Debating divestment and a portfolio free of fossil fuels

Debating divestment and a portfolio free of fossil fuels

The conversation about investing and the fossil fuel industries has taken a dramatic turn in recent months. Spurred in part by a Rolling Stone article authored by Bill McKibben of 350.org published last summer, students on U.S. campuses are organizing to pressure their colleges and universities to divest their holdings in fossil fuel companies.

The argument for divestment makes sense on a number of grounds, not the least of which are the long-term prospects for investment portfolios. A recent analysis by Patrick Geddes, chief investment officer and partner of investment firm Aperio Group, found that even a portfolio that excluded all fossil fuel companies would incur significantly less financial risk than would the practice of active stock selection.

"Screening negatively affects a portfolio's risk and return," Geddes concluded, "but…the impact may be far less significant than presumed."

Such an analysis does not even take into account the long-term investment implications of the argument that if climate change is to be limited to a global increase in temperatures of 2 degrees Celsius, no more than 20 percent of all fossil fuel reserves accounted for at present can be burned.

"Governments and global markets are currently treating as assets reserves equivalent to nearly five times the carbon budget for the next 40 years," a 2011 report from the nonprofit Carbon Tracker asserts. "There are more fossil fuels listed on the world's capital markets than we can afford to burn if we are to prevent dangerous climate change."

But mainstream institutional investors do not appear to be deterred from pursuing a course that largely ignores critical issues such as climate change.

"Recent public discourse, unfortunately, seems to ignore the inarguable truth that divestment [from fossil fuels] would be costly," wrote Mark Kritzman, CEO of investment advising firm Windham Capital Management, in a discussion abstract for an upcoming conference titled The Cost of Socially Responsible Investing.

"The financial cost of excluding investments based on criteria other than expected performance can be substantial, potentially amounting to hundreds of millions of dollars," Kritzman continued. "Even if they conclude that countering climate change would warrant such a sacrifice, proponents of divestment should offer some evidence or reasoning that it is the best course of action."

Robert Zevin, CIO and portfolio manager of the socially responsible investment firm Zevin Asset Management, took issue with aspects of Kritzman's analysis: "If one believes, as many do, that the long term prospect for fossil fuel companies is dismal because of increasingly expensive and dangerous extraction methods and the inevitability of having to bear the environmental costs of their product through a carbon tax, or permit, or subsidy to renewable competitors, then one might have an argument that divestment is both effective at hastening better behavior from companies and a better educated and proactive citizenry AND a wise investment decision."

And on the subject of divestment, John Fullerton, founder and president of the sustainable finance nonprofit Capital Institute, wrote, "There is no denying that the annual financial returns of a portfolio restricted from investing in one of the largest sectors of the economy will indeed behave differently than the benchmarks against which endowments have traditionally chosen to measure themselves."

However, Fullerton continued, "It is clear that business as usual with regard to our fossil fuel based energy system takes us well past 2 degrees of warming and represents a clear and immediate threat to the future of civilization. ... We know what we need to do logically to avoid the catastrophic consequences of climate change, but we are way off course."

According to Fullerton, "By raising divestment as a call to action, the students have opened the door to the really important conversation university endowments and all institutions with responsibility over large pools of capital should be wrestling with at this pivotal moment in history."

For investors contemplating a portfolio free of fossil fuel components, reliable options already exist. One is the Green Century Balanced Fund offered by Green Century Capital Management. Not only has the Balanced Fund largely outperformed the S&P 500 Index over the past five years; the Fund's carbon footprint is 49.5 percent less carbon intensive than that of the S&P 500, according to a recent analysis undertaken for Green Century by Trucost.

"The Balanced Fund's low carbon intensity continues to be directly tied to the Fund's avoidance of the Oil and Gas, Utilities and Basic Resource sectors, as well as stock selection within the Insurance sector," Green Century stated in a new report.

In 2009, Green Century became the first mutual fund in the U.S. to analyze and make public its carbon footprint.

"Companies with lower carbon intensities will likely be best positioned to maintain financial competitiveness in a carbon constrained economy," Green Century stated. "Investors may also benefit from a higher standard of transparency and disclosure from the financial services and mutual fund industries."

This article reprinted with permission from SocialFunds.

Photo of chalkboard debate provided by woaiss via Shutterstock.