As an investor in today’s economy, you have a say in what companies you invest in and support. By investing in a company, you are effectively voting with your dollars.
By the same token, as an investor you also have the right to purposefully refuse to invest in a specific company or industry. Perhaps you disagree with their business model or you oppose the negative impacts they are having on society. This act of withholding investment is at the core of “Divestment”.
Without access to capital markets, fossil fuel companies cannot finance their operations. As fewer buyers come in to buy shares of fossil fuel companies, the potential value of these companies decline.
Before COVID (January 2019-January 2020) the S&P500 had a 1-year return of 16%, while the Energy Sector returned -6%. (1)
After COVID (from March 2020-August 2021) the S&P500 returned 41%, while the Energy Sector returned 53%.
According to Bill McKibben of 350.org, fossil fuels had “underperformed the rest of the market badly… So, for instance, New York State pensioners are $19,000 apiece poorer than they would be had the state divested.” (2)
Over the past seven years climate activists have been working to promote the divestment from fossil fuels with endowments, pensions, and foundations.
“Over 47 U.S. colleges and universities have chosen to divest. According to the environmental activist group 350.org, 10 institutions have taken that step since 2017. In 2017, Columbia University said it would sell holdings in coal companies. In January 2019, Middlebury said it would phase out of fossil fuel investments, reversing a position opposing divestment taken six years ago… Over the past six months, more than 300 Harvard faculty members have signed a petition calling for divestment of fossil fuel stocks.” (3) Real progress is being made; however, many institutions are slow to change.
Harvard University has not wavered in its opposition to fossil fuel divestment since 2013, when then-Harvard President Drew Faust declared: “The endowment is a resource, not an instrument to impel social or political change.” (3)
In May 1990, Harvard quietly acknowledged that it had sold off tobacco company stocks because their products posed “a substantial and unjustified risk of harm to other human beings.’’
“When we burn fossil fuels, we release greenhouse gases and particulate air pollutants. Air pollutants cause heart and lung disease and early death…” says Caren Solomon, a physician at Brigham and Women’s Hospital and an associate professor at Harvard Medical School
In May, however, the Crimson reversed its position opposing divestment, saying that climate change posed “an existential threat” and that the university’s position “compromises its efforts to position itself as an academic institution at the forefront of the fight against climate change.” (4)
“But in an era in which climate change is more rampant, more destructive, and more visible than ever — not to mention the attacks on its scientific reality — we realize that we can no longer view an endowment with investments in fossil fuels as an economically sensible future,” the paper said. And besides the Crimson added, “symbols matter, and the endowment is a symbol of Harvard’s values.” (4)
In June 2021, state legislators brought forward legislation to force Harvard to divest. (5) Legislators “introduced a bill utilizing the Legislature’s Constitutional oversight authority to compel the university to divest from fossil fuels. If successful, the legislation would require Harvard’s governing boards to take more aggressive climate action.”
To date, activists say they have secured more than $8 trillion in divestment commitments from more than 1,000 philanthropies, schools, pension funds, and other institutions. (6) Among the institutions that have embraced divestment is the Rockefeller Brothers Fund. Rockefeller was the founder of Standard Oil, the original and largest of all of the oil companies.
As big investors to stop buying new stock in fossil fuel companies and phase out their existing equities, stocks, and bonds in these businesses may find themselves saddled with sunken assets; these reserves may become stranded assets as the market makes it unprofitable to harness them.
Cleaner sources of energy are already outcompeting coal, oil, and natural gas in some markets. Renewable energy technology is improving and costs for renewables are continuing to fall.
An April 2019 report by Reuters concluded that in 2018, the top 29 shale producers spent $6.69 billion more than they earned from operations… “a reckless spending record racked up two years after investors began pushing shale drillers to start turning a profit.” (7)
In December 2017, The Wall Street Journal found that shale producers had lost $280 billion between 2007 and 2017, the first 10 years of the shale drilling rush. (8) This has left drilling companies hunting for capital to fund continued drilling and operations.
“Pension funds have legal obligations related to their fiduciary duties, to consider long and medium-term risks, such as those related to climate change that could have adverse effects on their investments,” the Global Initiative for Economic, Social, and Cultural Rights wrote in an April 17 report. “Such risks include physical impacts of climate change on pension fund assets and investments, but also the increasingly evident risk of stranded assets and the associated legal risks of failing to address the climate-related risks.” (9)
Many pensions have concluded that the oil and gas industry carries too much economic risk to make a sound long-term investment.
In 2018, “Norway’s parliament ordered the country’s trillion-dollar sovereign wealth fund — built largely from fossil fuels — to sell its holdings in about 150 oil and gas companies and invest up to $20 billion, about 2 percent of its total, in renewable energy, mainly wind and solar projects.”
The European Investment Bank plans to stop funding fossil fuels starting in 2021 as Europe steps up the fight against climate change. (10)
“The bank will phase out support to energy projects reliant on fossil fuels: oil and gas production, infrastructure primarily dedicated to natural gas, power generation or heat based on fossil fuels,” the EIB said in a strategy paper. “These types of projects will not be presented for approval to the EIB board beyond the end of 2020.”
The bank pledged to create an “energy transition package” that would provide extra support for EU countries or regions such as those in formerly communist eastern Europe still relatively dependent on fossil fuels.
But it’s not just institutions that can make a difference through divestment. Individuals can exercise the same ability within their own accounts.
In 2019, Sen. Jeff Merkley (D-OR) introduced a bill to allow federal employees to divest their retirement accounts from fossil fuels. (11)
My goal as a financial advisor is to “help clients match their investments with values.” This means screening out carbon intensive or fossil fuel investments from the portfolio. By each of us doing our part, we can aid in driving change within the economy, discourage fossil fuels and promote technologies for the 21st century.
If you want to learn more about divestment and what that would mean for your portfolio, please feel free to reach out to me at email@example.com
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2021-125032 exp 8/23