Our investment process is designed to identify the global leaders most capable of thriving in the emerging economy that will carry society forward.  Certain business activities entail unacceptable risks in environmental, social, or governance areas.  Our research has shown that the fossil fuel exploration and production industry poses unique risks that are not manageable to the extent required to make companies directly involved in this activity attractive investments.  The paper outlines these risks, as well as Portfolio 21 Investments’ long-held rationale for not investing in the sector.

We believe that the fossil fuel sector is unnecessary to prudent portfolio structure and that it is possible to produce risk adjusted returns that are competitive with appropriate broad-market benchmarks through a portfolio that does not invest in fossil fuel companies.

Portfolio 21 Investments has a number of  policies in place as negative screens to avoid industries and business activities that are simply too environmentally risky or present social outcomes that are too unattractive to warrant investment consideration.

Please share the paper with others and we welcome your comments and questions.

John Streur is President of Portfolio 21 Investments. He has 25 years of experience in the field of investment management. 

McKibben recently hit the road in a biodiesel bus for a 21-city speaking tour to raise awareness around why divestment is a powerful tool for education.  The most prominent example of this was, of course, the campaign to end apartheid in South Africa.  Beginning in the late 1970s and continuing through the early 1990s, this campaign, which was a primary focus of the nascent Socially Responsible Investing industry, mobilized educational institutions, governments, and faith-based investors to divest from companies with South African business interests.  According to an analysis by corporate responsibility consultant Richard Knight, during the 1980s a total of 155 colleges at least partially divested.  They were joined by 90 cities, 22 counties, and 26 states that also took some form of economic action.  Nelson Mandela has stated that he believes the University of California’s $3 billion divestment in the late 1980s was a particularly significant milestone in the eventual dismantling of apartheid.

It is probably not surprising then that McKibben is focusing his efforts at colleges, universities and religious organizations across the country.  Today’s youth will have many decades to manage the impacts of current and future climate change and have the most at stake.  They may be able to speak collectively and persuasively that fossil fuel risks have grown too large to ignore and must be addressed systemically.  Since early November, more than 100 college and university groups have signed on to the campaign to Go Fossil Free.  Some, like Harvard, University of New Hampshire, and Brown, are passing student resolutions and pushing for dialogue with administrators.  Others, such Unity College in Maine and Hampshire College in Massachusetts have already started the process of creating new investment policies.

We applaud the work of these young activists and wish them great success.  Clearly, we are of like mind that the risks inherent in these industries are just too high.  We have supported 350.org since its launch and Portfolio 21 Investments’ policy is to not invest in fossil fuel production or any extractive industry.  We recently shared more about our policy, and the reasoning behind it, with journalist Marc Gunther following his recent article on this topic for Guardian Sustainable Business (“Where can investors who worry about climate change put their pension?”, November 30, 2012).  Marc included our response, along with comments from several other fund managers, in a follow up post on his blog.

Amanda is Portfolio 21 Investments' Communications Manager.  She has more than 10 years of research, communications, and interactive media experience in the financial industry.

Water and energy are two commodities that are interdependent but priced very differently. The future projections of global water and energy use plus food production equal long-term challenges for an expanding world population.  It takes a lot of water to produce energy, and shale gas extraction requires more water than traditional energy extraction techniques.  According to Chesapeake Energy, it takes 4.5 million gallons of water to drill and fracture a typical deep shale gas or oil well.  Furthermore, it is estimated that up to 20 billion barrels of waste water is generated from hydraulic fracturing per year.  This figure is also expected to accelerate.  While the energy sector accounts for a relatively small percent of total water use in the U.S., it is forecast to rise due to increases in shale gas supply.  There are many questions about the future of hydraulic fracturing, like where to source water over the next 100 plus years, as it won’t likely be available from current sources, and then what to do with the waste water. Water use in hydraulic fracturing is affecting many groups, including energy companies, state and local regulators, the U.S. Environmental Protection Agency, municipalities, landowners, lawyers, water treatment and disposal companies, and equipment suppliers.  Dialogue among these parties is shaping standards of practice.

At the heart of the matter is water supply and demand dynamics.  State and local officials in many regions are forecasting a growing gap between supplies and demand as a result of expectations about population growth and climate change.  Increasing water demand from hydraulic fracturing is exacerbating the problem, as water is the key link in the supply chain that enables energy sector growth.  The hydraulic fracturing industry can address some water risk using various techniques.  Sourcing and disposal is key.  First, the use of “brackish” water instead of potable water to preserve fresh water supplies can be increased.  Recycled municipal water is also a viable option for energy production.  Waste water from gas and oil production can be treated and reused.  It could also be remediated for agricultural use.  Furthermore, metals and solids with commercial value can be extracted from the waste stream using advanced separation technologies.  However, there is more technological development needed to improve the cost dynamics.  Desalinization and reverse osmosis technologies are expensive, though costs are coming down.  It may even be possible to one day harvest water from flue gas.  Water distribution to and from drilling sites poses another problem.  Currently, most water is trucked, and trucking is struggling to keep up with demand.  It is also the biggest cost component of disposal.  Pipelines may be feasible solutions in some cases, or there may be cost effective ways to evaporate produced water.

Drilling companies are attempting to meet these challenges; however, changing regulations are complicating the matter as well as the mobility of the energy sector, and options vary by region. Often the practices used come down to economics and the low cost solution is likely to win out.  The hope is that the solution is long-term in nature and environmentally responsible.  There will be investment opportunities in finding effective solutions to the water challenges as it relates to new energy production.  At Portfolio 21 Investments, we have a policy not to invest in the extraction or production of oil, gas, or coal; however, we are proactively exploring potential investment opportunities in companies that apply environmental solutions and preservation in the energy sector.

Tony is Senior Portfolio Manager with Portfolio 21 Investments.  He has 15 years of experience in the field of investment management.

The compelling report, “Charting Our Water Future,” was written by the 2030 Water Resources Group, which represents a collaborative effort among multi-national corporations, non-profits, and consulting firms widely respected for their work in sustainability. The team’s year-long data gathering and analysis should serve as a wake-up call that more regions of the world, and a growing population, will continue to run out of water—and therefore food—compared to what we already are experiencing today.

The projected gap is a whopping 40% worldwide. That’s based on average economic and population growth trends and assumes that future gains in water use productivity track history. The raw numbers are mindboggling:  demand is projected to grow to 6900 million meters cubed by 2030. The report states that we will be able to sustainably withdraw 4200 million meters cubed of water annually in 2030.

The lion’s share of water use today is attributed to agriculture and food production—a stunning 70% or more of the total. Industrial and energy represent a combined 17% of all water use, and only about 14% is tied to residential consumption. So while taking quicker showers might make us feel better about doing our share to reduce water use, the more dramatic changes need to occur in food production and industrial activity.

Efforts to meet today’s growing demand for water varies by country and by region.  So far the classic response is fairly similar worldwide: tap more water through energy intensive means, such as desalinization or pumping it hundreds of miles through pipelines.  But pumping water is an energy hog.  Consider this: 12% of U.S. energy consumption goes to water use. That’s more power than we use to light the entire country annually.

Energy intensive sources of new water supply are not a sustainable solution to fix the anticipated future supply and demand gap.  Many will not be able to afford the cost of energy-intensive water sources. And the planet does not need the associated greenhouse gas and related environmental damage.

The solutions to more efficient water use will occur through better application of existing technology, new technology development, and tough policy decisions about who gets water.  The report estimates these efficiency and technology-oriented solutions will require about $60 billion in additional annual capital spending between now and 2030, or just over $1 trillion in total new investment in order to close the gap.

The report’s investment and capital requirement conclusions are generally in line with most of the research I have read on this matter. Furthermore, most reports warn it’s unlikely that the investments will be made uniformly as needed across the rich and poor regions of the world.

Supply and demand gaps are always closed, and this one will be too, in time.  The question is—how?  Will it occur through high water prices, restrictions on use, or a slowdown of economic development in some regions?  Or will dramatic change come through increased conflict, war or its avoidance by governments crafting sensible water use policies?  At Portfolio 21 Investments we would like to see a fair and equitable solution for all, but the reality is that solutions will be cobbled together through a variety of outcomes around the world. There will be winners and losers, in terms of companies, governments, and of course individuals.

Portfolio 21 Investments analyzes the natural resource use policy, practice, and procedures of every company we evaluate.  We have long recognized water as a critical resource for many businesses and we find real differences between the practices of different companies, even in the same industry.  As water becomes more difficult to access, companies that have developed the processes to operate with less water, to use water more efficiently, and that have a secure supply of water may have a better competitive position than those that have not.  We seek companies that are leaders in the efficient use of water across all industries.

John Streur is President of Portfolio 21 Investments. He has 25 years of experience in the field of investment management. 

The first article in the series titled “Power, Pollution and the Internet” largely exposes the energy demands and associated pollution responsible to maintain and deliver instant satisfaction in the electronic age.

A data center is a facility used to house computer systems, usually many computer servers.  The facilities are typically spread over a large area to accommodate cooling requirements needed to maintain operational temperatures within the facilities.  Data centers aim to be operational 100% of the time so as not to cause outages for customers.  As a result, the servers within data centers gobble up energy regardless of whether they are processing information or waiting on standby.  According to the article, worldwide data centers use about 30 billion watts of electricity, which is roughly equivalent to the output of 30 nuclear power plants.  They can also waste up to 90% or more of the electricity they pull off the grid, due to low utilization rates of the servers.

In addition, the article highlights the use of backup diesel generators that data centers rely upon in order to limit the amount of downtime from potential power failures or a lapse in grid energy.  The author states that at least a dozen major data centers have been cited for violations of air quality regulations in Virginia and Illinois alone.  Even if a data center does not need to rely on a generator for operational power, generators still have to be tested on a regular basis to ensure functionality. In the second article in the series, the author focuses on a data center in Washington State that has 40 diesel generators located near an elementary school.  The scale of the backup operation was enough to convince the school superintendent to install particulate monitors to observe emission readings.

Industry reaction to the series of articles has been loud and swift.  Some argue the author has an outdated perception of the Internet, and chose to focus on minor uses such as emailing pictures to friends, versus focusing on how it serves a larger good by powering businesses, schools, public works, and the media.  Another primary criticism of the series is the failure to recognize the gains in data center energy efficiency since their inception.  Efforts such as The Green Grid have worked to establish baseline information on the power usage effectiveness of data centers and the water footprint of cooling efforts.  In addition, the 2012 Carbon Disclosure Project directly asks about companies’ data center activities, including specific emissions, annual electricity consumption, and power usage effectiveness of company owned data centers.  In our view, data monitoring, increasing transparency, and industry knowledge sharing is key to improving the environmental profile of data centers.

When evaluating companies operating large data centers, we prefer companies that are members of The Green Grid, actively upgrade facilities to reduce energy demands, purchase renewable energy, and report on the combined power usage effectiveness of their data centers globally.  Finally, companies that share best practices with their peers will help improve the energy efficiency of data centers across sectors and countries.

Emily is a Senior Research Analyst with Portfolio 21 Investments.  She has 10 years of experience in the environmental field.

Among the Global 500 group companies, representing the largest market capitalization, climate change is a growing concern and focus of their business planning—more than two-thirds identify climate change risks to their business operations, and more than one-third see these risks posing real and present dangers.  The impacts of recent extreme weather events have likely made an impression.  This acknowledgement of the current impacts of climate change has increased by 10% in the last two years among CDP respondents.

The CDP’s challenge at this year’s Forum indicates that although there is a growing corporate awareness and momentum toward emissions reductions, this will be only be part of the solution.   CDP Chairman Paul Dickinson framed the challenge:  “Most of the things that get done in the world get done by the world’s largest companies.  Governments need to step up and match the operational domain of the corporations.  That means international treaties.”  And further:  “The developed world has no moral authority to say that they can’t consume in the way that we do…if we don’t get leadership in your country, from the United States.”  We are seeing corporations demonstrate willingness, but there is a great degree of uncertainty about the future of energy—what will it cost and where will it come from?  Setting a price on carbon would likely help incentivize businesses to reduce pollution, and perhaps even compete with one another about who could do it most efficiently and in the shortest time period.  I hope that’s a race that we will one day see unfold.

Amanda is Portfolio 21 Investments' Communications Manager.  She has more than 10 years of research, communications, and interactive media experience in the financial industry.

While many actors, including the United Nations Environment Program, called for a final agreement with specific targets, Rio + 20’s final agreement, called “The Future We Want,” is largely without teeth.   The agreement lacks enforceable commitments on all biodiversity, poverty elimination, and social equity issues.  For example, specific to oceans and seas, language from the agreement calls for “support to initiatives that address ocean acidification and the impacts of climate change on marine and coastal ecosystems and resources.  In this regard, we reiterate the need to work collectively to prevent further ocean acidification, as well as enhance the resilience of marine ecosystems .  . .We commit to intensify our efforts to meet the 2015 target as agreed to in the Johannesburg Plan of Implementation to maintain or restore stocks to levels that can produce maximum sustainable yield on an urgent basis.”  In effect, the nearly 50 page agreement lacks any firm sustainable development goals but resolves to establish an intergovernmental process to develop goals based on Agenda 21 and the Johannesburg Plan of Implementation.

Outside of formal political negotiations, there were numerous side agreements crafted and unveiled by the large corporate presence at the conference, as well as other partnerships.  Corporate promises earned much media attention, including Microsoft’s announcement that it would become carbon-neutral by 2013.  In another example, Femsa, a Latin American soft-drink bottler, said it would procure 85% of its energy needs in Mexico from renewable energy.  And a group of development banks, led by the Asian Development Bank, the World Bank, and others, will provide more than $175 billion to support sustainable transport in developing countries, including promoting public transportation and bicycle lanes over road and highway construction in the world’s largest cities.  Ban Ki-moon announced more than 100 commitments had been taken by governments and companies under his Sustainable Energy For All initiative.  Specifically, $50 billion was committed to objectives like doubling the share of renewable energy in the global energy mix by 2030.  In sum, the United Nations reported nearly 700 voluntary commitments by stakeholders represented at the conference.

While these commitments may be viewed as a silver lining to the Rio + 20 conference, overall the conference lacked global leadership to direct meaningful change that sets the world on a path of true sustainable development.  Greenpeace said the gathering was a “failure of epic proportions.”  David Suzuki, a geneticist and environmental activist, may have said it best in an interview with Democracy Now, “A meeting like this is doomed to fail because we haven’t left our vested interests outside the door and come together as a single species and agreed what the fundamental needs are for all of humanity. So we’re going to sacrifice the air, the water, the biodiversity all in the sake of human political and economic interest.”

Emily is a Senior Research Analyst with Portfolio 21 Investments. She has 9 years of experience in the environmental field.

Rio + 20 has two themes:  a green economy in the context of sustainable development and poverty eradication, and the institutional framework for sustainable development.  The conference is focused around these two themes under seven priority areas: jobs, energy, sustainable cities, food security, water, oceans, and disaster readiness.  The Earth Summit in 1992 closed with adoption of Agenda 21, a blueprint to rethink economic growth, advance social equity, and ensure environmental protection.  The expectation is that governments attending Rio + 20 adopt practical measures for implementing sustainable development.

In advance of the summit, the United Nations Environment Program (UNEP) published its fifth Global Environmental Outlook (GEO-5) report.  The report assesses what it considers the 90 most important international sustainability objectives.  GEO-5 indicates that only four have seen substantial progress: eliminating the production and use of ozone-depleting substances, removal of lead from fuel, improving access to clean water, and increasing research to reduce marine pollution.  Some progress was shown in 40 goals and little or no progress was detected for 24 goals, including climate change, fish stocks, desertification, and drought.  According to the UNEP, this is evidence that global treaties need to have quantifiable targets in order to succeed.  As a result, the agency is calling for specific targets at the Rio + 20 Conference.  As the UN Under-Secretary General and UNEP Executive Director Achim Steiner says, “GEO-5 reminds world leaders and nations meeting at Rio + 20 why a decisive and defining transition towards a low-carbon, resource-efficient, job-generating Green Economy is urgently needed.  The scientific evidence, built over decades, is overwhelming and leaves little room for doubt.”

While it is clear much work needs to be done to strengthen our global environment, political realities may impede significant progress.  In May, United Nations Secretary General Ban Ki-moon said that negotiations leading to the Rio + 20 conference had been “painfully slow.”  According to an article in The Guardian, it’s been difficult to engage world leaders.  With President Obama focused on his re-election and European leaders focused on the financial crisis, negotiations have been left to personnel without the political power to make decisions that would result in a breakthrough agreement.  According to the article, Ban Ki-moon said that negotiations were bogged down in narrow national interests, overshadowing the need to set the world on the right track for sustainable growth.  For some, this has painted the Rio + 20 conference with skepticism and it is questioned if significant progress can come of the meetings.

While political realities have the potential to overshadow the conference, there is in fact opportunity.  Governments, the private sector, and civil society have an opening to establish global targets recognizing the ecological limits of the planet and work to establish initiatives and incentives that operate within those boundaries.  Indeed, the long term health and viability of the planet is at stake and it will take true leadership to let go of myopia and create a path that looks beyond the next election cycle or annual earnings report.

Emily is a Senior Research Analyst with Portfolio 21 Investments. She has 9 years of experience in the environmental field.

The legislation establishes a high-level climate change commission, a climate fund, and mandatory emissions reporting and registry.  The bill aims for a 30% reduction in emissions growth measured against a “business as usual” pathway by 2020, and 50% by 2050 (below 2000 levels).  These goals will not reduce absolute emissions but instead reduce the rate at which emissions rise.  To achieve these goals, the bill also requests the country’s energy ministers to develop a system of incentives by 2020 that favors the use of renewable energy.  In addition, it establishes goals for increasing electricity generation from renewable sources, including an aspirational target of 35% of electricity generation to come from renewable sources by 2024.

The General Law on Climate Change also phases out fossil fuel subsidies and as the sixth largest oil exporter in the world, cutting fossil fuel subsidies may have been a concern for some.  However, state-owned Petrõleos Mexicanos is the sole oil producer in Mexico and according to the 2011 World Energy Outlook, Mexico’s oil production has declined over the last decade and is projected to continue to decline due to the slow pace of new developments.  Some legislators see promise in the opportunity for reducing development and reliance on fossil fuels.  As quoted by the BBC, Porfirio Munoz Ledo of the center-left Democratic Revolution Party and chair of the Foreign Affairs Commission said, “Mexico is aware this is the end of the oil era, so we need to implement this fiscal reform – and if we go through it, we’ll be able to do without this oil.”

Finally, the bill requires international financial support to deliver its goals, as is mandated in the United Nations climate convention.  The Cancun summit agreed to establish an international Green Climate Fund that is supposed to provide much of that support.  However, details of the Fund have yet to be finalized and it is a long way from receiving the promised funds.  Certainly the limited growth of the global economy has reduced the coffers of all nations, likely making them less willing to submit promised monies to such funds.  Whether Mexico would get the financial support it plans on is questionable.  Beyond financial support, some worry that enforcing the bill may prove to be difficult.

While all laws face implementation challenges, the fact that Mexican legislators created the political will to pass comprehensive climate change legislation is both encouraging and a model the U.S. will hopefully follow in the short term.

Emily is a Senior Research Analyst with Portfolio 21 Investments. She has 9 years of experience in the environmental field.

Last month, the Environmental Protection Agency (EPA) issued its first ever rule on carbon dioxide emissions from new power plants, which was met with applause and some skepticism.   Currently the U.S. has no limits on the amount of carbon pollution that future power plants can emit.  The new rule states that any new power plant will be allowed to emit no more than 1000 pounds of carbon dioxide per megawatt-hour.  To offer some perspective on this number--natural gas plants currently average 800 pounds per megawatt-hour, while coal plants can average upward of 1800.  This makes it impossible for any new U.S.-based coal fired power plants to be built unless they capture and store their own carbon emissions, which is a technology that is currently not commercially viable.  With the low cost of natural gas, increased consumer awareness on climate change, preference for low carbon alternatives, declining costs of renewables, and now the new EPA ruling, many consider coal outdated and uneconomical.  From an environmental perspective, this rule is positive.  It also provides assurance to investors and businesses alike that we will not be returning to coal.

The EPA is also crafting carbon regulations for oil refineries and other stationary pollution sources.  According to the World Resources Institute, when the EPA’s carbon rules are fully deployed they could cover approximately three-quarters of the country’s greenhouse gas sources and could reduce U.S. carbon emissions anywhere from 5% to 12% by 2020 (using 2005 as a baseline).  We encourage the EPA to continue its regulatory work and we believe investors would be well served by comprehensive climate legislation.

Beth is a Senior Research Analyst with Portfolio 21 Investments.  She has 8 years of environmental and social investing research experience.