The United States Environmental Protection Agency (EPA) has proposed new standards for the sulfur content in gasoline, a move designed to cut harmful smog produced by cars and trucks. The EPA wants fossil fuel companies to reduce the amount of sulfur in gasoline to a maximum of 10 parts per million, down from the current standard of 30 parts per million. The State of California already has such a standard, so in a sense this is the rest of the country catching up to California’s standard. The gasoline with lower sulfur content is called “ultra low sulfur” gasoline and is currently available in Europe, South Korea, and Japan, in addition to California. The global auto industry supports the EPA’s move, "We have been anxiously awaiting this rulemaking because it is good for the environment and will help harmonize the federal and California programs for both vehicles and fuels," said Michael J. Stanton, president and CEO of Global Automakers, as reported by PR Newswire. The EPA estimates that the reduction in smog from lowering the sulfur content nationwide would be the equivalent of taking 33 million cars off the road.

However, the U.S. fossil fuel industry is fighting the EPA’s proposal through its trade association, the American Petroleum Institute (API), as well as efforts by Republican politicians. Responding to the EPA’s proposal, the API said in its press release: “There is a tsunami of federal regulations coming out of the EPA that could put upward pressure on gasoline prices.” They go on to say that gasoline prices could be increased by up to nine cents per gallon because of the increased costs to produce lower sulfur content gasoline.

The U.S. fossil fuel industry is producing ultra low sulfur gasoline for the California market now, but they are selling the higher sulfur gasoline to the rest of the country. They seem to be putting their profits above considerations of your health. They do not want to upgrade their refineries to produce cleaner burning fuel. And their response to the EPA proposal is closer to a lie than a half truth. They are basing their argument to delay or avoid the new regulations on the concept that this would cause the price of gasoline to rise. In reality, they have a choice: increase the price of gasoline or earn a slightly lower profit.

This is a great but tragic example of an “externality,” where a company or industry produces a product that causes harm but is able to lay the cost of the damage off onto society at large. I am somewhat amazed that the fossil fuel industry is so brazen in their position.

Smog contributes to thousands of premature deaths each year and makes respiratory ailments more severe for tens of thousands of people. The fossil fuel industry can improve their product and reduce these health problems, but they prefer the higher profits over your health. And of course you do not have to be a consumer of gasoline to suffer these ill effects; people who do not own a vehicle have to breathe the same air as drivers.

The EPA states that over 158 million Americans are currently experiencing unhealthy levels of air pollution, which are linked with adverse health impacts such as hospital admissions, emergency room visits, and premature mortality. Motor vehicle emissions are a particularly significant source of air pollution, especially in urban areas. Further, the EPA states that if implemented, the new standards would prevent by 2030 annually: between 820 and 2400 premature deaths; 3200 hospital admissions and asthma related emergency room visits; 22,000 asthma exacerbations; 23,000 upper and lower respiratory symptoms in children, and 1.8 million lost school and work days.

The EPA also provides a cost benefit analysis of implementing the regulation and suggests that in 2030 the annual cost of the program would be about $3.4 billion, or $130 per vehicle and 1 penny per gallon of gasoline. The economic benefit is between $8 billion and $23 billion in monetized health benefits to the country.

The fossil fuel industry views this expense as detrimental to its profits and against the interests of its corporate shareholders. It prefers the higher profits of the existing higher sulfur gasoline to the health benefits of the country.

Portfolio 21 does not invest in the stocks of fossil fuel exploration and production companies. The fossil fuel industry’s response to the EPA’s proposed new standards on sulfur content for gasoline is just another of many, many reasons for our fossil fuel free position.

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

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. 

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.

The first important number he details is 2 degrees Celsius, which is the amount that scientists and most governments have agreed is the maximum increase in global temperature, without very serious consequences.  The second number is 565 gigatons, which is the amount of carbon dioxide that we can emit by midway through this century in order to keep us within the 2 degree Celsius range.  This all makes the third number even more daunting; 2,795 gigatons is the amount of carbon contained in the proven reserves of the world’s fossil fuel companies.  Meaning, the world’s inventory of fossil fuels is five times the amount that scientists think would actually be safe to burn.  And every day fossil fuel companies spend millions of dollars to find and extract more coal, oil, and natural gas.

This equation very clearly illustrates an unsustainable system with dire consequences for the economy.  Some kind of mechanism must evolve to increase the price of fossil fuels and decrease the cost of renewable energy sources, and quickly.  But if that optimistic climate-saving scenario does indeed play out, energy companies will be left holding assets that they can no longer sell, which will cause the industry losses in the trillions of dollars.  The consequences for investors of this “carbon bubble” are being researched by UK-based Carbon Tracker Initiative, which published a seminal report earlier this year titled, “Unburnable Carbon.”

McKibben’s article is sobering, but its prominent place in Rolling Stone is encouraging, and it is already getting a lot of attention.  Considering the extreme global weather this year, this could be a very good moment for the message.  A recent opinion poll reported that in July 70% of Americans stated that they believed that the climate is changing, which is a 5% increase vs. the same poll in March.  This is a rapid, and likely seasonal, increase in acknowledgment of the problem, but it remains to be seen when opinion might translate into significant national will.  There is still much progress to be made toward articulating the future that we want to see, and how we will transition to the energy sources that we need in order to get there.

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