When Sterling College President Matthew Derr asked the Board of Trustees last fall to consider divesting the College’s endowment of its fossil fuel stocks, I’m afraid our response would have made for some very bad reality television. There were no raised eyebrows, no shouting or drama, not even any bad background music. My fellow board members and I couldn’t have agreed more that this action would be a logical expression of our values, and a way to help strengthen the movement for action on climate change.
As an institution with an ecology-centered educational mission, we take the facts of climate change very deeply to heart. Scientists agree that the planet’s temperature can be allowed to rise no more than 2 degrees Celsius (from a baseline temperature calculated at the beginning of the Industrial Revolution) without catastrophic consequences. We have already raised the Earth’s temperature by one degree, with consequent rising seas, disappearing glaciers, disease migration, increased drought, more frequent extreme weather events, and ocean acidification. Last year, the International Energy Agency’s chief economist told 350.org founder Bill McKibben that the door to a two-degree trajectory was “about to close,” and that the data was more in line with a temperature increase of about six degrees, or 11 degrees Fahrenheit. That, McKibben noted, “would create a planet straight out of science fiction.”
The Inherent Contradiction in Fossil Fuel Stocks
There is something inherently contradictory about relying on profits from fossil fuels to fund an institution like Sterling. As renowned educator James Powell wrote recently, “By investing in fossil fuel companies, colleges are using their current financial resources in a way that jeopardizes the quality of life of their future alumni. By any reasoned and humane interpretation, this violates colleges’ professed commitment to intergenerational equity.”1 Ecological concerns are infused in our curricula and campus activities, and we found no good reason to draw the line at our investment portfolio. With this in the forefront of our thinking, the Board quickly approved a divestment policy.
As it becomes starkly clear that we must, as a society, drastically reduce the burning of fossil fuels or face dire repercussions, government policies and regulations that substantially raise the costs of extracting and burning fossil fuels are increasingly likely in the coming years. The International Energy Agency states in its World Energy Outlook 2012, “No more than one third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2°C goal, unless carbon capture and storage (CCS) technology is widely deployed.”2 That means that two thirds of the proven reserves that fossil fuel companies have on their balance sheets must remain in the ground if we are to maintain a livable planet.
There is a growing awareness that there are in fact huge potential risks of investing in fossil fuel stocks. Investing in companies with potentially huge stranded assets on their balance sheets carries substantial risk that is most certainly not yet reflected in their stock prices—a situation increasingly being referred to as the “carbon bubble.” While fossil fuel stock prices remain artificially high, there may be some short term marginal increase in portfolio risk by shunning their purchase. The road to that end could be bumpy. But in the long term, I expect that a reduction in risk is to be gained by shunning investment in companies whose assets will one day be written down in value because the market for their inventory has been radically altered. Indeed, Standard & Poors Ratings Services recently issued a report with Carbontracker.org that states, “The financial models that use past performance and creditworthiness may be insufficient to guide investors looking to understand the possible effects of future carbon constraints on the oil sector.”3
Even before the urgency of the climate crisis accelerated and gave rise to the likelihood of a carbon bubble, during my thirty-year investment practice I have always thought that there are compelling reasons to avoid coal, oil and gas stocks, and I have largely done so. The environmental and safety hazards embedded in every aspect of these industries informed a deep wariness on my part that was confirmed by events regularly enough (and sometimes spectacularly so, as with the Deepwater Horizon explosion, the Peabody mine disaster, and the Exxon Valdez spills). Extracting fossil fuels is becoming even harder and riskier now that the easier-to-extract deposits have been picked over. The world’s remaining reserves require riskier technologies like hydrofracking, or once-unthinkable practices like blasting the tops off of mountains. Oil and gas deposits are in remote and highly sensitive regions like the Arctic and the equatorial rainforests, or require business dealings with shady foreign governments.
In May, the Board of Trustees approved a new investment policy that prohibits “direct investment in 200 fossil fuel extraction corporations identified by 350.org as of February 2, 2013.” Implementing the policy means moving our $960,000 endowment out of mutual funds into an actively managed account. (Because there are many clients in any mutual fund, none among them can determine the choice of stocks held in the fund.) The College will choose a manager that specializes in socially responsible investment (or SRI), so that a broad range of environmental, social and governance criteria can be applied to stock selection, in addition to climate concerns. We will vote on management and shareholder proposals, and may even submit some of our own.
No Risk for Returns
Most educational institutions faced with the divestment question will find it a more complicated conversation than we had at Sterling, due to our simplified endowment structure and mission clarity. The primary concern of university fiduciaries will likely be that divestment will jeopardize performance.
At some point, as I noted, holding companies with stranded assets may be the greater long term risk to portfolio value than missing out on their short-term run-ups in value. But university leaders should also be aware of a recent study by Aperio Group, an investment management firm specializing in custom indexing, that looked at how two primary, ever-present types of investment risk, tracking error and volatility, would be effected by fossil fuel divestment, using the Russell 3000 companies as their investment universe.4 After removing fossil fuel companies, Aperio was able to build a portfolio with an annual standard deviation from the benchmark of just over half a percent, and virtually no riskier (.01%) in terms of total volatility. These are reassuring numbers.
This projection did not surprise me. I know from my own experience that it is possible, given favorable market conditions and skillful stock picking, to avoid investing in fossil fuel companies without losing money, and that healthy returns can be earned even with such restrictions in place. The performance impact of a variety of SRI screens has been widely studied over the years, in fact, and claims that SRI screens hurt performance have simply not held up.5 These findings should help allay those who fear that divesting from fossil fuels could lead their institutions down a slippery slope to a broader SRI approach.
The point of divesting from fossil fuels is not to achieve moral superiority and wash the oil off of one’s hands. We are all fossil fuel users and benefit from their extraction, even if we don’t reap direct investment profits. Divestment from fossil fuel stocks won’t, in itself, reduce demand for the product, nor will it shake up or wake up Wall Street unless it is embraced widely.
But conscientious investors must aid in reallocating capital to the alternative energy sector and encourage others to do the same. In April, Bloomberg New Energy Finance reported that global clean energy investment in the first quarter fell to its lowest level in four years, driven by cuts in tax incentives at a time of austerity. In the same month, the International Energy Agency said that coal-fired generation grew by 45 percent between 2000 and 2010, far outpacing the 25 percent growth in non-fossil fuel generation over the same period.6 Because fossil fuels are finite resources, transition to renewable sources of energy is inevitable, but with the clock ticking toward climate disaster, it cannot proceed in a leisurely fashion.
Divestment is a powerful statement that will help create the political environment necessary to enact the critical policy solutions we need—such as a price on carbon (probably in the form of a carbon tax), the elimination of fossil fuel subsidies, stronger tax incentives for renewables, and an electricity grid overhaul. We know that oil, gas and coal producers will never concede on their own that their reserves are unburnable. That job will fall to our government when we can break through the wall of denial fueled by fear, ignorance and the industry’s campaign contributions. Until that moment, I am proud that Sterling is playing its part. •
Rian Fried is a Trustee of Sterling College, and the co-founder of Clean Yield Asset Management, as well as president of Clean Yield Group, Inc.
- “Divest Over Global Warming? Myths and Facts about University Divestiture,”at http://scienceprogress.org/2013/01/divest-over-global-warming/
- http://www.iea.org/publications/freepublications/publication/English.pdf, p. 3.
- http://www.carbontracker.org/wp-content/uploads/downloads/2013/03/SnPCT-report-on-oil-sector-carbon-constraints_Mar0420133.pdf, p. 2.
- http://www.aperiogroup.com/system/files/documents/building_a_carbon_free_portfolio.pdf, p. 4.
- See, for example, Sustainable Investing: Establishing Long-Term Value and Performance, a 2012 meta-analysis by DB Climate Change Advisors (now Deutsche Asset & Wealth Management) of more than 100 academic studies, which found that incorporating environmental, social and governance data in investment analysis is “correlated with superior risk-adjusted returns at a securities level” and that SRI approaches that merely employ exclusionary screens, while showing little upside, do not underperform. Links to this and other studies can be found at the web site of USSIF (http://www.ussif.org/performance).