Balancing the Moral and Financial Sides of Gun Divestment

A year and a half after the Sandy Hook tragedy, investor strategy on whether to pull out of gun investments is a debate of emotion versus reason.

Parts Factory Expands to Guns in Aim for More Reliable Profits

Newly-manufactured MMC Armory MA-15 rifles are displayed for a photograph at MMC Armory, a division of Mennie Machine Co., in Mark, Illinois, U.S., on Wednesday, June 26, 2013. After the last recession slashed Mennie Machine Co.'s profits and workforce at the tool and die-maker’s parts manufacturing business, theyíre turning to what they believe is the great economic equalizer: producing semiautomatic rifles and handguns to satisfy growing American demand. Photographer: Daniel Acker/Bloomberg

Daniel Acker/Bloomberg

On January 15, 2013 — a little more than a month after the shooting spree at Sandy Hook Elementary School in Newtown, Connecticut, that resulted in the deaths of 20 children and six adult staff members — Philadelphia Mayor Michael Nutter released a set of requirements for the gun industry called the Sandy Hook Principles. The set of 20 guidelines asked firearms and ammunition manufacturers to agree that they would, for example, support restrictions that limited access to firearms among children and the mentally ill, develop better safety technology and help call for universal background checks. Public pension funds could also adopt the principles, Nutter added, by requiring relevant portfolio companies to comply or risk being sold. By late January, the Philadelphia Board of Pensions and Retirement had adopted a resolution vowing to divest from its $15.3 million in firearms investments within 15 months if companies failed to sign on.

In the following several weeks, an initial flurry of chatter over divestment from gun-related stocks gathered the support of several pensions and endowments. There was a frenzy of calls to action similar to Nutter’s Sandy Hook Principles. Chicago Mayor Rahm Emanuel ordered that pension funds in his city divest from firearms holdings. California State Treasurer Bill Lockyer issued the same call to funds in his state. New York Mayor Bill de Blasio, then the city’s public advocate, organized with Lockyer Wall Street for Change, an initiative that drew attention to the money managers who were the biggest holders of gun interests and urged citizens to contact them and demand divestment. And three Princeton University faculty members originated a petition calling for the university’s endowment to divest from any gun or ammunition stocks.

But firearms divestment soon fell out of the headlines – even as gun violence remained prominently in them. “The state of the firearms divestment campaign is somewhat similar to the state of federal gun control legislation,” says Douglas Cogan, vice president for asset owner accounts at MSCI ESG Research in Boston. “Both have essentially stalled out.”

Hampering the firearms divestment movement is the fact that such calls tend to appeal much more heavily to moral arguments than financial ones. In response to the Princeton faculty petition, the university’s Resources Committee issued a report that quoted committee guidelines: “For Princeton, the purpose of selective divestiture is ... not to make political statements, to censure governments or to pressure either companies or governments to adopt particular policies.”

In addition, firearms-focused divestment efforts face their own particular challenges. One may be that most guns-focused divestment campaigns focus on just three small-cap public companies: Sturm, Ruger & Co., Smith & Wesson and Olin. Cogan says that within the MSCI world index, which includes about 1,600 companies, firearms manufacturers represent only one third of 1 percent of the market cap on the index. In contrast, the fossil fuel divestment campaign targets companies that collectively represent nearly 8 percent of the index. And all the while, firearms stocks have demonstrated that they’re not vulnerable to events like the massacre in Newtown — they’re bolstered by the aftermath. Gun sales, as measured by FBI background checks, reached a record high in 2013, up 8 percent over the previous year.

“Investors don’t really see this as an investment risk,” says Adam Kanzer, general counsel of Domini Social Investments, located in New York. “It’s more about the opportunity to make some progress here and influence the issue.”

During the brief period of divestment agitation in early 2013, a handful of U.S. public funds did get out of firearms and ammunition stocks, including the California Public Employees’ Retirement System (CalPERS), the Chicago Teachers’ Pension Fund and that city’s Municipal Employees’ Annuity and Benefit Fund, the New York City Employees’ Retirement System and the Rhode Island State Investment Commission. The California State Teachers’ Retirement System (CalSTRS) also divested from publicly traded gun companies but still has a stake in private equity firm Cerberus Capital Management, which holds Remington Outdoor Co., formerly known as Freedom Group, the manufacturer of the Bushmaster rifle used in the killings at Sandy Hook. For its part, Cerberus says it’s trying to sell the group.

But a number of the major public funds that had publicly announced they would consider divestment didn’t follow up on the issue. In Chicago the Firemen’s Annuity and Benefit Fund, to Emanuel’s dismay, voted against gun divestment in February 2013. Massachusetts State Treasurer and gubernatorial candidate Steven Grossman promised on January 15, 2013, that within a week legislation would be put forth that would divest state pension funds from semiautomatic weapons. Ultimately, such a bill was never filed, however. Given the state pension portfolio’s scant allocation to gun-industry-related equities, the move would have been largely a political statement. According to a review that Grossman ordered, less than 1 percent, or $27.8 million, of Massachusetts’ pension fund is allocated to gun stocks. Grossman has since stated that whereas he himself is in favor of gun divestment, he would leave such decisions to the Massachusetts state legislature.

As for the Sandy Hook Principles, they were never adopted by any city besides Philadelphia — or any company, save for Japan-based Daicel Corp., which sells ammunition through a subsidiary, Japan Shotshell. By contrast, the Sullivan Principles — created in 1977 to apply pressure in protest of apartheid in South Africa, and after which Nutter modeled his Sandy Hook Principles — were adopted by more than 125 U.S. companies and pension funds.

Without a strong financial aspect, can public investment funds pay heed to social issues while staying on the right side of the terms of their fiduciary duty? Alicia Munnell, director of the Center for Retirement Research at Boston College, is a vocal member of the camp that says no.

“I worry that if public plans that are already under a lot of pressure start looking at the social aspects of their investments, they’re going to take their eyes off the prize and not serve their constituencies well,” Munnell says. “I think public plans are not the place to fight these battles.”

Still, a persistent few are keeping the guns divestment movement humming along. Peter Dreier, professor of politics and chair of the urban and environmental policy department at Occidental College in Los Angeles, pushed his institution this February to become the nation’s first college to pass a resolution forbidding firearms investments. He says that in the days following the announcement, he heard from roughly 50 students, faculty members and administrators at other universities, all of whom expressed interest in bringing the same about at their colleges. He expresses bafflement that no university has moved on the issue since.

A nonprofit called Campaign to Unload, formed in December 2013 and inspired by de Blasio and Lockyer’s Wall Street for Change, is working to educate retail investors on the firearms investments that may be in their 401(k)s. A small volunteer group called Delco United is moving across the state of Pennsylvania, encouraging municipalities to divest their gun holdings — with some success. In March the Pennsylvania State Association of Boroughs sold its holding in Sturm, Ruger & Co. The numbers attached were relatively small, however: PSAB’s total holdings in the stock were less than $114,000.

Some major funds have lately demonstrated that they’re more willing to engage with the gunmakers in their portfolios than divest outright. Alliant Techsystems’ annual meeting on July 30 will include a shareholder resolution jointly filed by the Connecticut Retirement Plans and Trust Funds and the New York State Common Retirement Fund, asking the firearms manufacturer to comply with six elements of the Sandy Hook Principles. The Arlington, Virginia–based aerospace, defense and sporting goods company announced in the spring that it plans to spin off its sporting goods and hunting division to shareholders. But because the spin-off will occur after the annual meeting, the resolution will remain on the agenda.

In an e-mailed statement, Connecticut State Treasurer Denise Nappier explained that although gun stocks may not show signs of financial vulnerability yet, she believes they could over time. “These companies will enhance their long-term shareholder value if they are seen as a reasonable public voice in the debate over the proper response to the Newtown tragedy,” Nappier says. “At the same time, they will suffer if the public perceives them as unwilling to consider reasonable voluntary measures, such as the Sandy Hook Principles.”

Get more on endowments and on pensions.