Last week, the activist-aligned capital management firm Green Century held a webinar for its clients and supporters to discuss how divesting from fossil-related energy firms could impact the performance of portfolios. It’s an interesting topic, for sure – and one that’s been the focus of a good bit of research and scholarship lately, including the landmark study issued earlier this year by Prof. Daniel Fischel of the Univ. of Chicago Law School, which found that divested portfolios perform about 70 basis points worse on an annual, average basis relative to their diversified peers.
Of course, the idea that blacklisting an entire economic sector as ubiquitous and interconnected as energy represents a bad piece of investment advice is not exactly a controversial point-of-view among professionals in the field. But for firms like Green Century, which markets itself as a manager that can both make real money for its clients while completely and genuinely avoiding fossil fuels, the findings of the Fischel study basically contradict everything they’re trying to sell – hence Green Century’s decision to whip together this webinar, which was supposed to serve as an opportunity for green financial “experts” to push back on the prevailing narrative of divestment as a really expensive way to send a pretty weak message.
So we decided to listen in (since we did receive an invitation, after all) just to see what kind of spin they’d try to employ to get folks to believe that you can actually make money from weakening the diversification profile of your stock portfolio.
But you know? We have to give them credit: while the purpose of the panel was to discuss the benefits of divestment, the panelists on the call were surprisingly candid about the faults, failures and limitations of divestment as a sound investment strategy.
The webinar featured a number of fairly well-known divestment activists, including Green Century president Leslie Samuelrich and panelists Brett Fleischman of 350.org and Dan Kern of Advisor Partners, who has written extensively on divestment in the past. Below are five takeaways from the webinar:
In a departure from the usual talking points typically called upon by divestment activists, Dan Kern noted that divestment in the short term is a financial strategy fraught with risk that will cost the investor a good bit of her money. In fact, according to Kern, divestment doesn’t really work at all on the personal investment level. As Kern said during the webinar:
“We are particularly concerned about these patterns of performance given our work with individual investors who typically have a shorter investment time horizon than endowments, making it more difficult for them to have the staying power to ride out variations in performance.”
Another surprising, totally off-message point that that Kern made was that, while oil and gas stocks suffered in 2014 with the drop in the commodity price, many so-called green stocks did a lot worse. As Kern noted:
“With oil prices down sharply in 2014, were investors who divested big winners for the year? The answer is not necessarily. Energy stocks were down, but in some cases not as sharply as alternative energy holdings. Exxon and Chevron, two bellwethers for the divestment movement, declined by 6 percent in 2014. In comparing them to clean energy and clean technology that were logical reinvestment candidates, several of those declined by more than Exxon and Chevron, falling as much as mid-double digits for the year.”
Kern mentioned that the problem with investing in so-called green energy in the short term is that it exposes you to all sorts of volatility and risk emanating from the “clean tech” segment of the market. In short, according to Kern, timing is everything: “So, calling the timing right on some of these less mature [green] companies can create huge wealth if you get it right, but getting it wrong can cause severe damage to portfolio returns.”
As a recent research paper by Kern published in Think Advisor explains further, this is in part due to the linkage between the oil market and other sources of energy. From the report:
“Consequences of the rapid fall in oil prices included reduced demand for alternative sources of energy and a period of heightened risk aversion for investors, creating the dramatic performance results discussed anecdotally above. … Clean energy companies may offer attractive long-term prospects, but it’s important to recognize the higher near-term volatility they exhibit.”
While many supporters of the divestment movement have attempted to seize on the recent oil-price downturn as evidence of the “financial prudence” of divesting from fossil fuels, the reality is that any commodity or technology will experience price fluctuations over its lifetime. The question is: how to reduce the level of risk you are exposed to as an investor, while still keeping yourself eligible for high returns? As Kern admits in his remarks, just moving your money from fossil fuel companies to so-called green stocks is far from a safe bet.
While Kern said divestment in the short term is too risky for personal investors, he did say that divestment could work in the long term, especially for larger holders. So how does this work? While Kern didn’t spend too much time explaining this point during the webinar, he does provide details in his recent research paper. And the rationale is pretty surprising: invest in Russia.
In fact, according to Kern, the most risk-averse reinvestment strategy for a divested portfolio is to invest in stocks that are closely tied with the energy industry, such as utilities and countries whose value is closely tied to energy exports. As highlighted in the report:
“The approach we often recommend for clients, in which divestment proceeds are redeployed into companies that may be statistically correlated but are not directly involved with energy activities. For example, industry groups such as construction and engineering, aerospace and defense, and machinery have high historic correlations with oil companies. Another option for investors with a global perspective is investing in the currencies or non-energy equities of countries that are major energy producers, such as Canada, Norway and Russia. The broader economy in these countries tends to do well when oil prices rise, so investing in them could be a way to benefit from rising oil prices without providing direct funding to fossil fuel companies.” (Emphasis added)
In other words, if you’d like to make yourself believe that you’ve divested from fossil fuels, but still want the benefits of diversification that come from investing in fossil fuels, then the answer is to just dump all your money into countries like Russia and Norway, whose economies are significantly dependent on oil and natural gas. Sounds kind of like cheating to us. But whatever helps you sleep at night, we guess.
This led us to take a closer look at Green Century Funds own investments. Sure enough, Green Century invests in a number of companies that rely heavily on fossil fuel industry, whether it’s the utility, manufacturing or transportation sector. In fact, only .9 percent of Green Century’s equity fund is invested in renewable energy, while software, technology, transportation and pharmaceutical companies make up 33.1 percent. These companies may not be directly involved in the development of fossil fuels, but they sure use a lot of it to run their companies and produce (and fuel) their products.
Simply put: Even the leaders of the divestment movement clearly understand that removing themselves from fossil fuel related investments would just be too costly. So again, does this really count as divestment?
During the Q&A session, the panel was asked about the role of stranded assets in the divestment debate. As Dan Kern noted, there are very “mixed reviews” around the idea and what it means for investors.
As DivestmentFacts.com has explained before, the stranded-assets crowd basically believes that oil and gas is a bad investment because 1) the implementation of restrictive global carbon policies is right around the corner, which promises to 2) prevent companies from producing their oil and gas reserves, 3) raising the price for them so high that 4) consumers won’t even be able to afford a gallon of gas anymore, which eventually 5) will make renewable technologies much more cost-competitive, leading to 6) the end of the oil and gas industry as we know it. That, in a nutshell, is your standard, stranded-assets argument.
Yet as Kern made clear in his remarks, the stranded asset argument for oil and gas “really relies upon either significant near term regulatory change or significant consumer behavior change, and I’d say that in the near term I’m more of a skeptic than I think Leslie or Brett would be on the stranded asset argument.” Apparently Mr. Kern didn’t get the McKibben-approved talking points memo on this one!
Here’s one of those topics that’s always going to be a source of tension between the straight-activist crowd and firms like Green Century, which, although they may be aligned with activists from an emotional standpoint, are often burdened by their status as being actual capital markets professionals (as opposed to people like this). For a lot of these so-called green investing firms, engaging with firms they would otherwise love to destroy has always been the preferred approach relative to divestment – that’s why management firms like Trillium and Arjuna Capital buy up stocks from some of the largest oil and gas companies in the world. Not because they’re trying to make a buck off them – but because that stock ownership allows them to file proxy resolutions, which, although they never win, in turn allow them to fire off press releases and generate media coverage that, at the end of the day, is designed to defame the industry. It’s that simple, really.
But groups like 350.org have never been all that wild about that strategy, which is something that Brett Fleischman awkwardly admitted on the call. While tipping his cap to Green Century and other firms like Trillium for effectively utilizing the engagement tactic over the years, he claimed that engagement was the wrong tool for the job — “like using a screwdriver to cut roast beef.”
Yet as we’ve seen with many institutions that have rejected divestment, engagement with an industry that is relied on every day is often viewed as a more effective strategy than divesting from holdings that will be quickly repurchased by another investor. As Harvard President Drew Faust stated in 2013:
“Given our pervasive dependence on these companies for the energy to heat and light our buildings, to fuel our transportation, and to run our computers and appliances, it is hard for me to reconcile that reliance with a refusal to countenance any relationship with these companies through our investments.”
Chief Executive Officer of California Public Employees’ Retirement System (Calpers) Anne Stausboll also recently emphasized the importance of engagement over withdrawal, stating:
“Engagement is the first call of action and is the most effective form of communicating concerns with the companies in which we invest. That is why, when it comes to climate change and its risks, Calpers’ view is that the path to change lies in engaging energy companies, instead of divesting them. If we sell our shares then we lose our ability as shareowners to influence companies to act responsibly.”
Interestingly enough, even Bill McKibben admits that divestment won’t have any direct impact on companies, and instead notes that the movement “will undercut the industry’s political power” and is just “one tool to change the zeitgeist.” Perhaps emphasizing engagement – a tool that Green Century itself has found extremely powerful in effecting change – would be a better way to have an actual impact.
In his opening remarks, 350.org analyst Brett Fleischman thanked Green Century for its support of the divestment movement, noting that Green Century and 350.org have long partnered on initiatives to support divestment. Of course, it was only a couple months ago when Green Century’s Leslie Samuelrich spoke at Harvard’s Heat Week to urge the school to move forward with divestment; 350.org also features Green Century as a fund to consider to “reinvest in climate solutions” and together in 2014 the groups announced a “guide to divestment” with Trillium Asset Management.
While none of this is surprising given the organizations’ alignment on the fossil-free campaign, it does beg the question of whether Green Century supports divestment because it sees it as a way to combat climate change – a fact that even supporters of the divestment campaign have rejected – or rather a way to increase support of its own fund, and thus support its own business agenda.
As demonstrated by this webinar, trying to make the financial case for divestment isn’t easy – even for folks who support it! The more divestment activists try and provide the financial justification for divestment the more it fails. If it takes reinvesting money in Russia to make it work, you know the argument isn’t going to hold up. For any activist that actually listened to the webinar, the bottom line was clear: divestment isn’t for you, and it’s probably not for college endowments either.