A sustainable investor’s response to Bill McKibben’s call for fossil-fuel divestment

Why a nuanced approach has more value than a blanket divestment policy

Through his articles and activism, Bill McKibben communicates the planetary implications of unconstrained carbon emissions compellingly and to a broad audience. But his 350.org campaign to divest from fossil fuel producers oversimplifies the issue in order to provide a clear narrative for political activism.

For those seeking a sensible investment strategy rather than a political platform, a more nuanced approach wouldn’t leap to and stop at immediate, indiscriminate divestment. Instead, it would pursue a practical transition to a low carbon economy over a manageable time horizon. And it would recognize that climate change carries challenges for all manners of businesses, not just fossil fuel companies.

Divestment is appropriate in certain segments of the energy complex such as coal, oil sands, nuclear energy, and corn ethanol. Coal is the most pollutive of the major hydrocarbon fuel sources, and represents roughly two thirds of the potential carbon emissions inherent in global hydrocarbon reserves. Excessively resource-intensive forms of extraction, such as Canadian oil sands, are unsustainable. Nuclear energy, although carbon free, carries intolerable tail risks, as the Fukushima Daiichi disaster demonstrated. Certain biofuel feedstocks, such as corn ethanol, aren’t truly viable given their poor energy returns on investment. Prudent investors should avoid these businesses not simply out of feelings of social purpose, but also because the market doesn’t adequately discount the risks of adverse regulatory change.Ideally, renewables such as solar, wind, and second-generation biofuels would take up the slack. These technologies have tremendous promise over the long-term. But they also require substantial lead time to scale up, as well as additional innovations to improve their economics.

While these technologies scale up, heating homes and keeping the lights on actually requires increasing output of natural gas, which produces about half the rate of carbon emissions as coal for a comparable amount of power. And oil looks to be a practical necessity as a transport fuel over the next ten to 15 years if we’re to maintain or raise global standards of living, even in scenarios where we dramatically ratchet down consumption over the longer term.

McKibben is right to critique those who rely on shareowner engagement alone to address climate change, and aren’t selective in what they own. Rarely will engagement successfully change the core business proposition of a coal mining firm, nor dispel its associated risks. But where the core business proposition is constructive, engagement has its place. Gas producers must eliminate chemical spills and fugitive methane emissions sometimes associated with hydraulic fracturing through operational improvements. Banks must cease lending to mountain-top coal removal projects. Pharmaceutical companies must upgrade the fuel efficiency of their vehicle fleets. And shareowners must play a role in highlighting these opportunities.

We should note also that McKibben’s divestment campaign considers only the top 200 listed companies by estimated carbon reserves, when in fact climate change is relevant to the entire investment universe. Energy services companies provide drilling, rigs, and equipment to oil and gas producers. Electric utilities own and operate plants designed to burn hydrocarbons. Many additional industries have large carbon footprints: the transport and shipping sectors, energy-intensive chemicals and fertilizers, livestock agriculture, forestry, and additional industries further down the value chain from these. If carbon were priced to reflect its true cost, we’d expect to see follow-on effects throughout the economy, with the most hydrocarbon-intensive products and firms losing competitiveness to more efficient alternatives.
As a consequence, investors should seek companies who have achieved competitive advantages in energyefficiency, either by developing leaner manufacturing processes or by providing energy-saving products and services, such as fuel-efficient engines, better batteries, smart electricity meters, and specialty chemicals. And investors should view skeptically firms and industries that have large emissions footprints, for example in basic chemicals and forestry.

Overall, a nuanced approach that considers how we can practically transition to a low carbon emissions future has more value to a wider constituency than does a blanket divestment policy. And by considering climate change issues across the entire investment universe, not just a single industry, investors can better position to anticipate and provide for that low emissions future.

Geeta Aiyer, is Founder and President of Boston Common Asset Management