Public policymakers, when they look carefully at the facts about climate change, usually conclude that it’s essential to divest from fossil fuels. The slide toward climate chaos must be resisted with every weapon, and it doesn’t make sense for public leaders to remain invested in products that are destroying the world they are trying to create with their other, more benign policies.
Two years ago, Seattle Mayor MIke McGinn called for his city to divest. And last year, the San Francisco Board of Supervisors also voted unanimously for divestment from coal, oil, and gas companies. Like many other leaders of cities, colleges, and other institutions around the world, these city officials decided that was good public policy, and they directed their municipalities to get rid of carbon-based investments.
Shortsighted investment decisions
But policymakers don’t always have the last word. Separate investment committees are often given the legal power to make investment decisions about retirement funds. And they may take a narrower view of their responsibility, considering only their own past investment decisions and the dangers of doing something different and untried. They have invested in oil and made money in the past, so they should continue to invest in oil. They have never before divested, so that might have unknown results and must be risky. Big Oil has paid off in the past, they think, so let’s not change.
That’s what has happened in Seattle and San Francisco. Concerned for the financial security of their pension funds, retirement committees in both cities have ignored their leaders and opted to keep old-energy investments in their portfolios, at least for the present. In fact, however, that’s the riskiest move they can make. If they really want to fulfill their fiduciary responsibility to long-term financial stability and retirees’ continued income, they should look more carefully at the data.
For example, in a recently updated study, the Aperio Group looks at past performance of broad-based investment portfolios. It finds that portfolios excluding fossil fuels have almost exactly tracked portfolios with fossil fuels over the period studied, from 1988 for the US and from 1997 globally. In other words, sometimes one performed better, sometimes the other, but over the long term, there was almost no difference. As Aperio concludes: “Historically it has been possible to closely track broadly diversified indices with carbon-free portfolios.”
The data does not support the skeptics’ view that screening negatively affects an index tracking portfolio’s return. The data also shows that the impact on risk may be far less significant than presumed.
That small difference, in fact, shows a slightly better return overall when fossil fuels are excluded. And much of that difference appears in the last five years, during the same period that the danger of over-pricing carbon companies has become more apparent.
A similar study by MSCI ESG Research, covering 2008 to 2013, also shows a slight advantage to excluding fossil fuels. It’s only 1.2 percent—not significantly better, but good enough that it should allay any worries about a divestment downside. Based on past performance, it’s not risky to divest. If you had got rid of fossil fuel stocks in 2008, you might even be a little richer.
But what about future performance? We can’t be certain. As Yogi Berra pointed out, “It’s tough to make predictions, especially about the future.” But there are patterns that are becoming clearer with each passing year.
One is that the price of fossil fuels is extremely volatile. In six months, oil has dropped from $113 to $66 a barrel. And that affects oil stocks. In the last three months, while the S&P 500 has climbed 3.73%, shares of ExxonMobil have fallen 4.3% and of Chevron 8%. Smaller oil companies have done even worse, Anadarko Petroleum losing 17% and Cimares Energy 14%. That’s not the stability an investor would like to count on.
Another pattern—apparently contrary but actually closely related—is the bubble phenomenon. It’s a response to volatility on the upside. Investors often assume that if the price of something is going up, it will continue to go up. From the Dutch tulip bubble in the 17th Century to the recent housing bubble, people have lost enormous amounts of money on that misconception. In the case of fossil fuels, even with the current drop in valuation these companies are still wildly overvalued due to the reserves they hold and expect to sell. As Hank Paulson, Treasury Secretary during the housing bubble, warned, “We’re staring down a climate bubble that poses enormous risks to both our environment and economy.” That bubble, too, will burst, leaving investments in tatters.
A third pattern, the most disturbing of all, is the deteriorating physical environment caused by climate change—and its effect on the economy. Burning more fossil fuels disrupts the climate, which in turn disrupts the economy. A world with longer droughts and more destructive storms, with intense heat waves and impacted agriculture, is a world in which the economic engine could easily sputter and fail. In such a vicious cycle, all investments would suffer, but fossil fuels most of all.
Divestment is a fiduciary duty
Divestment from fossil fuels, therefore, is not merely a nice thing to do, not just a symbolic gesture or a way to shame the carbon polluters. Divestment is a duty—a fiduciary duty—for anyone who has the responsibility to ensure the security and stability of investments.
That’s why we’re asking CalPERS and CalSTRS to protect the retirement funds they have responsibility for by divesting from fossil fuels. Holding on to Chevron stock while trying to influence its policies will never convince Chevron to become a renewable energy company. But it will increase the likelihood the funds will lose money, while remaining complicit in the destruction of a habitable environment.
That’s not my definition of financial security—or of fiduciary duty.
Photo: Joe Mabel, Wikimedia Commons. Some rights reserved.