Do you like money? Do you like a steady climate? Then I’ve got the plan for you. It’s called divestment, and all the cool kids are doing it.
Taking a tactic from the anti-Apartheid campaign, the fossil fuel divestment movement —aided by Bill McKibben and his 350.org gang — has quickly grown from a handful of kids at Swarthmore to campaigns at over 300 college campuses, along with many cities, states, churches, and even pension funds. I’m here to tell you why it’s a good idea, and the short version is that it will push our country into action on climate change without costing investors money.
As for the long version…
The plan is aimed at civic and social impacts by using financial means.* First, by putting the climate change issue firmly into the media (which was working even better before campuses cleared for the summer); second, by getting prominent and respected American institutions to publicly stand against irresponsible fossil fuel companies; third, by expanding the socially responsible investment sector to allow for easier access by greater numbers of smaller investors; fourth, by extending capital to companies that work against climate change; and fifth, by showing that the next generation of leaders don’t plan on rolling over when companies are endlessly spewing vast amounts of greenhouse gases into a warming atmosphere, funding anti-scientific claims, corrupting politics, and spilling oil into our backyards. All of this combined will send a serious message to our leaders at all levels that they need to do something about climate change.
So how much does it cost?
Nothing. Actually, there’s a chance you could even make more money than if you stayed invested in fossil fuels. This is for two reasons: first, because the industry itself may very well be in dire straits in just a few years, and second, because the alternative, the socially responsible investment industry, has been doing quite well.
The argument for why fossil fuels may no longer be good long-term investments can be heard from some of the world’s top institutions. Chatham House and Deutsche Bank have released reports that paint a grim picture for the fossil fuel industry. Deutsche Bank lays out — and Chatham House corroborates — a future where the industry experiences a different kind of “peak oil”: peak oil demand. HSBC recently released a report giving a similarly poor outlook for the fossil fuel industry. In their analysis, the poor prospects are due to potential inability for companies to capitalize on their vast reserves. To top it all off, Standard & Poor’s released a report saying that previous methods of creditworthiness rating for the fossil fuel industry are going to need serious retooling, and that much of the industry could be seeing downgrades as soon as 2017.
Potential price hit to fossil fuel companies from being unable to extract reserves.
Things are looking just as rosy for the socially responsible investment (SRI) industry as they are grim for fossil fuels. The SRI industry in a nutshell is a section of the investment sector that allows investors to weed out investments in things they don’t like (negative screening) and replace it with things they do (positive screening).
Anyone familiar with traditional investment methodology sees how this could be a problem, since diversification is king, and purposefully excluding industries automatically limits your options. Therefore, the thinking goes, your return on investment will be worse.
But never fear, divestors! There is evidence that this thinking is not complete.
The key here is that any institutional investor pushing around millions of dollars is almost certainly actively managing its money. They are hiring managers — maybe even hiring managers to hire managers — whose job it is to put on a suit and figure out what 10-200 companies are going to do the absolute best, and they constantly buy and sell them, sometimes over months, sometimes over minutes.
Yes, the fossil fuel industry is a very large part of the market, and yes, it has historically done well. But you’re not investing in industries. You’re investing in companies. A good manager will get good returns from investing in the high performers of any industry. (And bad managers will get bad returns; hence, your average mutual fund actually does worse than the market.) The market is massive enough to effectively balance out the volatility of certain industries even without fossil fuel investments.
These points have been evidenced in the success of the SRI industry. The research is too extensive to fully cover here, but there are a few key things to point out.
First is that there is an inherent financial benefit for companies that pursue socially responsible policies.** Harvard Business School (HBS), Rosenberg Capital Management (RCM), and this extensive meta-analysis study showed that companies that apply socially responsible practices are likely to see a very real boost to financial performance. This image, taken from the HBS study, shows the growth of money invested in high versus low sustainability companies:
Second, meta-analyses done by the UN and RBC Global Asset Management of studies on the performance of investments into socially responsible companies have shown that screening for such investments has no discernible effect on investment performance.
Third, a key study by the Aperio Group looked at fossil fuel divestment specifically to analyze its impact on a portfolio. They found that divesting from the entire industry delivered a whopping 0.0034% theoretical return difference. That’s just not very much.
The result of this has been a massive increase in the size of the SRI industry. Many may think of SRI as a fringe industry, but in the U.S. there was $3.7 trillion engaged in SRI practices last year. If you look globally, you’ll find that investment players representing $34 trillion in assets under management have become signatories to the UN Principles for Responsible Investment. Not exactly fringe.
Given these facts, the reluctance of college endowments to divest so far has been disappointing. Luckily, some other investors have been quicker to adopt. San Francisco and Seattle, among other cities, are moving to divest their city funds worth billions of dollars. One of the most successful hedge fund managers in the business has been pushing for fossil fuel divestment too, done quite concisely for a panel at Middlebury. Some foundations, such as the Wallace Global Fund, have actually already undergone divestment from fossil fuels and are not only stable, but have been outperforming their investment benchmarks.
Long story short, fossil fuel divestment can have a positive impact on the planet, and the evidence shows that it can do so without a negative impact on your finances. So do it.
* It’s important to note that divestment is not expected to financially cripple fossil fuel companies directly. Exxon’s market capitalization alone is $400 billion, the same as the total endowment funds of the nation’s top 500 universities, so just the selling of stocks wouldn’t have a huge impact on the price.
** Note that some of these studies will refer to “environmental and social governance” (ESG) policies, not “socially responsible” policies, as I do here. The meanings are close enough to be interchangeable.
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