Although the voices discussing fossil fuel divestment have been going on for some time, most individual investors have not joined the chorus. Despite the arguments made for divestment, it is not an easy decision for many investors.
The call for divestiture of fossil fuel securities follows a long line of campaigns to pressure companies and/or governments to make changes where there appears to be social injustice. Divestment from companies that did business with South Africa in the mid 1980’s was an earlier and effective divestiture campaign. Other campaigns with success included targeting tobacco advertising and violence in Darfur. The fossil free divestment campaign is centered on the impact that carbon emissions has on climate change and targets those companies that make their business from extracting fossil fuels.
At COP 21, in the fall of 2015, parties to the UNFCCC reached a landmark agreement to combat climate changes and to accelerate and intensify the actions and investments needed for a sustainable low carbon future.(1) The central aim of the Agreement is to keep the global temperature rise below 2% Celsius of pre-industrial levels for this century, based on the belief that exceeding the 2% target would lead to devastating environmental and human consequences. One significant contributor to higher global temperatures is greenhouse gases, which include carbon dioxide (Co2). Since Co2 is a byproduct of burning fossil fuels, the less we burn, the lower the impact on global temperatures. Fossil Free Indexes, LLC estimates that current reserves in the Carbon Underground 200™ (2) (top global 200 publicly-owned coal, oil, and gas reserve owners) represents over 600% of what could be safely burned to keep global temperatures below the 2% target increase. (3) The divestiture campaign targets those public companies that own the reserves.
Given the strength of the argument, it is not surprising that many institutions and some individuals have made their opinions known by divesting from fossil fuels. According to GoFossillFree.org, (4) over $6 trillion in institutional assets across 851 institutions and $5.2 billion from 58,000 individuals have divested from fossil fuels. (5) The State and City of New York recently announced the divestment from fossil fuel companies from the $200 billion state pension fund and the $5bn city pension fund. Orlando became the 40th US city to pledge 100% renewable energy. (6) Other notable institutions taking steps towards divestment include the California State Teachers Retirement Fund (CalSTRS), California Public Employee Retirement System (CalPERS), The Rockefeller Brothers Fund, and the Norwegian Sovereign Wealth Fund. The largest group, however, has been faith based organizations including the Episcopal Church, the Lutheran World Federation, Islamic Society of North America, and World Council of Churches.
One consideration when making the divestment decision is the potential performance. By historical measures, leaving the major oil and gas companies out of a portfolio would have resulted in periods of underperformance when measured against traditional benchmarks such as the S&P 500® (7) or the Russell 1000®. (8) History might not be the best indicator of future performance as both the supply and demand sides of fossil extraction are undergoing disruption. Should the disruption gain momentum, the owners of the reserves stand to suffer significant losses if the value of their underground assets decline. For example, ExxonMobil had proven reserves of 20bn barrels of oil equivalent at December 2016; (9) an adverse re-evaluation of those underground assets would have a notable impact on the share price. The investment risk is material and many analysts will avoid including fossil fuel companies in their portfolios for that reason alone.
Over the past 5 years, renewables and clean technology have been superior performers compared to traditional fossil fuel providers:
So why not run for the hills?
Given the disruption in the sector, it might be a bit shortsighted to think that the major players will not play a role in shaping the future. After all, they are the ones with the deepest pockets and the most at stake with significant changes to both the supply of and demand for energy products. In 2011, Total S.A. of France invested $1.37bn in a controlling stake of solar energy provider SunPower Corp. Shell, Europe’s largest oil company, established a New Energies division in 2016 with $1.7bn of capital investment to invest in renewable and low carbon power. BP (from British Petroleum to Beyond Petroleum) claims the largest renewable energy business of any major international oil and gas company. (10) The company owns 14 onshore wind farms from Hawaii to Pennsylvania with four in Texas across 63,000 acres. By divesting from these companies an investor may risk not participating in the benefits of discovering new low carbon technologies.
The industry employs a large number of people. ExxonMobil, Total, Shell, and BP alone account for over 300,000 employees. That is not to say that one should encourage employment contributing to the devastation of the planet, but rather to encourage change in business practices. An alternative to divestiture is shareholder engagement where investors can make their voices heard on how a company runs their business and grapples with climate change. In 2017, the New York State Common Fund, through a shareholder proposal, urged ExxonMobil to publish an annual assessment of the long term portfolio impacts of technological advances and climate change policies to its oil and gas reserves. (11) There are numerous examples of public funds, endowments, and fund companies sponsoring shareholder proposals for more transparency and monitoring of climate sensitive activities.
Collaboration Capital does not recommend nor discourage a divestment approach to fossil fuel companies in a portfolio. We realize that each investor has unique needs, circumstances, and tolerances that must be considered and we will advise accordingly. As part of the ESG equity series, Collaboration Capital does not exclude fossil fuel names in its portfolios; however, we review business practices to ensure suitability. Sustainable development goals, industry innovation, responsible production, safety standards, and community engagement are just some of the areas in which energy companies can display positive metrics. With so much at stake, we feel it can be more effective to be a badger than an ostrich.
GEORGE W. ROONEY, JR., CFA
Chief Investment Officer
Collaboration Capital, LLC
(1) UNFCCC – Summary of the Paris Agreement; COP 21 – Conference of the Parties 21
(2) The Carbon Underground 200TM is a list of the 100 largest public oil and gas and the 100 largest public coal companies globally, as measured by the potential CO2 emissions of their reported fossil fuel reserves. The list is based on proprietary research published on their website.
(3) The Carbon Underground – 2017 Report
(4) Fossil Free Indexes LLC is a company that delivers research, consulting and investment solutions to investors concerned about climate and environmental risk.
(5) Fossil Free Indexes LLC is a company that delivers research, consulting and investment solutions to investors concerned about climate and environmental risk.
(6) Utility Dive – “Orlando becomes 40th US city to pledge 100% renewables”, Aug, 2017
(7) S&P500 Index: The S&P 500® index is an American stock market index that includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
(8) The Russell 1000® index is an American stock market index that represents the highest-ranking 1,000 stocks in the Russell 3000® index, which represents about 90% of the total market capitalization of that index.
(9) Ford Equity Research, NYSE:XOM, April 6, 2018
(10) BP Company site
(11) The Street – “ExxonMobil Was Just Dealt a ‘Watershed’ Blow as Climate Change Proposal Wins Majority Backing”, May 31, 2017