Won’t screening out fossil fuels restrict our profitability and increase investment portfolio volatility?
What is divestment?
Divestment is an activism strategy of selling stocks or bonds of a particular company (or industry) as a political statement. By withdrawing funds , divestors draw attention to operating practices with which they disagree, and make a public statement of refusal to be involved with those practices any longer.
For example, in the 1980s and 1990s, many institutional investors – cities, college funds, pension plans, etc. – divested themselves of their shares in companies doing business in South Africa, as a way of protesting apartheid there. More recently, a Sudan divestment movement arose to protest the genocide in that country. Today, the fossil-fuel divestment movement recognizes that the operating practices behind fossil-fuel companies threaten the future of life on our planet, and urges divestment from these companies.
But fossil fuel companies are profitable!
The bottom line: Fossil fuel companies cannot be allowed to burn through all of their assets without major long-term and irreversible consequences for our planet. Either we slow and eventually stop the burning of fossil fuels (devaluing companies’ remaining fossil fuel assets), or we cook the planet. It’s that simple.
A groundbreaking report by Carbon Tracker (drawing on research from the Potsdam Institute) outlines the science behind what’s known as “the carbon bubble.” The report calculates how much fossil fuel the world can burn over the next 40 years (while limiting global warming to an approximate two degrees Celsius), and concludes that we have five times the amount of fossil fuel reserves it would take to cross the two degree threshold. This means that if fossil fuels companies are successful in implementing their current business plans, we will be unable to avoid runaway climate change – extreme storms, droughts, record heat, food and water shortages, sea-level rise, and more wars over resources. These as-yet unburned fossil fuel resources are currently treated as “assets.” They would be more properly regarded as liabilities.
Fossil fuel companies’ stock prices are supported by assets that cannot be sold or burned, in order to preserve a livable planet. When more governments take serious action to advert catastrophic climate change — through caps on carbon, carbon taxes, or subsidies to alternatives fuels — fossil fuel holdings will begin their decline. Now is the time to prepare portfolios for a future dramatically different from the fossil fuel companies’ imagined ideals. Forward-thinking investors must recalculate the value of these companies based on operating strategies that acknowledge planetary boundaries.
Acknowledging the risk in continuing to invest in fossil fuels, a group of regional institutional investor networks bluntly stated that “further delay in implementing adequately ambitious climate and clean energy policy will increase investment risk for institutional investors and jeopardize the investments and retirement savings of millions of citizens.”
Would we get a lower return on investment if we divest from fossil fuels?
As more universities, cities, and institutions divest from fossil fuels, we see that divestment can actually be a profitable decision. Asked about the effect of fossil fuel divestment on her university’s portfolio, Vice President of Finance for Unity College Deborah Cronin said, “[O]ver the past five years the portfolio has met or exceeded market benchmarks despite the shift away from fossil fuel holdings. The College’s endowment is managed for the long-term benefit of the College, and it is anticipated that investment earnings will meet long-term market performance benchmarks.”
In fact, market studies show that the risks associated with divestment are statistically insignificant. Current analysis of investors who want a portfolio free of the “Filthy Fifteen” – America’s largest and dirtiest coal companies — can get a tracking error versus the Russell 3000 of only 0.14%, which increases absolute portfolio risk by only 0.0006%. Projections for a portfolio that is fully divested from fossil fuels have a slightly higher tracking error of 0.69%.
Advisor Perspectives states:
A rigorous study of the 18-year performance history of the MSCI KLD 400 Social Index, the longest-running index subject to multiple social and environmental screens, demonstrated that “the impact of the social screens appears negligible” relative to the S&P 500. With respect to the index’s exclusion of the tobacco industry, “the cost of this policy rounds to zero.” A 2012 meta-study of more than 100 academic studies conducted by Deutsche Bank’s Climate Change Advisors found that environmental, social and governance factors are “correlated with superior risk-adjusted returns at a securities level” and that socially responsible investment (SRI) funds that practice exclusionary screening do not inherently underperform. According to a 2007 meta-study conducted by the United Nations Environmental Program Financial Initiative (UNEP FI) and Mercer, “the argument that integrating ESG (environmental, societal, governance) factors into investment analysis and decision-making will only lead to underperformance simply cannot be made.” Its 2009 follow-up study reinforced that message.
What investments does DC have in fossil fuel companies?
As of June 2012, DC’s retirement funds had among it’s top 25 holdings $24.5 million in common stock in Exxon Mobil, and $12,7 million in common stock in Chevron Corp. “At the end of Fiscal Year 2011 (“FY 2011”), the combined assets of the Police Officers’, Firefighters’ and the Teachers’ retirement funds (“the Fund”) were valued at $5.2 billion.” This is only 0.7% of the entire retirement fund. In addition, the DC Retirement Board website shows that the retirement funds include investments in:
- Anadarko Petroleum Corp
- Arch Coal
- Consol Energy
- El Paso
- Sandridge Energy
- Plains All American Pipeline
What’s at stake for DC?
Studies on the physical impact of climate change suggest that a sea-level rise of 0.1 meters by the year 2043 will flood about 103 properties and other infrastructure within the District, costing about $2.1 billion. By 2150, 0.4 meters of sea-level rise is likely to impact 142 properties. If sea-level rise were to reach 5.0 meters (the upper projection), the experts warn of significant damages in excess of $24.6 billion to commercial buildings, military installations, museums and a number of government agencies, including the Federal Bureau of Investigation, the Justice Department, the Internal Revenue Service, the Federal Trade Commission and the Department of Education. Although sea-level rise of five meters is considered unlikely at this time, it is entirely possible that during an intense hurricane such as Isabel in 2003, storm surge could meet or exceed this level.
According to the same study, had Hurricane Sandy made landfall 300 miles further south, its storm surge would have pushed up the Potomac River nearly eight to 10 feet. With sea level continuing to rise, and storm severity increasing, it is only a matter of time before D.C. is inundated from a massive storm surge driven by climate change.
The Federal Government is acutely aware of this, which is why the Army Corps of Engineers is building a storm wall on the National Mall.
Why should DC divest?
While DC is reducing greenhouse gas emissions in the District, that does not mean we are being as effective as we could be in reducing D.C.’s climate impact. D.C.’s Climate Action Plan calls the present moment a “climate of opportunity” and recognizes this city’s great strides work toward becoming the greenest city in the nation, stating that “each green school and office, car and bike share trip, green or solar roof installed represents the District’s commitment to energy efficiency, saving money, and creating the greenest, most livable city for us all.” We can continue to lead the nation in sustainability by also recognizing that every dollar we divest represents the District’s commitment to the planet.
In the Climate Action Plan “the Government of the District of Columbia is committed to meeting the challenge of reducing greenhouse gas emissions from its Government Operations.” Divesting is just another step in reducing the District’s government’s greenhouse gas emissions.
Wouldn’t shareholder activism have more impact than divestment?
Internal shareholder action works best when the goal is to change one aspect of a company’s overall operations. In the case of fossil fuel companies, the goal is to reject a basic business model that relies on the extraction and burning of more carbon than the Earth can bear.
Furthermore, fossil fuel companies have ignored shareholder action on climate issues for years. In fact, ExxonMobil shareholders just voted this spring for the 16th time to reject a resolution to lower emissions from the company’s operations.
We are running out of time to save the climate. Divestment makes a strong public statement now that the District will no longer invest in industries that threaten our long-term stability and security. It is an ethical choice to make, which will position DC as a leader in a growing national movement.
Won’t screening out fossil fuels restrict our profitability and increase investment portfolio volatility?
No! Fossil fuel companies’ untapped carbon reserves should rightly be seen as liabilities, not assets. In 2013, 33 countries and 18 sub-national municipalities have carbon taxes in place. As more and more countries move to restrict carbon, the value of fossil fuel companies will drop. Portfolios that exclude fossil fuels (already statistically the equal of portfolios that include fossils) will be the most stable moving into the future.
Won’t this decision hurt District residents employed by the targeted fossil fuel companies?
Renewable energy sources produce far more local, permanent, well-paying jobs than the fossil fuel sector. Fossil fuel jobs are in long-term jeopardy already due to the numerous risk factors cited above. The District has a responsibility to pursue a sustainable future for all of our residents, and has no responsibility to direct its investment dollars into any particular industry.
“Were we to burn through all known fossil-fuel reserves, the results would be unimaginably bleak: major cities would be flooded out, a large portion of the world’s arable land would be transformed into deserts, and the oceans would be turned into liquid dead zones. If we take the future at all seriously, which is to say as a time period that someone is going to have to live in, then we need to leave a big percentage of the planet’s coal and oil and natural gas in the ground.”
“We act in the faith and the hope that others will join us, that we can contribute in our own small way to the arousal of public conscience. We cannot expect- or bargain in advance-to see the precise results of our commitment before we make them. We must do what we believe is right and hope that what we do will contribute to the eventual success of what we believe is right.”
– Harvard Corporation Advisory Board March 1984, in its motion to divest from South Africa.
“Letter from the Global Investor Networks of the World’s Largest Economies,” IGCC, accessed April 2, 2013. http://www.ceres.org/files/investor-files/2012-global-policy-letter.
 Geddes, Patrick CIO Aperio Group http://www.aperiogroup.com/system/files/documents/building_a_carbon_free_portfolio.pdf
 Lloyd Kurtz and Dan DiBartolomeo, “The Long-Term Performance of a Social Investment Universe,” The Journal of Investing, Fall 2011.
 Mercer, Shedding Light on Responsible Investment: Approaches, Returns and Impacts (November 2009). See also additional studies cited in Kurtz and DiBartolomeo.
 Kanzer, Adam Exposing False Claims about Socially Responsible Investing A Response to Adler and Kritzman http://advisorperspectives.com/newsletters13/23-socrespinv4.php
 DC Retirement Board June 2012 Top 25 Equity Holdings http://dcrb.dc.gov/sites/default/files/dc/sites/dcrb/publication/attachments/DCRB%20TOP%2025%20HOLDINGS%20AS%20JUNE%2030%202012-REVISED%20June%2030.pdf
 Draft Climate Action Plan http://rrc.dc.gov/green/cwp/view,a,1231,Q,460764.asp
 DC Climate Action Plan p.4 http://green.dc.gov/sites/default/files/dc/sites/ddoe/publication/attachments/ClimateOfOpportunity_web.pdf
 Kolbert, Elizabeth http://www.newyorker.com/talk/comment/2013/05/27/130527taco_talk_kolbert?mbid=nl_Daily+%28246%29 Line in the Sand