Since Bill McKibben first issued his call to divest from fossil fuel stocks in “Global Warming’s Terrifying New Math” last August, there has been quite a reaction in the press and among investors. It is impossible for me to know what has actually happened in terms of divestment, but enough has been written and published in the media that we can see some of the counter arguments the investment industry is making. In some cases, I have been surprised by what I have read.
To be clear, not all investors are making counters to McKibben’s argument. In addition to Portfolio 21, I know of at least two other firms that affirm their positions to not invest in fossil fuel stocks (defined as those companies engaged in the exploration and production of coal, oil, and gas) based on their assessment of the risks created by these companies, as well as the risks to these companies as a result of being in the business they are in.
For the most part, what I have seen from investment firms are attempts to justify investing in fossil fuel stocks, because: 1) we need fossil fuel to heat homes and run the economy; 2) if you pick the best fossil fuel companies, they have lots of exposure to hydraulic fracturing (“fracking”) and natural gas, which is better than coal; 3) there are other ways to reduce the world’s carbon footprint, like investing in more fuel efficient businesses; 4) we should invest in these companies so we can engage in a dialogue with management and try to get the companies to change their ways.
This last argument I find particularly intriguing. Really? What could these companies possibly change that would solve the problems created by their core business?!
For Portfolio 21, it is not about divestment. We do not own these stocks because our research tells us that these companies pose too much risk to the environment and society, and that they face too much risk based on their business operation profile. On this latter point, the types of projects fossil fuel companies are involved with today indicate the increased risks they have to take in order to keep oil and gas flowing. Deep water drilling in Arctic waters, shale oil production, and fracking close to populated areas are just a few examples.
Despite the fact that Portfolio 21 does not have to debate divestment, I find the counterpoints to the Go Fossil Free campaign to miss a point. Any investor, especially a responsible investor or one interested in sustainability, invests in a company because they want to invest in that company, because they feel that their portfolio needs that company and that it is one of the very best opportunities available. Or maybe an investor owns fossil fuel stocks because they are afraid that they will underperform the herd if fossil fuel stocks rise sharply in value.
Fossil fuel stocks make up the bulk of the energy sector, which accounts for about 10% of the global equity market. Whatever you are doing as an investor, you can do it without exposure to any given 10% of the equity market - - unless you are an index fund trying to exactly replicate the market benchmark. There are many companies in other sectors ─ big, well-established, stable, high-quality, global companies ─ engaged in forward-thinking business practices that are helping to move our economy toward using less resources and a lower carbon future. There are many companies to choose from in lieu of fossil fuel stocks.
I cannot accept any argument that relies on the concept that fossil fuel stocks are somehow irreplaceable in a portfolio, or that by investing in them one is somehow moving us towards a lower carbon future in a manner superior to what could be done with some subset of the other 90% of companies available for investment.
People invest in fossil fuel stocks because they like them and they are afraid to miss out on profits if fossil fuel stocks run up in price. Portfolio 21 does not like fossil fuel stocks because of the risks we see and if we miss out on those gains we will try to make it up elsewhere, or live without those particular profits.
John Streur is President of Portfolio 21 Investments. He has 25 years of experience in the field of investment management.