for this board that incorporates elements of each and as john said, they're a leader among

pension funds in the u.s. and the world and that is the opportunity on the table today. please stand by. cheap natural gas, renewable energy. policies targeting carbon emissions, as we all know,

decimated the coal industry, depressed oil prices, and have left assets stranded and will continue to do so. as we all know, the directionality is clear. the international community is committed to keeping warming well below 2 degrees celcius. and that has real implications for institutional investors. john highlighted a number of them. and i will just add to them and provide a little more color. just yesterday, lloyds of london, oldest insurance market in the world, committed to divesting from coal. norway's sovereign wealth fund, largest in the world, is considering a divestment from fossil fuel as well. world bank announced that it will no longer finance fossil

fuels. they announced that i've come together to engage the largest carbon emmitters, under even umbrella, new umbrella, called the climate action 100, which john mentioned. that is to say, that the directionality is clear and transition to a low-carbon economy is nuanced in the impact it's going to have. john spoke really well to the nuances. it will create winners. it will create losers. the question is, how do you manage that downside risk and capitalize on the upsides of the transition?

this response, how do you manage that and mitigates the solutions. time check? >> i haven't been timing you. >> that's all right. bill mckibbon called for a managed transition off fossil fuels. if we're talking specifically about fossil fuel companies, which oil and gas companies are currently aligned with a two degree pathway and which are spending capital on projects that will be stranded down the line. to answer that question, there was a report that ranks the 69 largest oil and gas companies on the proportion of their capital expediture that falls either inside or outside of a two degree budget. what emerges is a picture of which companies are most exposed to asset risk and least exposed.

with that information, investors can choose a number of pathways. you can hedge that risk in a number of ways. john mentioned some of them. you can allocate to a low-carbon index. it reweights towards better performers and underweights carbon emissions and momentum, transitioning to become more sustainable companies. and you can engage with the laggards and help them become more sustainable. and then you can, of course, just divest all together and take a phased approach to text itting -- to exiting the conversation. what i will say is that it's

being done in a measured approach. some of the key aspects to engagement, which 5 want to spend a few moments on. a, to improve management and corporate governance at the board level. b, to improve disclosure and align that disclosure in a way that's decision-useful for investors. and, c, to actually reduce carbon emissions. and so there's a financial stability board. the financial stability board

was created by central bank governors and bank of england and it was created to avoid another 2009 financial crisis. they identified climate change and been able to make capital allegation decisions. and the tcfd marks a significant evolution in terms of how institutional investors and, you know, the market and private market actors, just signalling

how this is an issue that will affect us all. let's glean the data we need to make informed decisions. >> just for time sake -- >> you were on a personal journey from divestment to coming back to pris mission. can you explain briefly why you've changed your perspective. >> it's not really that i've changed my perspective. >> your approach. >> every institutional investor has a path they can take. john can probably speak to this better than i can. if you are a foundation with a clear mission of solving climate change, you have more leeway to make decisions, bound by if ied -- fiduciary duties and it may

cause you to make certain decisions that others don't. in that context, it's a multipronged approach that will win the day. not to throw the baby out with the bath water and take an approach that ultimately, again, is thought out. it has teeth. if you are going to engage with companies, put a timeline on it and articulate the consequences if they don't shift in alignment with how you want them to shift. and use the other levers at your disposal. we need $1 trillion in investments annually to meet the paris agreement. a small chunk of that will come from governments. the rest from investors, finance institutions, and companies, and so investors have a key role to play to help us achieve a

2-degree target. you have a plan on the table today. that's one aspect. engagement. whether to engage with fossil fuel companies or not, that's up to the board to decide. but we can provide guidance and experience. i mentioned a report that ranks these companies. engage across other sectors, help the automotive industry transition to more efficient vehicles, electric vehicles, etc. >> so when i was engaging with calpers, you were imploring on me to please do not divest and walk away.

calpers has said, be at the table. go to level 2, not level 3. go to level 2. >> yeah. >> and be at the table negotiating with us, so we have the clout. and if we do it together, we can move a lot of the bad players and hold -- put some teeth in to how we're doing it, because we haven't put any teeth in and they held themselves accountable. >> there's historical context. sfpers committed in 2015 and not much has been done. the environment is much different today. it was last month that it was launched. it has teeth. collectively, this group of investors owns roughly around 25% of the companies that are being engaged. so companies will listen to that

group. i think the question -- part of the question and part of the answer to the question is, what kind of teeth are you putting behind it. $40 billion pension fund, dutch pension fund, said we will engage, but if we don't see change in three to five years, we'll divest. there is a middle ground that can be struck. i will not tell you what to do, but i'm trying to paint a picture that there are multiple avenues. you can take the new york city route. as john mentioned, they have not ta tangibly committed to anything today. >> i'm picking up, we commit in 2015 to do something, to go to level two, but that's not strong enough because we're not putting teeth in it. if you go to level two and want to be at the table, get a

commitment from the companies that we have real standards we can judge their actions within two, three -- whatever the time period. >> yes. figure out exactly what you want those companies to become and give a time frame. if they don't transition in that time frame, make an informed decision. so that's one side of the conversation. >> so i'm trying to think about our progress, too, as a board. we went to that 2015. and some of the other pensions did what we did. we're going to be a the at table, going to level two. we're going to engage. are you saying now because we've committed to being much more trying to put teeth in it that

other organizations are doing that with us. >> and to get back to boring operational stuff, but the fact that there is a head count. >> yes. it's a great idea, but who will do it. >> like we don't have 20 people like calpers does. >> but adding actual, dedicated people to the task. and as i understand it, number one, have someone whose day job is that, and, two, plug into the initiatives, so you can extend the reach. you nope what it is you want to do. >> let's progress on that. it's important to see that we have moved ahead. we haven't moved ahead fast enough and we want to put some teeth into this. so i think what we're really saying is, 215, we did that. we need more responses. we need to have more effect.

so what we're doing now, putting on the table, is that we're actually hiring somebody now to do it full time. so we're putting money behind it. and we haven't done that before. calpers has 20 people behind it. i don't know if new york city has anybody behind it. >> i think it's a question of how you word it, right? it's a question of what you are committing to. new york city said, in five years, our desire is to not have these companies in our portfolio. >> that's a long time. to me, it doesn't seem like a lot of teeth. it's where people have gone, but it seems like they're studying it, looking at it. we have people in the audience saying, we need some teeth in this to see results. >> this is one of the nice things about the proposal.

step one is moving $1 billion, right, this idea that, you know, all of this other stuff is good and important and go to have aspiration and process, but moving money is important. >> to be clear, getting rid of all fossil fuels, selling them all tomorrow, is just fiducia fiduciarily, legally imprudent. it exposes you to a lot of risk. everyone who will make this decision and has made this decision, hasn't just done it the night after. they've done it in a phased, prudent approach. you have responsibilities. >> when you say "phased, prudent approach," don't you still need a timeline? you don't think it's prudent to do it tomorrow, but don't you think you have to put a timeline on it at some point? >> i do. 100%, yes.

[applause] if the decision you are making is to divest -- and i'm not telling you to do that -- but if that's your decision, of course, give it teeth. if you are going to engage, give that teeth, too. in the meantime, don't -- don't get rid of the proposals on the table to invest in solutions to invest to a low-carbon index. if this passes, it will be, as far as i understand, the largest allocation to low-carbon index. >> so number one, recommending to put this amount of money to a carbon index. we're doing something finally. so i think most of us like that. and i think, two, the fossil fuel -- you're saying, recommending from your

standpoint, it's not prudent to do it tomorrow, but it is important for you to now identify those companies, analyze them, figure out which ones are not a good investment and dirty and will be bad for the portfolio anyway. >> i will steer away from making that kind of a recommendation, but what i will say is that, whatever decision you to make, yes, needs to be really well thought out, so if you do divest over a period of time, if that's what you choose to do, you are doing it in a prudent way. i do believe the riskiest fossil fuels are easily identifiable you've gotten rid of some of them already. and there are others that can be done in a more immediate fashion.

>> and in how many -- we've sold in the thermal area, what, nine companies? >> right. >> restricted. okay. that's what we're looking to build on right now. >> how many people have come to you and said, we've divested and we made a mistake? or we wanted to slow it down, if we had a chance to resell? walk me through -- >> none of our signatories -- >> whatever divestment they've done. >> it's important to differentiate. if you divest from all fossil fuels and you do that tomorrow, that's different than selling off two coal companies or whatever it is. so i think what i'll say is that every signatory that's taken some kind of divestment action,

has done it in a thought out, procedural way and not a reactive, get-rid-of-this-tomorrow way. i can safely say that, right? >> thank you. that's helpful. >> are we on time? >> behind. shall we go to alan or do you have more questions? >> i think there will be quite a few questions from the board. but i also don't want to make the public wait until 4:00 to be able to speak. so why don't we continue to move forward and give our investment consultant a chance to speak. >> sure. alan. >> let me jump right into it. the issue is not whether global warming exists. credible evidence indicates it exists. it's associated with greenhouse

gases and burning of fossil fuels as a contributor to that. the question, as been said before, how do we manage the risk of global warming on our investment portfolios. i don't know if you can put up page 4, bill. we did not -- i know john and i know stephanie. we didn't collaborate on this, but there are a number of ways to deal with global warming that have a positive effect on the result you are trying to achieve and don't have a negative effect on the risk-return parameters of the portfolio, which is the duty of you, the board, to protect. proxy voting, active engagement alongside others. investment technologies in industries expected to benefit from change in energy mix, and the last one, which was mentioned, ability to take an invest fund, which is not a value buyer, and use the

tracking error in that index fund, who in a measured way, create the effect you are trying to do, and that's to reduce the carbon footprint of the companies you invest in. i'm sad to say that we don't find that broad divestment from industries across the board is an effective way to do that. you have approximately -- i'm not laughing at you. i would appreciate it if you don't laugh at me. >> as a reminder to everyone in the room, be respectful to the speakers. when you talk, we will not laugh at you or make noises. everyone be respectful. if you find anyone being disrespectful, remind them. >> you have $523 million of cu in your portfolio. it's a lot of your portfolio. not only will divestment have no measurement impact on the production of fossil fuels, we're simply transferring our

ownership of those holdings to someone else. someone who knows that you are going to sell those. someone who will extract the price at which you sell the securities, causing to you pay transaction fees to get rid of those securities. and that -- while it's small -- is a permanent loss of principle in your portfolio. if you were to do that in a confined period, the cost of the portfolio would be about $1.2 million. in disposing of the shares, we forefit our seat at the table to influence fossil fuel producers. by selling that, we give up the right, but the people that were going to buy the shares, don't care about this as much as you do. we had a pension conference this week. we had 22 public pension plans came up. to a man and woman, they said,

tell us when san francisco will sell. we'll buy the securities. these are not folks that care as much as you do and when do about the environment. having said that, the costs go simply beyond the one-time kfrts of selling and replacing those securities. well, established investment theory is when you have securities to invest in, you can improve more, and you remove a chunk of securities, you reduce the opportunity to earn a return at every level of risk in the portfolio. that's a concern. it's hard to measure exactly, but energy is 4.5% of the your energy portfolio, 5.9% of

russell 1000. 7.9% of the value. so a value manager will have to get rid of 10% of the portfolio. on pages 7 and 8, we estimate the offset setting it off, between 5 and 20 basis points. you remember you as a board last fall adopted an asset allocation for the best return you could going forward and the assumptions is that we were going to invest in unconstrained s&p 500 activities and bonds. if we knew we would take 5% away, the projected volatility of what you chose would be higher and to offset that, you would have to absorb a 5- to

20-basis-point cost to the portfolio. >> would you tell us what that amount is in dollars? >> it's in the report. it's anywhere from $5.7 million to $23 million annually. >> million? >> million. that's on the equity portfolio, doing those numbers on the bond portfolio. to cost assumes they're tracking the index. and value managers are chosen to add value above the index. value manager is paid for you to determine the security or set of securities are undervalues. and to buy them with the idea of selling them when they're higher valued. energy stocks are susceptible to price fluctuations.

backward looking analysis said, should have gotten out of it, but we've had oil and gas prices going down with other days of distraction. in the 17 days in january, oil is back up. it's because of a growing economy. when the economy grows, more energy is used. and most of it comes from fossil fuel prices. so prices are up 4.8% with energy. the value managers, the costs are even higher than what i said. on page 10, we note that energy stocks perform particularly well in inflationary environments

with growth. we've haven't had that for 10 years, but the possibility -- and that's not our base case. our base case, as you heard, was modest growth in the economies going forward. if indeed the tax cut or other things going on cause us to move into a higher growth economy and inflation reasserts itself, that's very good for energy stocks and not very good for anything else. on february 14, you will hear about hedging and the need to do it. the most effective way is to diversify the portfolio, but to have a diversified set of equities in which energy would be won. i don't want to go through too much more. let me close by emphasizing the board's fiduciary duty. new york city's mayor and controllers have made statements about what they'd like to do. there are five funds in new york

city. each has a board like you and has an advisor like us. in fact, we advise one of them. those boards will have to go through exactly what you are doing. they haven't done it yet. they may decide to divest, but have not taken that action. we did reach out to the 10 largest public advisors and two additional, because we also asked cambridge and they all said they didn't recommend broad divestment. i'm probably the most sensitive person in this room to the environment. i won't go into it. i know you will laugh about it, but the fact is, symbollically using the assets that are trusted to you to make a political statement is not a good fiduciary duty. your duty is to provide the highest return at a reasonable risk to the beneficiaries.

we enthusiastically endorse the five earlier steps and we don't recommend a broad-based divestment. >> you talked about the potential costs and you said between 5 and 20 basis points -- >> on the equity portfolio. >> which is about $10 billion. if the board were to vote broad-based divestment, everything, it could be higher than 5 to 20 basis points? >> yes. >> and if it was just 5 to 20 basis points, we have an assumed rate of return of 7.5%. i believe your forecast going forward is that we'll probably only earn 7.1%. >> correct. >> if in your analysis, you determine that because of this broad divestment that our rate would go down to 6.9% what will have to happen to our

rate of return at some point? >> everybody should understand, this is a closed system. the contributions and investment returns have to manage what you pay out in benefits and expenses. we may not want that to be the case. it is absolutely true. if we impair the investments, one of two things happen -- investments have to go up or payouts go down. it will be millions of increased contributions on the part of the city. >> you did say that you thought that there was maybe a smart way to go about this for that reason, you support staff's recommendation. >> absolutely. >> let's proceed with staff's

recommendation. >> looking back, you can say about retail and a lot of things -- >> how can you say that when our returns are dismal for a 10-year period and you are saying that we keep this set of investments -- how can it be worse? >> what we're getting now is the return in the last 10 years. what has happened during that period to oil and energy prices because we've had an excess supply, they've come down. we don't think that's at stasis. we think that energy prices are likely to rise and what we saw in the past will not be predictive of the future. >> if you think they're going to go up,y