Dumping Fossil Fuel: A Movement Quietly Gathers Momentum

When first rolled out, the movement to urge major stockholders to divest themselves from oil and coal interests seemed a little quixotic. But in the light of recent turmoil in oil markets, and the continuing plunge of coal, – maybe worth paying attention.

Rolling Stone:

But a growing number of savvy, social-minded investors are waking up to this risk and moving their money out of fossil-fuel stocks. In September, as the price of oil was entering its free fall, 50 foundations announced they would be ending their investments in fossil fuels over the next five years – a deal orchestrated by Divest-Invest Philanthropy. An initiative launched by the Wallace Global Fund to encourage institutions to exit Big Carbon investments and begin capitalizing sustainable alternatives, Divest-Invest has now secured more than $50 billion in divestment commitments. And these climate-conscious philanthropists are driving toward an even more ambitious goal: $150 billion in divestment commitments before the next round of U.N. climate talks in Paris next December.

These foundations require high-market returns to fund their philanthropy, and are managed by investment professionals loathe to leave returns on the table. But Jenna Nicholas, project manager of Divest-Invest, says there was minimal arm-twisting required. “The financial argument for divestment is actually stronger than the argument for maintaining holdings in these companies,” Nicholas says. Indeed, Big Carbon investments are “severely overpriced” in the market, wrote Bevis Longstreth in a 2013 piece called “The Financial Case for Divestment of Fossil Fuel Companies by Endowment Fiduciaries.” Longstreth, who served as commissioner of the SEC under Ronald Reagan, wrote, “Fiduciaries have a compelling reason, on financial grounds alone, to divest these holdings before the inevitable correction occurs.”

Rolling Stone, again:

In fact, financial professionals who model divestment returns have found there is no reason to assume there will be a “penalty” for shunning Big Carbon. The Aperio Group, based near San Francisco, modeled the returns of a carbon-inclusive index like the Russell 3000 against a hypothetical version of the index tweaked to exclude fossil-fuel stocks and reweighted to approximate the risk profile of the original index. The result? From 1988 through 2013, the Russell 3000 had a yield of 10.63 percent; the same index minus Big Carbon stocks would have yielded 10.68 percent – a barely measurable difference.

Other studies suggest that carbon-free investing could even offer higher returns: S&P Capital IQ, a division of McGraw Hill Financial, modeled the performance over the past decade of the S&P 500 index stripped of its fossil-fuel stocks. A $1 billion endowment invested in a carbon-free S&P 500 would have yielded an additional $119 million in profit through 2013 – a divestment dividend rich enough to fund 850 four-year scholarships.

And there’s this, just last week.

Guardian:

The world’s richest sovereign wealth fund removed 32 coal mining companies from its portfolio in 2014, citing the risk they face from regulatory action on climate change.

Norway’s Government Pension Fund Global (GPFG), worth $850bn (£556bn) and founded on the nation’s oil and gas wealth, revealed a total of 114 companies had been dumped on environmental and climate grounds in its first report on responsible investing, released on Thursday. The companies divested also include tar sands producers, cement makers and gold miners.

As part of a fast-growing campaign, over $50bn in fossil fuel company stocks have been divested by 180 organisations on the basis that their business models are incompatible with the pledge by the world’s governments to tackle global warming. But the GPFG is the highest profile institution to divest to date.

A series of analyses have shown that only a quarter of known and exploitable fossil fuels can be burned if temperatures are to be kept below 2C, the internationally agreed danger limit. Bank of England governor Mark Carney, World Bank president Jim Yong Kim and others have warned investors that action on climate change would leave many current fossil fuel assets worthless.

“Our risk-based approach means that we exit sectors and areas where we see elevated levels of risk to our investments in the long term,” said Marthe Skaar, spokeswoman for GPFG, which has $40bn invested in fossil fuel companies. “Companies with particularly high greenhouse gas emissions may be exposed to risk from regulatory or other changes leading to a fall in demand.”

Even as oil prices start to rebound, (up to $58 for Brent crude, according to this very current account) I’ve pointed out that roller coaster energy prices do not make oil more attractive to investors, in fact, more knowledgeable observers than myself have pointed out oil “volatility sells Teslas”.
Wait till all the suckers that ran out to buy SUVs during the recent price plunge see what happens to gas prices in the next year and a half.

Coupled with pressure from rapidly maturing renewable competitors, the multi-pronged attack on fossil energy should be enough to give investors plenty of pause. More on this soon.