In our market society, investors have immense power to shape norms and political culture on questions of economic importance.

To date, the conventional wisdom has been that investing to foster a world that accelerates the shift from old fossil fuel energy to new clean energy is a well intentioned, but bad idea if you care about financial returns.

As the fossil fuel divestment movement took flight over the past few years, many of the wise stewards of capital at university endowments and pension funds warned of the financial harm that would result if divestiture was pursued. An article in the Wall Street Journal summed it up with a headline: The feel-good folly of fossil fuel divestment. The argument went that shifting capital out of fossil fuels would constrain the investment universe, in turn leading to reduced returns.

It’s now been three years since the fossil fuel divestment movement was launched by 350.org’s Bill McKibben’s article in Rolling Stone Magazine. And the evidence is clear: not divesting has destroyed billions of dollars of investor wealth. In the analysis Corporate Knights released in November, which examined 14 major funds with a collective $1 trillion in assets, we found that over $22 billion (U.S.) had been sacrificed as a result of not shifting out of fossil fuels into clean energy stocks three years ago. Contrary to the conventional wisdom, divesting from fossil fuels in favour of clean energy has been a huge money-maker.

Oil and coal prices may recover somewhat over the next several years, but make no mistake – the global economic shift away from declining fossil fuel industries toward the rising clean energy economy is already under way. Investors who fail to grasp this reality will do significant financial harm to the people who have entrusted them with their savings.

Some of the biggest investors are already getting with the program. PFZW, the $183 billion Dutch pension fund, has pledged to halve its carbon footprint by 2020 while increasing its investments in climate solutions fourfold. AXA, the French insurer with $1.6 trillion in assets under management, is selling off its stakes in mining companies and electric utilities deriving over 50 per cent of their turnover from coal, while tripling its green investments.

Overall, however, investors have been dragging their heels – too reliant on outdated asset allocation models ill-equipped to navigate the future. In order to make a timely transition from the fossil fuel age to the clean energy age, we cannot afford to have such a large portion of the capital markets missing in action. That is why regulators are stepping in. The French government recently amended legislation to require institutional investors to report their carbon footprints as well as how they are contributing to the international goal of limiting climate change. State lawmakers in California have passed a bill banning its largest public pension funds from investing in coal stocks. Recognizing that investors need data to decarbonize their portfolios, the U.K. government has made it compulsory for listed companies to include emissions data in annual reports.

The good news is there is finally a place to reinvest. In the public equity space, there are over 1,300 companies with a collective market value of over $2.3 trillion that Bloomberg has identified as earning significant sources of revenue from the new energy economy. That is bigger than the collective $2.2 trillion value of the global coal and oil stocks as tracked in the MSCI index. The story of a fossil fuel sector being overtaken by new energy holds for bonds, private equity and real assets such as real estate.

Where would you rather invest: in an old energy economy in decline or in a new energy economy on the rise? Do you want to live in a world that falls into dangerous climate change and economic upheaval, or a safer and more prosperous planet?

It’s time for investors to get on with it and for governments to enact measures to ensure the take-up is as broad and swift as possible.

Many world leaders and sophisticated investors get this, but are stuck in their old ways of doing things. It is up to average citizens – whose money is ultimately on the line via their pensions – to speak up and make them do what is required. Franklin D. Roosevelt famously remarked in a meeting with social justice activists after his election in 1932: “I agree with you, I want to do it, now make me do it.”

In this spirit, in partnership with South Pole Group and 350.org, Corporate Knights has created a new tool to empower citizen investors with the financial facts to make the case for shifting investments out of old fossil fuel companies into new energy companies.

The Portfolio Decarbonizer powered by carbon data from South Pole Group shows the financial implications of divesting fossil fuel companies in favour of those that derive at least 20 per cent of their revenues from environmental markets or new energy. To get things rolling, Corporate Knights tracked down the investment holdings of 14 major funds and ran the numbers. The results can be seen in the accompanying table.

A more comprehensive dataset for these 14 major funds can be found here.

What can you do?

Find the portfolio of your college, institution or pension (click here to see how to do this), and run them through the Decarbonizer. Then share the results with us in this form and with the hashtag #decarbonizer so we can share them with all of you and send a clear message about what kind of world we want to invest in.

With files from Ahmed Nagi, Jason Visscher and Michael Yow.

⁶Based on the difference of investing the estimated value of a fund’s public equities holdings (on Sept 30, 2012) in two simulated portfolios (Clean and Uncleaned based on fund’s recently disclosed holdings), rebalanced quarterly over a three year time period to September 30, 2015. The Clean Portfolio excluded the companies with the largest oil and coal reserves as well as coal-fired utilities and re-invested in companies already in the portfolio that earned at least 20 per cent of revenue from new energy or environmental markets. View full methodology here.

⁷ In the four cases where the fund did not have any companies classified as environmental solution providers, free float market capitalization weighting was used.

⁸ Money divested from carbon intensive companies was shifted into companies providing environmental solutions already existing in the investor’s portfolio. In Harvard’s case they had just one such company, a sustainable food, feed and fuel ingredients firm called Darling Ingredients, which performed poorly on the stock market over the past three years.

Click here to go back to the Decarbonizer landing page.

The post What kind of world do you want to invest in? appeared first on Corporate Knights.

Step 2: Paste just the names of the listed companies (sometimes these are called publicly traded companies or quoted companies) into a .csv file. It must be a .csv file. The tool assumes that weights are according to free float market cap, so while it is nice to have the weights, it is not necessary.

Format should look like below

Step 3: Look up the ISINS. You can do this one of two ways. The old fashioned way is to google one by one: name of the company + ISIN, and then fill in .csv file as below. If you have access to a Bloomberg terminal, you can use their matching function, and then select the best matches manually.

Format should look like below

Step 4: Google the university endowment/pension fund/foundation to find the 2012 annual report and get the USD value of public equities in the fund. If this is difficult to locate, find the overall value of the fund and multiply by 50 per cent as a rough average to get the total equity holdings value as of the 2012 date. If the fund does not report in USD, use a foreign exchange calculator to convert to USD.

Step 5: Go to decarbonizer.co and upload the file, set your decarbonization investment strategy, enter the USD amount (just the number without $ or commas: 10000000) and press decarbonize to see your results.

Click here to go back to the Decarbonizer landing page.

The post How to get the investment holdings file prepared for the Decarbonizer Tool appeared first on Corporate Knights.

The Toronto Star reported:

Dan Madge, a spokesperson for the CPPIB, said the fund’s investment in Canadian equities closely resembles the broader TSX Composite, which is heavily weighted towards energy. Dropping a major sector from the portfolio “would not be prudent,” he said, adding that it would reduce diversification and prevent the CPPIB from engaging directly with energy companies on the need for better disclosure on climate risks.

“Engaging with companies on this topic and pressing for improvement are necessary to protect long-term value,” Madge said. “Selling our fossil-fuel holdings to investors who might not be as engaged as we are is not the most responsible course of action.”

Dropping a major sector entirely would indeed qualify as a radical move for an investor the size of CPPIB. However, doing nothing is arguably more risky than taking a page from the prudential policies of some of the most sophisticated institutional investors on the planet: Norway’s Oil Fund, the Dutch civil servants pension fund PFZW and French insurer AXA. All three of these investors are huge, have taken prudent measures to reduce – not eliminate – their exposure to the riskiest fossil fuel assets and are increasing their exposure to environmental solutions.

The Norwegian Oil Fund is still invested in what it believes to be the ‘best’ oil sands companies but has sold its stakes in five deemed to have unsustainable business models. It is also in the midst of unloading all companies that generate more than 30 per cent of their output or revenue from coal-related activities. In addition, its environmental related mandates in equity and bonds are set to increase in size and scope across renewable energy, water and waste management, energy efficiency and pollution control.

PFZW, the $183 billion Dutch pension fund, has pledged to halve its carbon footprint by 2020 while increasing its investments in climate solutions fourfold. The fund recently released a note outlining its plan to sell stakes in about 250 companies with relatively high carbon emissions. Coal producers will be mostly cut from the portfolio by 2020 and it will reduce investments in companies with fossil energy stocks 30 per cent by 2020.

AXA, the French insurer with $1.6 trillion in assets under management, is selling off its stakes in mining companies and electric utilities deriving over 50 per cent of their turnover from coal, while tripling its green investments.

The point regarding engagement is important, particularly for Canada – home to a large number of fossil fuel companies who will either build a bridge to the future by making investments in new energy today, or get stranded in the past. A great example is the proud century-old TransAlta Corp. Traditionally a coal power company, it decided to diversity over the past decade into renewables. Today, its $1.5 billion valuation is based almost entirely on its 70 per cent stake in TransAlta Renewables (valued at $1.99 billion), which it spun off into a separate listed company earlier this year.

An influential investor like CPPIB could play a constructive role by leading and co-investing with Canadian energy companies in their portfolio diversification to have more upside exposure to growing new energy markets. The leading part would be more effective if CPPIB had a stick and carrot. The stick is divestment, the carrot is capital. The upside is better returns and a better world.

How to make this happen? Two policies would help:

1. The Minister of Finance Bill Morneau, a globally respected authority on pensions, could borrow a page from Norway’s Minister of Finance who recently instructed asset manager of Norway’s oil wealth to exclude coal companies from its portfolio
2. The Minister of Finance could join France, which recently amended a law so that institutional investors are required to disclose their exposure  to  climate related  risks,  the  GHG  emissions  associated  with  financial  assets  and  the alignment  of  portfolios  with  the  energy  and  ecological

The post CPPIB and climate risk appeared first on Corporate Knights.

Summary Methodology: In order to calculate the potential impact of cleaning a portfolio, we go through the following steps. For each rebalancing date[2], we remove all companies from the original portfolio for which we do not have the requisite market data. This is the Uncleaned Portfolio. Then we remove all other companies who fail the user-defined selection criteria. We then readjust weights according to the user preference and re-balance quarterly, calculating portfolio returns monthly to determine by how much the Clean Portfolio over or underperforms the Uncleaned Portfolio on a total three year return basis.

Detailed Methodology:

1. Remove all securities which do not have the requisite market data[3] as of end of the most recent quarter. This list constitutes the Uncleaned Portfolio.

2. To determine the Clean Portfolio make-up, we remove companies from the Uncleaned Portfolio who fail any of the below filters selected by the user.
   • Inefficient Polluters: all securities in high carbon sectors[4] that either have higher than median weighted CO2e intensity (scope 1&2 CO2e/sales) than their Sustainability Accounting Standards Board Level 3 Sustainable Industry Classification System™ peers[5] within the portfolio, or do not report their CO2e.
   • Carbon Underground 100 Coal.[6]
   • Carbon Underground 100 Oil.[7]
   • Oil sands. All securities that are members of the Oil Sands Index[8], as of the end of the most recent quarter.

• Utilities with more than [x defined by user] % coal generation. All utilities companies that have more than x% generation from coal, as verified by a South Pole Group.[9]

Note: If a company is deemed “green[10],” it overrides the above exclusions, as there are cases in which a company has higher direct carbon emissions, but the overall lifecycle impacts of their core product is positive, such as manufacturers of insulation or solar panels.

3. Weights of the excluded securities are set to 0; for the Uncleaned Portfolio remaining weights are allocated on a free float market capitalization basis, and for the Cleaned Portfolio remaining weights are allocated according to the re-investment criteria selected:
   • In green companies: the weights of the green companies are increased proportional to their free float market capitalization, in such a way that the sum of the weights in the portfolio equals 1.
   • Sector Neutral: the weights of the remaining securities in the portfolio are re-allocated within the altered sectors to remaining companies proportional to their free float market capitalization, such that sector neutrality relative to the Uncleaned Portfolio is maintained.
   • Free Float Market Cap: the weights of the remaining securities in the portfolio are re-adjusted based on their free float market capitalization, in such a way that the sum of the weights in the portfolio equals 1.

Note: If there are no green companies in the portfolio on a specific rebalancing date, the algorithm defaults to Sector Neutral. If Sector Neutrality cannot be accomplished due to the absence of a particular sector in the Cleaned portfolio, the algorithm defaults to a free float market capitalization re-investment strategy. On subsequent rebalancing dates the user-defined weighted method is re-tried.

4. Once we have obtained the weights of the Uncleaned Portfolio and the Cleaned Portfolio, we proceed to calculate the portfolio return by using the Bloomberg monthly total return including gross dividends for each security. Rebalancing takes effect immediately after the rebalancing date. The difference is the $ amount by which the Cleaned Portfolio outperformed or underperformed the Uncleaned Portfolio based on the specified initial USD investment amount in the two strategies three years ago to the most recent quarter end.

Copyright © 2015 Clean Capitalist — a project of Corporate Knights

[1] ASX 200, Bovespa, CAC 40, DAX 30, FTSE 100, FTSE All Shares, FTSE Bursa Malaysia KLCI Index, FTSE/JSE Africa Top40 Tradeable Index, Hang Seng, IBEX 35 Index, KOSPI 200, Nikkei 225, OBX 25, OMX Stockholm 30 Index, Russell 1000, S&P 500, S&P BSE SENSEX Index, S&P Global 1200, S&P/TSX Composite, Stock Exchange of Thailand (SET 50) Index, STOXX 600, Straits Times Index STI, Swiss Market Index.

[2] Rebalancing dates: March 31^st, June 30^th, September 30^th, December 31^st.

[3] Sales, free float market capitalization, and total returns used to calculate index weighting are all obtained from Bloomberg. All figures are obtained in USD. All Carbon data provided by South Pole Group.

[4] High carbon sectors generally account for over 75-80% of a global portfolios weighted carbon intensity and are comprised of the following GICS sectors: Energy, Industrials, Materials, Utilities.

[5] SASB developed the Sustainable Industry Classification System™ (SICS™), which categorizes industries based on resource intensity and sustainability innovation potential. SICS is structured in 3 levels: industry, sub-sector, and sector.

[6] The Carbon Underground 200^TM identifies the top 100 public coal companies globally and the top 100 public oil and gas companies globally, ranked by the potential carbon emissions content of their reported reserves, as of the end of the most recent quarter. The reserves of these companies total 555 gigatons (Gt) of potential CO₂ emissions, almost five times more than can be burned for the world to have an 80% chance of limiting global temperature rise to 2°C (3.6° F).

[7] See above.

[8] Oil Sands Sector Index constituents available here.

[9] This data is provided by South Pole Group’s database of coal utilities which includes all GICS level 1 Utilities listed on the MSCI World, FTSE All World Developed Index, Russell 1000 and MSCI Emerging Markets Index. The % of electricity generation from coal is determined by South Pole Group based on available information as of the end of the most recent quarter.

[10] Green companies include all companies who either: (a) who earn at least 20% of revenue from environmental markets according to FTSE), or (b) derive at least 25% of revenue from renewable energy, energy smart technologies, carbon capture and storage (CCS), and carbon markets – according to Bloomberg New Energy Finance (BNEF) – and the company has a market capitalization of at least (USD)$1b as of the end of the most recent quarter.  To arrive at its estimate, BNEF assesses an organization’s sectors and subactivities within these clean energy areas, and then calculates an estimate using reported segmented revenues (as the preferred metric), along with any other available metrics such as segmented Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), GWh breakdown of energy production and megawatt breakdown of generation assets.

Click here to go back to the Decarbonizer landing page.

The post Methodology appeared first on Corporate Knights.

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 21^st 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?

The post Divestment moves investors off climate sidelines appeared first on Corporate Knights.

Henry Paulson, the former Goldman Sachs Group chief executive and financial crisis-era treasury secretary, spearheaded a report last year called “Risky Business” in an attempt to convince investors that climate change is bad for their bottom line. One of the advisors listed on the report? Former Goldman co-chairman and Clinton treasury secretary Robert Rubin. Meanwhile, another Goldman alumnus has developed into one of the most respected voices on climate investment risk: Robert Litterman.

In the small world of quantitative finance, Bob Litterman is a household name. As one of the world’s leading risk managers, Litterman first gained acclaim through his pioneering work at Goldman Sachs where he co-developed in 1992 the Black-Litterman Global Asset Allocation Model.

Making partner in 1994, Litterman went on to head up the firm’s risk department and then the quantitative group in the asset management division. In the latter position, he oversaw a group that, at its peak, managed over $185 billion (U.S.) in assets. It was during this time that he was asked to join the board of the World Wildlife Fund (WWF).

While not very familiar with conservation and other environmental issues, Litterman brought a unique perspective to the board. He’d studied human biology at Stanford University as an undergraduate, where he became interested in the way humans responded to incentives. He decided to transition over to economics and pursue a PhD after a brief stint as a journalist, moving on to spend a few years teaching at the Massachusetts Institute of Technology and working at the Federal Reserve Bank of Minneapolis.

Litterman joined the WWF board in 2007 just as global awareness was beginning to spike around sustainability issues, with the Intergovernmental Panel on Climate Change and Al Gore sharing a Nobel Peace Prize for their work around climate change that year. “Having worked in academia, central banking and then risk management on Wall Street put me in a position to have a framework when thinking of climate risks that’s a little bit unique,” Litterman explained in an interview with Corporate Knights.

After leaving Goldman Sachs in 2009 and helping to found Kepos Capital, an asset management firm, Litterman started to grow more concerned about the calamitous risks that climate change posed to the planet. But it was the release of the Carbon Tracker Initiative’s seminal publication in July 2011, “Are the world’s financial markets carrying a carbon bubble?” that set him on a new path.

Bubble trouble

The central premise behind the carbon bubble is that global action is needed to keep average global temperatures from rising above 2 degrees Celsius to avoid catastrophic climate change – that is, to keep climate change somewhat manageable. As governments around the world take increasingly assertive action to limit emissions, a significant chunk of coal, oil and other carbon reserves (likely more than two-thirds) will have to be left in the ground. These unburnable assets have yet to be adequately accounted for by the market, with significant implications for the market valuations of fossil fuel companies.

“It’s not just that we have yet to price climate risk appropriately, but today’s equity markets believe that any actions to institute adequate pricing are far down the road,” explains Litterman. “The biggest short-term risk to investment portfolios is that companies with stranded assets are going to be re-priced downwards by the market as the prospect of carbon pricing becomes more immediate.”

So why does drastic action need to be taken to reduce emissions immediately? As an individual steeped in risk management, Litterman is fixated on the worst-case scenarios. The scientific evidence for climate change is overwhelming, he explains, but there remains a great deal of uncertainty about exposure to the most dire climate scenarios.

“We’re doing an experiment by altering the climate here that has never really been done before, and scientists have been consistently preaching to expect the unexpected,” says Litterman.

As global temperatures continue to rise, so does the likelihood of a calamitous shift in the Earth’s ecosystem. “The most prudent way to guard against such a scenario is to hit the brakes hard at first – hard enough, in fact, that you expect to solve the problem,” adds Litterman.

Over the past four years, Litterman has transformed into an ardent advocate for carbon pricing and protecting portfolios from climate-related risk. From speeches around the country to op-eds in the pages of USA Today and others, he’s been busy trying to educate Americans on what those risks are and how to manage them.

He even took his arguments to the pages of Regulation Magazine, published by the Cato Institute, an American libertarian think-tank that once counted conservative Supreme Court Justice Antonin Scalia as editor. He’s joined the boards of the Asset Owners Disclosure Project and Climate Central and recently teamed up with Henry Paulson and others to fund climate change research papers.

Over the past two years, the notion of stranded assets has begun to gain acceptance in the mainstream. Major financial institutions, such as Citigroup, HSBC and ratings agency Standard & Poor’s, have acknowledged the risk stranded assets pose, and the Bank of England is currently conducting an inquiry into the potential overvaluation of fossil-fuel companies.

Bank governor Mark Carney warned last year that the “vast majority of [fossil fuel] reserves are unburnable” under a 2-degree scenario, while the deputy head of the bank’s prudential regulation authority, Paul Fisher, told an insurance conference in March that the stranded assets risk is real.

Investments in fossil fuels “may take a huge hit,” said Fisher, pointing to “specific examples” of it already happening but stopping short of describing them.

Skepticism within the financial community remains, however, even among so-called climate hawks like economist Larry Summers, another former U.S. treasury secretary and former Harvard University president turned professor. Summers, having spoken with some of the world’s smartest investors on the topic of “unburnable carbon” and stranded assets, said most don’t consider it a threat – at least not in the near future.

“There are real limits on how much you’re going to move investors,” he told a group of investors during the World Economic Forum.

Litterman has proven otherwise.

Hedging, not divesting

To be clear, Litterman isn’t a big fan of wholesale divestment of fossil fuel holdings – at least not yet. He doesn’t feel like there’s a strong economic case. Instead of dumping specific funds with fossil-fuel company exposure from WWF’s endowment, he designed a separate financial product that hedges against the risk of stranded assets. It’s a technique he encourages other investors to embrace.

This derivatives contract, the WWF Stranded Assets Total Return Swap, is attractive for a number of reasons. First off, explains Litterman, it’s a straight-forward tool. Conducting a company-by-company analysis to determine its level of exposure to emissions pricing would be a difficult task, but making valuations based on the level of coal and oil sands reserves is simpler.

To avoid having to sell off assets or seek out external managers and ask them to change their investment approach, Litterman decided to leave the underlying WWF portfolio untouched and add a derivatives contract on top, which shorts the dirty guys. “It’s very clear what we’re doing, we’re betting that stranded assets are going to underperform the S&P 500, and that’s certainly a bet I like,” he says.

The product has performed exceptionally well, returning around 85 per cent since January 2014 (performance numbers updated Feb. 2016). “So if you think of it from a fiduciary position, you have no reason not to do it,” says Litterman. “It both reduces risk and increases expected return, and in the case of the World Wildlife Fund, it aligns our portfolio with our mission, which is to protect ecosystems throughout the world.”

In a way, the threat of divestment has helped his strategy. This past year has seen a number of high-profile announcements from large institutional investors, municipalities, universities, and religious organizations committed to phasing out fossil-fuel holdings through divestment. Litterman feels this movement has impacted the valuations of the targeted companies.

Understanding that it’s not the only factor – other people would point to the fortuitous decline in oil prices for one – he still finds it notable how closely aligned performance is with some of these big divestment announcements over the past year.

“Remember, it’s not just the actual pricing of emissions that affects the valuation of these assets, it’s also the expectations of emissions pricing coming sooner and at higher levels than people previously expected, and I think that that has certainly happened over the last year,” he adds.

Rather than base its entire responsible investment strategy on the stranded assets total return swap, WWF has also hired funds to invest in the green economy. Litterman doesn’t think that clean energy investments are a bad idea, but they’re not as sure a bet.

“Both sides of the equation make sense, but it’s just more obvious what’s going to be negatively impacted than what’s going to be positively impacted,” he says.

Considering Litterman is an inductee into the Risk Hall of Fame – yes, there actually is one – it’s a perspective that would be unwise to ignore.

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