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."

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