How to respond to these common complaints about divestment…
A growing body of evidence suggests that it is fossil fuel investments that are increasingly risky, and that many fossil free portfolios are outperforming their conventional counterparts. Key arguments and resource to use relating to this are here.
- While it’s important to point out the positive statistics on fossil free portfolio performance, leading with divestment as a money making strategy isn’t a great idea (even if you may end up being right!). You’re not a financial advisor after all. Focusing on climate risk and “risk exposure” of a portfolio to fossil fuels is a more persuasive line.
- It’s worth clarifying the divestment ask gives them 5 years to extract themselves, as this is sometimes a sticking point.
- It’s also worth pointing to all the organisations that have already divested and are doing fine.
Once the decision has been made, it’s often just a case of instructing the financial officer or external asset manager to apply exclusion classes.
Here’s some resources to help:
- Institutional Pathways to Fossil Free Investing: Endowment Management in a Warming World
- Climate Proofing Your Investments: Moving Funds out of Fossil Fuels
- List of Exclusions by Asset Class
Remember: here’s the Fossil Free Divestment Ask.
Shareholder engagement has been a crucial tactic at creating change in all sorts of areas from the living wage to curbing executive pay, but there are some reasons why we think divestment may be a more powerful option in the case of fossil fuels:
- There is no track record of success for challenging the business model of a company rather than specific corporate practices. So far no engagement strategies has developed an ask or a timeline that matches the size or urgency of the climate challenge and the need to keep 80% of fossil fuels in the ground.
- The engagement clout from the organisations we’re dealing with is minimal in financial and ‘shareholder power’ terms
The vast sums of money going into political lobbying and further extraction and stated commitment to burning all of their reserves shows the fossil fuel industry is not willing to change their stripes.
A recent United Nations report on emissions disclosure from the ‘Principles for a Responsible Investment Academic Network’ further confirmed “pressure from the state, NGOs and the public impact a corporation’s decision to report GHG emissions data, but pressure from equity investors and debt lenders does not.”
Further resources making the case against engagement:
- 350.org’s response on engagement in the Guardian
- Jonathon Porritt: ‘Engaging with fossil fuel companies over climate change is futile’
- Clean Yield: Talking to the Hand: Why Engagement With Fossil Fuel Companies Offers So Little Promise
- Green Century: The power and limitations of shareholder advocacy with fossil fuel companies
- GreenBiz: Why shareholder engagement with fossil-fuel companies won’t work
- Ben Franta: Why We Must Divest From Fossil Fuel: A Student’s Open Letter To Harvard President Drew Faust
- Clean Yield: MA Divestment Testimony
- Bevis Lonstreth: How, Given Norway’s Control of Statoil, to Dovetail Active Ownership With Exclusion
Hurrah – that’s a great start and make sure to celebrate this victory. Tar sands and coal are some of the dirtiest fossil fuels. 99% of tar sands need to be kept underground to meet the 2 degrees target, and coal is generally seen to be in the way out.
Even if we abandoned coal and tar sands completely however, that wouldn’t be enough to stop runaway climate change and institutions need to be pushed further.
Fiduciary responsibility, or fiduciary duty, is a legal term meaning that trustees must act in the best interest of the ‘fiduciary’ or ‘fiduciaries’ – which could be an institution like a university, or individual pension holders for a pension board trustee.
In many cases, this duty is interpreted to mean maximising short term returns at the expense of all other factors. As such, many administrators justify a policy of continuing to invest in fossil fuels by stating that any other course of action would be breaking their legal responsibility.
Growing concern that this current interpretation tends to overemphasise short-term performance while neglecting longer-term risks prompted the 2012 Kay Review into Equity Markets and Long-term Decision and 2014 UK Law Commission Report to support a broader interpretation of fiduciary duty – suggesting that socially and environmentally responsible approaches to investment are, at the least, consistent with this duty, and that institutional investors acting in their clients’ best interests should consider the environmental and social impacts of their investments.
As this ruling is relatively new, decision makers should be pointed towards this summary of the Law Commission ruling.
- The review states that “the primary aim of an investment strategy is therefore to secure the best realistic return over the long term, given the need to control for risks.” Financial risks to take into consideration included “environmental degradation”, “poor safety record”, and “risks to a company’s long-term sustainability.”
- “The Law Commission’s conclusion is that there is no impediment to trustees taking account of environmental, social or governance factors where there are or may be, financially material.”
- They state that environmental concerns may also be taken into account as a non-financial factor so long as there is there is no “significant impact on returns” and “trustees have a good reason to think that scheme members would share the concern.”
- The Law Commission suggests that administering authority’s requirement to diversify their investments does not prohibit fossil fuel divestment, stating “the law does not require a portfolio to be diversified to the fullest extent possible.” … “for example, in Harries, the Church Commissioners reached the view that excluding 13% of the market would be acceptable, while excluding 37% would not be.”
The UK Government has agreed to implement the recommendations of the Law Commission:
- “Fiduciaries such as pension scheme trustees have a duty to consider any factors which are, or may be, financially material to the performance of an investment …this should include taking into account environmental and social, and corporate governance factors and wider macroeconomic considerations, where trustees think these may be financially material.”
- “[We] share(s) the Law Commission’s hope that this report will remove any remaining misconception that fiduciaries duties require trustees to focus on maximising short-term returns alone.”
- “The interpretation of fiduciary duty has evolved significantly over time and must continue to evolve to adjust to changing social and economic realities” – Smith School Stranded Assets Programme
UN climate chief Christiana Figueres said “Investment decisions need to reflect the clear scientific evidence, and fiduciary responsibility needs to grasp the intergenerational reality: namely that unchecked climate change has the potential to impact and eventually devastate the lives, livelihoods and savings of many, now and well into the future,” she added bankers would be “blatantly in breach of their fiduciary duty” if they failed to accelerate the greening of their portfolios.
Top tip for Local Government Campaigners:
In March 2014 the Local Government Association (LGA) (England & Wales) published a legal opinion on how fiduciary duties affected the scope for a Local Government Pension Scheme (LGPS) fund to incorporate ESG risks into their decision making, concluding that as long as authority’s powers are used only for investment purposes “the precise choice of investment may be influenced by wider social, ethical or environmental considerations, so long as that that does not risk material financial detriment to the fund.”
- ShareAction lays out fiduciary duty here
- Reagan era SEC Commissioner: The Financial Case for Divestment of Fossil Fuel Companies by Endowment Fiduciaries
- Pensions & Investments: Divesting is an exercise in real fiduciary care
- The economic benefits need to square with our ERISA fiduciary responsibilities
Most institutions will use external asset managers and consultants to manage their money on a day to day basis (and pay an enormous amount for the pleasure). Some key things to note are:
- Whoever manages the money, the ultimate decision rests with the trustees at your institutions. If they say divest, the asset managers have to do it (or they can threaten to find someone else that will)
- Asset managers aren’t neutral – they will be consulted around decisions like divestment, and may say things like ‘it’s just not possible’ and derail the process.
- Some institutions claim that engagement is happening through their asset managers (who are entrusted to vote at AGMs on their behalf) – often this is lip service, and it’s worth checking the voting record of the asset managers and flagging this up to officials
- ShareAction conduct an annual asset managers survey to compare firms against each other
This argument has been put forward by a number of institutions, including Harvard, that are unwilling to divest. But now the debate is public, investments are political if you like it or not – you’re either with the fossil fuel industry or you’re not!
Divestment is about political rather than financial power, so if the ditched shares are bought up by some faceless investor, it doesn’t really matter. The point is that a public institution has stood up to the fossil fuel industry and set out its stall for climate action, and the fossil fuel industry can’t undo that reputational hit very easily.
Oxford University Smith School ‘Stranded Assets’ Report:
‘The outcome of the stigmatisation process, which the fossil fuel divestment campaign has now triggered, poses the most far-reaching threat to fossil fuel companies and the vast energy value chain’.
Divestment movements have been incredibly powerful in the past, and there’s more information about ours here.
Where the institution chooses to ‘reinvest’ may be determined by both its mission, and its current investment strategy and asset allocation criteria. There are some examples of local reinvestment here, and it’s worth looking around for local options to suggest (without giving financial advice).
While the options for reinvestment have sometimes seemed limited, especially for larger investors, it’s important to note that:
- The number of ‘fossil free’ products out there is growing, so encourage them to take a look. Many of the large index providers now have fossil free options, as a good place to start.
- When investors (especially large institutions) have signaled that they are ready to divest in the past (eg South African Apartheid), products were created (within days) to meet their demand. Institutions that have asked their manager lineup if they can help them go fossil free, by and large, have received positive reactions.
- If you are addressing trustees, challenge them to post a request for proposal (RFP) and see what comes back.
Resources from the US:
- Green America: List of Fossil Free Products and Managers
- US SIF: Separate Account Managers (look for asterisk under the “Screening & Advocacy” tab)
- US SIF: Mutual Fund Chart (look for asterisk under the “Screening & Advocacy” tab)
- Divest-Invest: Resources (Invest tab)
- Fossil Free Indices: Fossil Free Indexes (S&P500 with Parametric), MSCI (with Blackrock), FTSE (with Blackrock)