The fossil fuel divestment/engagement question that isn’t going away for institutional finance

Fossil fuel divestment has become a highly topical issue, notably for investors with a public profile or an ethical quandary to manage. At the beginning of February, 17 US foundations running nearly $1.8bn, including the Russell Family Foundation, the John Merck Fund, and the Schmidt Family Foundation, the $304m fund co-created by Google’s executive chairman, Eric Schmidt, became the latest institutions to ditch their brown investments. Investors with clear environmental ‘missions’ are increasingly no longer willing to finance companies contributing to climate change. Ellen Dorsey, Executive Director of the Wallace Global Fund, named after Henry A. Wallace, former US Secretary of Agriculture and Vice-President under Franklin D. Roosevelt, told the media: “It became increasingly clear to foundations that they ‘own’ climate change, and they’re potentially profiting from those investments at the same time as they make grants to fight the issue.” The foundations said they would shift their investments to renewable energy or other sustainability ventures. Their move follows activist student-led campaigns in the US marshalled by 350.org, an environmental NGO, which has already led to more than 50 institutions divesting from some fossil fuels, including universities, churches and major cities like Seattle and San Francisco. The campaign has spread to over 500 universities, cities and religious institutions across Europe, North America, Australia and New Zealand, and is expected to gain momentum. As RI reports this week, on February 12, the General Synod of the Church of England, the body that brings together bishops, clergy and laity, will debate issues including climate change and divestment. A UK student campaign akin to the US, called “Push your Parents” with the strap-line: “Mum & Dad, did you know your pension is f@!#ing up my future?” is also gathering support and expected to gain column inches with its punchy message. The mainstream investment world generally doesn’t like to bebothered by climate change, sidestepping it (not without some justification) as an international problem for politicians to resolve. Two wrongs don’t make a right though. And as the major capital provider to fossil fuel companies it will be hard pressed to avoid the scrutiny. NGOs and campaigners are getting smarter in making the institutional finance link. The Russell Family Foundation mentioned at the head of this piece was the legacy of George and Jane Russell who bought the small brokerage and mutual fund business of George’s grandfather in 1958 and developed it into the Frank Russell Company, the investment management and advisory firm. The Russell Family Foundation and Russell Investments are separate, but the link is there. The science, regulatory impact and potential investment fall-out for fund managers are no less real. Late in 2013, seventy global investors representing $3trn (€2.17trn) in assets wrote to 40 oil, gas and coal companies asking them to review their exposure to carbon asset risks and outline their plans for managing them. They cited influential research by non-profit, Carbon Tracker, which warned that markets are overvaluing fossil fuel stocks given that nearly three-quarters of proven reserves can’t be extracted and burnt if we are to hit internationally agreed climate change targets. Analysts from HSBC, Citi and Standard & Poor’s have all referenced Carbon Tracker’s work in notes that warn that some fossil fuel companies face steep cuts in the value of their equity or debt. The investor response is likely to be ‘engagement’ of the like proposed by the pension fund coalition. To this end, Bob Monks, the corporate governance specialist, has published a handy chart, gauging, in his view the impact of divestment versus engagement or inaction. The chart can be found at: link
As Monks notes, other less social-minded investors than pension funds will buy up divested stock, begging the question of what changes? But, as public consciousness

on the issue grows, the validity and seriousness of the ‘engagement’ approach will also rightly be tested. Monks should know. After more than 30 years of personally engaging with Harvard, his Alma Mater, on responsible ownership, he has a fascinating new e-book out jointly written with Marcy Murningham, titled: “Trusting Harvard: The Cost of Unprincipled Investing” that recounts his persistent prodding of an institution that has social responsibility writ in its educational DNA, yet has budged little on its financial accountability. The supporting webpage for the book is here issue isn’t going away. Last year’s student campaign at Harvard led to Drew Faust, President of the university, eventually backing an engagement approach for Harvard’s $33bn endowment and hiring Jameela Pedicini, formerly of CalPERS, to become its first ever Vice President for sustainable investing. Institutional investors need to know which side of the climate/fossil fuels debate they are on and how they are going to respond…