October 22, 2020

Less Divestment, More Collaboration, Financial Experts Say

It’s no surprise financial experts are sounding the call on the inefficiency of fossil fuel divestment. With the COVID-19 pandemic not fully behind us yet, the new shift towards focusing on economic recovery has financial experts saying divestment isn’t the smartest option.

Recently this month, experts and business professionals have issued multiple statements asserting that divestment is not a meaningful to climate change, in fact, divestment may even be putting your financial investments at-stake.

However, among these experts, one common theme emerged:  collaboration with the energy industry is needed to combat both the climate and economic crisis.

The Low-carbon transition will include the energy sector.

Nathaniel Bullard, a writer with Bloomberg | Quint, has been writing about divestment over the past couple of years. In 2014, he wrote a white paper on how divestment won’t work, since fossil fuels represented $5.5 trillion in the stock market—a sizeable share of the S&P’s total value.

In 2020, he notes that while fossil fuel stocks have faced serious challenges in recent years, there will be a shift towards companies that create value for the low-carbon transition:

“Now it’s clear the focus should be less on divestment from the fossil fuel sector and more on reallocation to companies that are planning to create value from the low-carbon transition. That doesn’t necessarily exclude the energy sector.”

Rather than taking up the argument put forth by divestment activists, Bullard suggests that companies not limited to the oil and gas industry are also responsible for addressing how they plan to reduce carbon emissions from their footprint. This requires collaboration with these companies, rather than divestment—which simply leaves shares of stocks to be bought by others.

“Oil and gas and the many industries that depend on the energy density and chemical richness of hydrocarbons are in the realm of molecules. Decarbonizing the world of molecules is tremendously hard. It means not only substituting electrons for them wherever possible, such as in electrifying road transportation, but also making innovations in molecules themselves, including creating new carbon-neutral aviation fuels.”

Many of the world’s largest fossil fuel companies are no longer exclusively producing fossil fuels. Already, Europe-based energy companies like Shell have major offshore wind operations throughout Europe or BP which is a world leader in biofuel production. Together, energy companies are adapting to a low-carbon future and creating the technologies that are already reducing the industry’s carbon footprint.

Responsible investing doesn’t include fossil fuel divestment.

Last week, asset owners took some time to sound their call on responsible investment strategies. At Pensions & Investments’ WorldPensionSummit, ESG leads and pension fund managers had a clear message: divestment is irresponsible and not the right strategy for addressing carbon emissions.

David Hickey, a portfolio manager with Edinburgh’s pension program valued at $9.7 billion, says the role of an asset owner is not to provide new capital:

“We have never been divestment fans… That’s not the action of a responsible owner.”

Moreover, Hickey also mentions that companies aren’t affected by divestment, either, pointing out that investors own the right to dividends and to a vote at the annual meeting:

“What you are not doing is providing new capital to that company… Engage your equities, deny your debt.”

Another sentiment that was expressed among fund managers was the need to increase internal audits of how ready that funds’ investments are for climate change. The new strategy is called a transition readiness assessment, and some funds have already started reviewing their investment.

Kristy Jenkinson, who is head of sustainable investment with one of the largest pension programs in the country, the California State Teachers’ Retirement System, says her fund has implemented this approach and is going asset class by asset class to address the issue. CALSTRS, which has already rejected divestment and is a vocal rebuker of divestment activism, continues looking for investment solutions that add to their financial soundness, instead of nipping asset growth. Jenkinson adds on that public equities, unlike private ones, need to me be more ‘transition-resilient’ in fixed income:

“We want to invest more in climate-related solutions because we think they are going to be really good investments.”

Conclusion

Expertise matters, especially when talking about pensions and endowments worth hundreds-of-billions of dollars. Many of the industry’s finest are sounding the alarm on the possible ramifications of a divestment decision, and once it’s done, it will be too late. Activists want the public to put facts and science first. The experts are aligned when it comes to divestment: we need engagement, not one-sided financial boycotts.