RI Interview: Fossil fuel firms should stop dismissing Carbon Tracker, says Rockefeller’s Heintz

How the $850m charitable foundation is getting out of fossil fuels

A day before a UN climate summit in New York last September, the Rockefeller Brothers Fund (RBF), the $850m charitable foundation created by descendants of Standard Oil founder John D. Rockefeller, called a news conference to announce it was getting out of fossil fuels.

No doubt to the shock of US oil executives, the RBF said that for climate protection reasons, it could no longer justify investments in that industry, particularly those in coal and in companies that extract oil from tar sands.

The RBF also said that along with proceeds from the divestments – its total exposure to the industry is worth $57m (€46m) – it would increase investments in renewables “and other business strategies that advance energy efficiency, decrease dependence on fossil fuels and mitigate the effects of climate change.” In the mid-term, those investments are to rise to 10% of the portfolio, and the RBF has hired New York asset manager Perella Weinberg Partners as an external “Chief Investment Officer (CIO)” to realise the goal and manage the rest of its portfolio.

Meanwhile, the RBF has been a sponsor of Carbon Tracker, the UK think-tank that has repeatedly warned investors and the fossil fuel industry about the risk of “stranded assets.” According to the think-tank, that industry will likely be forced to leave huge reserves unburned or “stranded,” due to future regulation of carbon emissions and sinking demand caused by greater fuel efficiency and the expansion of renewable energy. The industry downplays this, banking that worldwide demand for energy will continue to rise.

The fund is headed by its President, Stephen Heintz, who was a co-founder, with a certain Barack Obama, of the US progressive think tank Demos – alongside Charles Halpern of the Nathan Cummings Foundation and others.

Mr Heintz, does your divestment from coal and tar sands mean you will have all but left the fossil fuels industry?

We’re committed to divesting from the fossil fuel industry. It won’t happen immediately but over the next three to five years. By the end of this year, we’ll be under 1% of our assets in energy companies that have coal and tar sands exposure. That’s the first phase. The next will be divestment from oil. We’re still debating what to do about gas, however. Some on our board feel strongly that gas should be seen as a “bridge fuel” while renewable energy becomes a bigger part of the energy mix. Gas is much cleaner than either coal or oil, and if extracted in an environmentally safe manner it can be very useful. Whether this can be achieved with fracking is, of course, a big question.Are you using the proceeds from the divestment for your clean tech strategy?

Yes. As we withdraw funds from fossil investments, we’re looking to redeploy them to what we call “mission aligned” investments. Within that category, our top priority is clean energy technology, but we are looking at some interesting investments in other parts of our philanthropic mission. For example, we have a project in the Balkans, which is designed to help three countries not in the European Union develop in a way that speeds up their accession to it. So we could complement our economic development projects there with investments in microfinance funds. We also have similar projects in the Middle East and China, so we will be looking at microfinance opportunities there.

“Fossil fuel companies should start paying attention to Carbon Tracker”

Is the RBF invested in renewable energy or are you just entering the space?

We have a number of renewable investments already and are in the process of doing due diligence on three others right now. One example is in Brazil, where we already have an investment in hydropower. We will also be looking in Europe, particularly Germany, which has been a leader with its Energiewende (national effort to make renewables account for 50% of the power supply by 2030). We’re also very excited about the US. Renewables there are currently a small part of the energy mix, but we are excited about their rapid growth rate.

Any other mission-related investments the RBF would like to mention?

In the US, we’re looking to make our first investments in housing for low-income and marginalised communities, as they too would spur economic development and job growth. I can’t reveal more detail, as we are at the due diligence stage.

Once you have reached the 10% target for such investments, will you stop there?

We want to get to 10% pretty quickly, but our hope is that we can continue to expand this part of the portfolio after then. This depends on our finding the right investments –that is ensuring that our portfolio remains adequately diversified and well protected against volatility. If we succeed, I don’t see why mission-related couldn’t become half of the portfolio. But that will be a 10- to 20-year process.

What kind of returns do you require to fulfil your grant-oriented mission?

The Board has been clear that we wish to make grants in perpetuity, and those grants make up about 5% of our net assets yearly. That means we have to achieve returns that are 5% plus inflation. So that returns of, say, 8 or 9% is challenging amid the volatile market environment we live in.

What is RBF’s current asset allocation?

Global equities make up 41% of the portfolio and global fixed income just under 12%. The rest of the portfolio is divided between private equity (19%); hedge fund/absolute return (14.5%); property and infrastructure (12%); and cash (just under 1%).

Is a hedge fund allocation in keeping with long-term, responsible investment?

Our exposure to the asset class is pretty modest compared with that of other endowments. That said, I don’t think that it’s fair to generalise about hedge funds. SAC was an aberration, but the authorities have since punished it for insider trading. There are, however, many more responsibly managed hedge funds, and it only takes proper due diligence to locate them.

Does the RBF rely on engagement with portfolio companies?

We certainly do. It is the third pillar of our responsible investment strategy, the others being the divestment and mission-aligned investing that we already touched on. Our history of proxy voting goes back to 2005, when we first asked our asset managers to vote according to our proxy guidelines (e.g. independent chairman, board diversity and shareholder democracy). We also began to make shareholder proposals, for example at Standard Oil successor firm ExxonMobil.They called for an independent board and asked the company to do an analysis of the risks associated to climate change. Although the resolutions were not successful, they demonstrate that we were already an engaged investor back then.
About a year ago, we decided to get serious about mission-aligned investing and then began a search of firms providing CIO services. After reviewing a total of 13 firms, we settled on Perella Weinberg early this year. They’ve been working hard for these last nine months, taking over a portfolio from another CIO services firm and preparing for our divestment from fossil fuels. And now we want them to ramp up our mission-related investments, particularly those for renewables.

Would you say Carbon Tracker’s “stranded assets” theory is gaining traction? Several other investors like AP2 of Sweden have joined you in divesting in part due to its work.

We have supported Carbon Tracker since it started, and yes I think its theory is gaining traction among investors. Beyond the examples you just cited, the Governor of the Bank of England is now talking about stranded assets. The fossil fuel companies should probably start paying attention instead of simply dismissing Carbon Tracker outright.

Eric Haskell of Perella Weinberg, who is RBF’s outsourced CIO, will be one of the guest speakers at the upcoming RI Americas in New York. Click here for details.