The Logic of Divestment: Why We Have to Kiss Off Big Carbon Now
The headliner among the 50 divesting foundations was the $860 million Rockefeller Brothers Fund, which stewards part of the fortune of John D. Rockefeller, founder of Standard Oil – whose corporate offspring include Exxon Mobil and Chevron. “Obviously the money came from oil,” says RBF trustee Valerie Rockefeller Wayne. “We embrace the irony of that.”
For RBF, the logic of divestment was twofold. “There was a very clear moral impetus to do this,” Wayne says. RBF makes significant grants in the field of sustainable development, and the fund reached a breaking point with Big Carbon over what Wayne describes as “the schizophrenic notion that we had investments that were undermining our grants.”
But there was also “an economic reason for divestment,” Wayne says. RBF’s business is philanthropy. It was determined not to damage its portfolio. But as RBF scrutinized its fossil-fuel investments, it began to have concerns. One of the primary assets on an oil company’s books are its “proven reserves” – that is, the oil in the ground and beneath the oceans that will be the source of future profits. RBF questioned the wisdom of parking its money in companies that, in a low-carbon world, would not be able to bring that oil to market – “proven reserves” risked becoming “stranded assets.” RBF also balked at investing in companies that continue spending astronomical funds in the hunt for even more unburnable oil. Exxon Mobil, America’s largest oil company, despite having more than 25 billion barrels of proven reserves, sunk more than $7 billion into new exploration in 2013 alone. “There is no good reason for this vast expenditure of stockholder wealth,” wrote Longstreth. (He has also served as chairman of the finance committee of the Rockefeller Family Fund.) “It is wasted capital,” he continued, “an offense against stockholders in terms financial alone.”
There’s no stronger marker of the growing clout of the divestment movement than the fact that the oil majors now feel compelled to trash it. After ignoring activists for years, Exxon Mobil took to its corporate website last October to blast divestment as “a movement that is out of step with reality,” adding, as only an oil company could, that “to not use fossil fuels is tantamount to not using energy at all, and that’s not feasible.”
The dismissive stance of Exxon Mobil echoes that of large institutional investors – most conspicuously Harvard University, with its massive $33 billion endowment – who have argued that not to invest in fossil fuels is not to invest soundly. Harvard President Drew Faust presaged Exxon Mobil’s line of argument by writing in a 2013 open letter that fossil-fuel divestment is neither “warranted or wise.” (Faust declined to be interviewed for this article.)
Exxon Mobil and Harvard have business-as-usual on their side. What they don’t have in their corner are the facts. The financial arguments mustered against divestment simply do not hold up under scrutiny. Indeed, the greatest impediment faced by the divestment movement today is misinformation – a litany of debunkable myths about the cost and benefits of kissing off Big Carbon.
MYTH #1: Divestment Costs Too Much
The most damaging misapprehension about divestment is that dumping fossil-fuel stocks means sacrificing profit. As Faust wrote in her letter, “Logic and experience indicate that barring investments in a major, integral sector of the global economy would . . . come at a substantial economic cost.”
But more and more investment professionals are rethinking this assumption. Historically, oil and coal stocks have been solid investments, functioning as a bulwark against inflation and included in institutional portfolios by default, says Donald Gould, chief investment officer of L.A.-based Gould Asset Management, which manages more than $450 million in client funds. Gould has a unique perspective on divestment. His firm specializes in traditional asset management (not socially responsible investing). But he also chairs the investment committee at Pitzer College in Southern California, where last year he helped the administration figure out how to divest its $125 million endowment from fossil-fuel stocks, arguing that the moral benefit for the college trumped any possible financial fallout. While a market purist might deem a carbon-free portfolio “suboptimal,” Gould says, “it’s a very low impact. If you take the fossil-fuel companies out, you’re still very
well diversified.”
“To not use fossil fuels is tantamount to not using energy at all,” Exxon said in a response to the divestment movement. “And that’s not feasible.”
In fact, financial professionals who model divestment returns have found there is no reason to assume there will be a “penalty” for shunning Big Carbon. The Aperio Group, based near San Francisco, modeled the returns of a carbon-inclusive index like the Russell 3000 against a hypothetical version of the index tweaked to exclude fossil-fuel stocks and reweighted to approximate the risk profile of the original index. The result? From 1988 through 2013, the Russell 3000 had a yield of 10.63 percent; the same index minus Big Carbon stocks would have yielded 10.68 percent – a barely measurable difference.
Other studies suggest that carbon-free investing could even offer higher returns: S&P Capital IQ, a division of McGraw Hill Financial, modeled the performance over the past decade of the S&P 500 index stripped of its fossil-fuel stocks. A $1 billion endowment invested in a carbon-free S&P 500 would have yielded an additional $119 million in profit through 2013 – a divestment dividend rich enough to fund 850 four-year scholarships.
MYTH #2: Fossil Fuels are a Safe Investment
Past performance, they say, is no guarantee of future results. And nowhere is this more true than with investments in fossil-fuel companies. The “spasms of volatility” now roiling the oil markets, Gould says, may cause portfolio managers to rethink the orthodoxies of oil stocks: “The risk,” he says, “may be higher than it used to be.”
Exxon Mobil, of course, scoffs at the notion that its ability to profit from its 25 billion barrels of proven reserves is in any way threatened. World governments, it wrote last March, lack the political will to impose the emissions reductions required to stabilize global temperature rise at 2 degrees Celsius: “The policy changes such a scenario would produce are beyond those that societies . . . would be willing to bear, in our estimation.” Exxon calls this low-carbon scenario “highly unlikely” and neatly deems it unworthy of financial analysis.
But even before President Obama and Chinese President Xi Jinping announced their climate accord in November, Exxon Mobil’s spin had been undercut by the Paris-based International Energy Agency. In June, the IEA released an independent analysis projecting that carbon curbs strong enough to meet the 2 degrees Celsius threshold could leave nearly $300 billion in stranded fossil-fuel investments by 2035. The IEA’s report buttressed the findings of the investment bank HSBC, which in its study of European fossil-fuel giants warned that the gigatons of unburnable carbon reserves on the books could become all but worthless.
The overall shock to the value of oil companies posed by these low-carbon targets, HSBC’s analysts wrote, could be “equivalent to 40 to 60 percent of the market capitalization of affected companies.” Free-market orthodoxy – specifically the theory of “efficient markets” – would argue such future risks are already reflected in a company’s stock price. But it appears increasingly likely that the market in Big Carbon stocks is no more “efficient” than the subprime mortgage market was circa 2007. In a warning that should keep anyone with oil in their portfolio up at night, HSBC cautioned, “Because of its long-term nature, we doubt the market is pricing in the risk of a loss of value from this issue.”