Shortly before Nelson Mandela passed away I had a chance to ask F.W. de Klerk what impact the anti-apartheid divestment campaign had on his decision to end apartheid. He said it had no impact at all, and then went on for 15 minutes explaining all the ways it had no impact, which made me wonder.
In the past year a new kind of divestment campaign has caught fire, faster than any other divestment campaign in history, according to a recent Oxford Study. Investors representing over $1.5 trillion in assets under management, including the Rockefeller Brothers Fund, Norway’s giant oil fund and the Church of England (whose Archbishop is a former oil executive) have all joined the chorus singing sayonara to fossil fuel investments.
But if you listen to their reasoning, this is not about biting off the hand that fed them; rather, it’s about morality and economics.
It’s about the morality of not standing on the sidelines of climate change, “the most pressing moral issue in our world,” in the words of the lead bishop on the environment for the Church of England.
It’s about the economics of not getting stuck with a bag of stranded assets when the carbon bubble pops, a topic on which Bank of England governor Mark Carney has expressed concerns. And it’s about not missing out on the transition from a high-carbon to low-carbon economy, “the largest economic opportunity of the 21st century,” according to Silicon Valley legend John Doerr.
The president of Harvard University–whose endowment is estimated to have a carbon footprint as big as Jamaica’s–is not convinced. As Drew Faust argues, constraining investment options risks significantly constraining investment returns, and that divestment is unlikely to have financial impact on the affected companies. It also raises the troubling inconsistency of boycotting a whole class of companies whose products and services we rely on.
The above points ring true in the straw man context of wholesale divestment.
But when you consider the kind of selective divestment that is actually taking place by hundreds of institutional investors, Faust seems woefully misguided.
The goal of the divestment movement has almost nothing to do with affecting the cost of capital of targeted companies, and everything to do with preserving portfolio value and de-legitimizing the worst one per cent of climate offenders and the policies that prop them up. In other words, it’s about fiduciary duty.
Investors electing to sit on the sidelines as the climate heats up may want to take note of environmental law firm ClientEarth. The $4.4-billion Children’s Investment Fund Foundation has put aside $11.4 million to fund initiatives like the Asset Owners Disclosure Project and ClientEarth’s Climate and Pensions Legal Initiative, which seeks to lay the groundwork for suing laggard pension funds in breach of their legal duties.
For investors who want to make sure they are on the right side of the law and history, please see the below four R’s of responsible investing:
Reject the worst offenders. A recent HSBC report titled “Stranded assets: what next?” warns of the growing short- and long-term risks that climate regulation, low oil prices, and energy innovation pose to some fossil-fuel companies. It pinpoints pure-play coal and high-cost oil producers as the biggest risks. These companies generally make up a minuscule fraction of a global investor’s portfolio. In the Church of England’s case, divesting $18 million from thermal coal and oil sands companies represented just 0.13 per cent of their $14 billion portfolio.
Reduce exposure to worst-in-class. With increased levels of corporate carbon emissions data, investors can now reduce their exposure to the most carbon inefficient companies by upwards of 50 per cent at no cost to returns. These strategies also offer the prospect of upside potential as carbon pricing becomes more prevalent.
Forty-seven investors representing $2.5 trillion in assets under management have signed The Montreal Carbon Pledge committing to measure and disclose their portfolio carbon footprint with an aim to reducing it over time. For example, the $183-billion Dutch pension fund, PFZW, has pledged to halve its carbon footprint by 2020, while growing its investments in climate solutions fourfold. Other investors like former Goldman Sachs risk chief, Bob Litterman, are shorting carbon for higher returns. The Litterman-inspired WWF Stranded Assets Total Return Swap is long S&P 500 and short stranded assets. It has returned over 40 per cent for the World Wildlife Fund since January 2014. While the oil price collapse helped, it’s not the whole story. As Litterman explains, “what the swap reflects is that market expectations today are that emissions will be priced much sooner, and at a higher level, than the market was expecting just six months ago.”
Re-allocate to climate solutions. This is where the growth is found. Zurich Insurance has committed $2 billion to green bonds, a market growing by 300 per cent annually. PensionDanmark is investing up to $5 billion in unlisted wind and transmission grid investments. ABP is putting $5 billion in green real estate funds that carry the GRESB Green Star seal of approval. There are also some good bargains among the 1600 listed companies tracked by Impax Asset Management that earn more than 20 per cent of their revenue in environmental markets.
Remind the rest this is important. About 350 investors representing $24 trillion have called on governments to implement carbon pricing and an ambitious climate deal in Paris. Now it’s time for investors to exercise what pension sage Raj Thamotheram calls forceful stewardship with their own portfolios.
It starts by asking companies one question: What is your business plan for a 2-degree world?
