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Fossil Fuel Divestment is Timely Issue for Investors

While the debate rages in Washington over the fiscal cliff, a greater threat lies ahead. You could call it the climate cliff, the point of no return where our use of fossil fuels triggers catastrophic climate change.
by Mindy S. LubberForbes Sustainable Capitalism Blog Posted on Dec 17, 2012

While the debate rages in Washington over the fiscal cliff, a greater threat lies ahead. You could call it the climate cliff, the point of no return where our use of fossil fuels triggers catastrophic climate change. Environmental activist Bill McKibben is rightly drawing attention to this crisis by embarking on a national tour of college campuses and urging universities to divest their endowments of fossil fuel stocks, much as anti-apartheid activists pressured universities to shed South Africa investments in the 1980s.

McKibben is engaging students on an issue that will directly and dramatically affect their futures and all of our futures. These concerns are warranted, and students are increasingly seeing climate change as the moral issue of their generation. They see it is a major economic issue as well. As director of the $11 trillion Investor Network on Climate Risk (INCR), I have been working with investors for years to limit the environmental impact of their portfolios and redirect resources to more sustainable investments. Navigating this challenge raises thorny questions that are financial, political and even existential. But it is critical to our economy – and our planet – that we tackle them now.

We cannot simply accept Wall Street refrains that divesting is hard because fossil fuels are embedded in our economy, and are profitable to boot. Such thinking denies the ‘true’ negative costs of fossil fuels.

Many fossil fuel stocks have been profitable in recent years, but because neither the producers nor consumers pay to emit climate-warming carbon pollution into the atmosphere, those profits are grossly distorted. The consequences of a free license to pollute – including super storms, droughts and rising seas, for example – are borne by taxpayers, insurers and anyone in harm’s way. The economic costs of Hurricane Sandy and this summer’s historic drought eclipsed $100 billion, an amount equal to the combined annual profits of just three big oil companies, Exxon, Chevron and Royal Dutch Shell.

Until there is a price on carbon, along with other clean energy policies, these profits will likely continue, fossil fuel consumption will keep rising and clean energy will struggle to compete on an uneven playing field.

In evaluating fossil fuel stocks, the calculus for institutional investors has some complications. University endowments are designed to benefit future generations of students whose educations will be financed by the endowments, directly or indirectly. Pension funds have an obligation to keep pension promises to current and future retirees decades into the future. As long as returns on fossil fuel stocks remain high (and subsidized by the lack of a price on carbon pollution), they will remain highly attractive to asset managers who must meet their duty to maximize returns. But they have a fiduciary duty to meet the needs of their investors, students and beneficiaries over the long term as well.

This places institutional investors in a unique predicament. They are not allowed to invest in a way that favors one generation of beneficiaries over another. If investing in carbon-intensive stocks is good for current retirees but undermines the broader economic future for those just entering the workforce, are they meeting that standard? Conversely, if they divest and returns suffer, are they favoring younger beneficiaries over older ones? Clearly, they need to find a balance that ensures returns for current retirees while minimizing risk for future ones. Ratcheting down investments in fossil fuel companies would send the clearest signal that those companies must adapt.

Investors should also address the inherent risks in any fossil fuel investment. An estimated 50-80 percent of the current market value of oil, gas and coal companies is based on unburned reserves; that is, resources that are still in the ground but which, if burned, would lead to catastrophic climate change and economic disaster. With a strong price on carbon, how much of those reserves will be left in the ground, in essence, creating liabilities that could take a big toll on shareholder value?

Given such profound concerns, it is clear investors cannot stand by idly. Many of them are already doing more to exert their influence to achieve a low-carbon world. Investors are filing dozens of shareholder resolutions with U.S. companies every year calling for action on strategies that lower their carbon emissions and boost their clean energy efforts. Many of these resolutions are focused directly on fossil fuel companies like Exxon, coal-fired electric utilities and hydraulic fracturing operators whose practices need cleaning up.

These investors are beginning to rebalance their portfolios by tilting their strategies toward clean energy and away from the riskiest high-carbon companies, especially coal. There are a growing number of funds and indexes focusing on clean energy and lower carbon companies.

But, most important of all, global investors are clamoring for strong low-carbon policies – in other words, a carbon price – that will catalyze the necessary massive shift of capital to clean energy. Global investor groups, including INCR, requested exactly this in a recent letter to major governments whose climate negotiators met this month in Doha, Qatar. They are looking for clear, concise and honest market signals.

The bottom line is this: There will be a day of reckoning when it comes to fossil fuels, and investors need to take far stronger steps to avoid the climate cliff. Fundamental shifts in investment are warranted, and investors must begin diverting capital away from fossil fuels and toward clean energy at a much faster clip. The societal costs of inaction on the climate are immense, and the risks are rising just as surely as the seas.

Read the post at Forbes Sustainable Capitalism Blog

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Meet the Expert

Mindy S. Lubber JD, MBA

Mindy S. Lubber is the president of Ceres and a founding board member of the organization. She also directs Ceres’ Investor Network on Climate Risk (INCR), a group of 100 institutional investors managing nearly $10 trillion in assets focused on the business risks and opportunities of climate change. Mindy regularly speaks about corporate and investor sustainability issues to high-level leaders at the New York Stock Exchange, United Nations, World Economic Forum, Clinton Global Initiative, American Accounting Association, American Bar Association and more than 100 Fortune 500 firms. She has led negotiating teams of investors, NGOs and Fortune 500 company CEOs who have taken far-reaching positions on corporate practices to minimize carbon emissions, water use and other environmental impacts. She has briefed powerful corporate boards, from Nike to American Electric Power, on how climate change affects shareholder value.

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