The campaign to get investment funds to divest holdings in fossil fuel companies has become the issue du jour of late. The Stanford University endowment fund recently dumped its holdings in coal companies. Pope Francis has pledged his support for the movement; the UN climate change chief has urged religious groups to divest--should advisors be ready to answer questions on the issue from clients?
A report released at the US Socially Responsible Investing Conference 2014 suggests, yes. According to the survey the number of investment managers offering fossil-free portfolios to clients increased by over 50% in the past year. "...the growing drumbeat of responsible investors seeking investment strategies with little or no exposure to coal, oil and gas extraction companies will only increase as more evidence of the negative effects of climate distribution reverberate," according to Steven Schueth, president of the company producing the survey.
According to the survey 36% of investment professionals offered investors the option of explicitly excluding the fossil fuel industry from their investments, up from just 22% a year previous. Seventy six percent of those questioned believe the risk of investing in fossil fuel companies is growing; 56% said they were concerned about the possibility of stranded assets.
But not everyone is convinced divestment is the best approach to environmentally-aware investing.
Simply selling the stock of fossil fuel companies is not as easy as, say, divesting from tobacco--the heart of the modern economy is the hydrocarbon-fuel system, and so the issue is a bit more complex. Organizations like Harvard University have refused to divest on the grounds that shareholders can have a greater impact through engagement with fossil fuel companies, an approach investment professionals in Canada advocate as well.
Bob Walker, vice-president of NEI Ethical Funds, has watched the debate with interest. "It is hard to know if this movement has legs. It is in its early stages. But I thought Occupy would last too," he says. Walker explains that Ethical Funds, has, on occasion, resorted to outright divestment. But the company recognizes the practical realities of modern economy and prefers to work through engagement. "There are multiple tools for dealing with climate change. We prefer engagement. There are multi-stakeholder approaches that work well. We've never invested in Exxon Mobil, which has funded of anti-science climate change research. We divested from Talisman when CEO was talking out against climate change. So we have used that option, but only strategically. "
Walker explains that Ethical Funds has had good results working through organizations like the Boreal Leadership Council that has had success working with First Nations groups and companies in the extractive industries to preserve forests important to caribou herds. Working with the Canadian Oil Sands Innovative Alliance, a group that brings together various energy companies to develop technology to mitigate the effects of energy production, is another success story. "We're not solely responsible, but we think we've had an effect through these engagement strategies. We've had some success," he says.
Ethical Funds has also had success getting companies to issue plans about carbon pricing scenarios, which would not have occurred through divestment. "Everyone knows this is coming down the pipeline. Most companies in the oil patch have begun to think about how they are going to respond, we think, partly as a result of our dealing with these companies. They have issued plans for a price on carbon. They understand this is going to impact their license to do business and so they want the government to do something, they want a price on carbon," he says. "We need an energy strategy for Canada."
Walker explains the endowments talking about divestment are broadly invested and so have many other environmental exposures in their portfolios. "I'm not sure these divestment activists have done their research," he says. He worries the bdemand to divest could even have negative effects. "The danger is that this polarizes the debate. We've been using oil for over a century. Hydrocarbons provide 80% of our energy. This is the basis for our entire way of life. This is a collective problem. Everyone is in this together. I'm worried we're going to spend years we don't have arguing about this. I'd rather talk to companies," he says.
Walker will debate this very issue in coming weeks at the upcoming 2014 Canadian Responsible Investment Conference May 26-28, Toronto