Download Fossil Fuels and Sustainable Investing

Fossil Fuels and Sustainable Investing
Remarks to student environmental action coalition campaign to divest University of
New Hampshire’s Endowment from fossil fuel companies
by Joseph F. Keefe, President & CEO, Pax World Management LLC
The growing student movement focusing on divestment from fossil fuels, along with the work of
KEY TAKEAWAYS
Bill McKibben and 350.org more broadly, deserve encouragement and support—for making the
• There are essentially three
approaches to investing in
fossil fuels: A) invest in fossil
fuels without regard to
climate change, B) full
divestment from fossil fuels,
and C) partial divestment
from fossil fuels with a bestof-class/engagement
approach to investing in
energy companies.
• Divestment should be
one component of a
multi-pronged strategy to
address climate change through investments.
debate about climate change more public, more pointed, more urgent and hitting closer to home.
In the sustainable investment community, it has helped re-kindle an important conversation
about the role of fossil fuels in a sustainable investment portfolio. While there is some
disagreement between those advocating total divestment and those advocating other approaches,
the result of this dialogue and debate, I believe, will bring more attention to this critical issue
of how investments impact climate change—just as the tragedy in Newtown, Connecticut has
focused attention on investments in gun manufacturers.
My own view is that we need to deploy a host of strategies—as citizens, consumers and
investors—to address the developing catastrophe of climate change, and we must do so with
a sense of urgency and resolve. Policy makers are simply not listening. The fossil fuel industry
is not listening. Large institutional investors, foundations and endowments generally are not
listening. So, we need strategies to break through.
As investors, there are essentially three strategies or approaches one can take to investing in fossil
fuels, two of which incorporate climate and sustainability considerations into the investment
process while one doesn’t at all:
CONTINUED
•
Integrating sustainability
into an investment portfolio is
completely consistent with a
fiduciary’s duty to balance an
optimal risk/return trade-off
in the short term with an
optimal risk/return profile for
the long term.
• If your investment consultant
or advisor, attorneys or
investment committees, are
telling you that you cannot
do that, then they are simply
wrong.
Joseph F. Keefe is President and Chief Executive Officer of Pax World Funds and its investment adviser, Pax World Management LLC, as well as
CEO of Pax Ellevate Management LLC. Pax World launched the nation’s first socially responsible mutual fund in 1971 and today is a recognized
leader in the field of sustainable investing—the full integration of environmental, social and governance factors (ESG) into investment analysis
and decision making. Pax World offers a family of mutual funds, including the Pax Ellevate Global Women’s Index Fund, as well as multi-manager
asset allocation funds and separately managed accounts for institutional investors. Mr. Keefe was named by Ethisphere Magazine as one of the
“100 Most Influential People in Business Ethics” for 2007, 2008 and 2011. In 2012, he was recognized by Women’s eNews as one of “21 Leaders
for the 21st Century,” where he was the sole male honoree, and in 2014 Joe was honored at the United Nations as one of five recipients of the
Women’s Empowerment Principles Leadership Award.
1 | FOSSIL FUELS AND SUSTAINABLE INVESTING
Approach A: Invest in fossil fuels without any regard whatsoever to climate change or other
sustainability issues.
Approach B: Full divestment from fossil fuels.
Approach C: Partial divestment from fossil fuels coupled with a best-of-class/engagement
approach to investing in energy companies, favoring those with stronger commitments to reducing
carbon emissions and investing in renewable energy while also directly engaging corporate leaders
through shareholder activism strategies.
Approach A is unsustainable and irresponsible in that it simply continues the status quo and fails
to recognize the need for investors and capital markets to play a role in reducing carbon emissions
and ameliorating climate change. It effectively aligns investments with those who deny the science
on climate change or actively resist efforts to address it. By doing nothing, this investment approach
helps guarantee that nothing will be done. Unfortunately, most mutual funds, pension funds,
foundations, endowments and other institutional investors, as well as individual investors, follow
approach A, meaning that they—or at least their investments—are part of the problem rather than
part of the solution.
Approach B has been embraced by a minority of investors in the sustainable investment
community but is now being urged as an alternative strategy by 350.org and the growing student
divestment movement around the country.
Approach C is the approach taken to date by the majority of investors within the sustainable
investment industry, where many regard a complete divestment from fossil fuels as impractical
but a best-of-class approach—screening out the worst polluters while investing in the “better”
energy companies that have made larger commitments to renewables and reduced emissions—
coupled with shareholder engagement and public policy activism, is instead embraced as a bridge
strategy that encourages investment in renewable energy and the transition to a sustainable
energy economy.
Under Approach C, investor engagement through dialogues with companies, shareholder
resolutions and other strategies typically encourages companies to reduce carbon emissions as
well as other forms of pollution, optimize use of natural resources, including food and water,
actively disclose their carbon and environmental footprints, and embrace other environmental
policies and programs.
At Pax World, we employ a combination of approaches B and C. While we have historically taken a
partial divestment/best-of-class/engagement approach (Approach C) for most of our funds, we also
offer one fund* that completely divests from or avoids investing in fossil fuels (Approach B). (By
the way, we don’t invest in gun manufacturers either.)
CONTINUED
* As of April 30, 2014, Pax World offers 2 funds that completely divest from or avoid investing in fossil fuels.
2 | FOSSIL FUELS AND SUSTAINABLE INVESTING
Why do we take a hybrid approach to investing in energy companies and divesting from fossil fuels?
With respect to Approach B (complete divestment), many in the sustainable investment community
have concerns about pursuing it as an exclusive strategy. First, we are not convinced that these large
multi-national companies miss, or perhaps even notice, the small sliver of capital that is withdrawn.
Indeed, when divestment occurs the shares are simply sold on the open market and someone else
purchases them. While it’s possible that the price could be affected if large numbers of shareholders
sell their shares, these companies are so large, and the number of shares that would need to be sold
is so great, that is very unlikely that stock price will be affected at all. (Parenthetically, my own view
is that, if we really want to affect stock price and reduce the demand for fossil fuel company shares,
a much better option would be a carbon tax—but that’s another conversation. I think it’s also critical
that we demand that fossil fuel companies disclose their lobbying and political contributions so we
know what they are doing with their shareholders’ money, whether they are misusing shareholder
money to resist efforts to combat climate change, which politicians they are attempting to influence,
etc.—but that’s probably another conversation as well.)
That said, I do believe a divestment strategy, if widely embraced, could have the effect of shaming
companies, putting pressure on them to be more responsive, to embrace sustainability strategies,
and to change. So, I think divestment has a definite place within the range of strategies that we
need to deploy in order to marshal investment capital to be part of the solution rather than part
of the problem.
Another concern about divestment as an exclusive strategy is that when you sell your shares you
lose your seat at the table, your voice, your entitlement to vote your proxies at the Company’s
annual meeting, your ability to support shareholder resolutions, including resolutions asking
companies to disclose or reduce their carbon emissions, and so forth. The role of activist investors
in prompting change should not be completely discounted.
For example, over the past year shareholder resolutions have been filed with companies such as
Chevron, Exxon Mobil and ConocoPhillips asking these companies to review their exposure
to climate change risk and to adopt quantitative goals for reducing greenhouse gas emissions.
Resolutions have been filed with financial services companies such as JP Morgan Chase and PNC
Bank asking them to assess the costs and adopt programs to address the carbon emissions related
to their lending, investment and finance portfolios. In addition to these, shareholder resolutions
have been filed calling on companies in the natural gas industry to address fugitive methane
emissions, and companies in other sectors to address water use, electronics recycling and other
critical environmental issues. And these are on top of numerous shareholder resolutions asking
companies to issue sustainability reports disclosing their environmental, social and governance
(ESG) practices.
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3 | FOSSIL FUELS AND SUSTAINABLE INVESTING
This is important work, but to file such resolutions, and generally to engage companies in these
types of dialogues, you have to be a shareholder. Thus, my own view is that a complete divestment
approach, while a necessary component to a broader strategy, is insufficient as an exclusive strategy,
and needs to be supplemented with other approaches, and part of a more diversified, multipronged investment approach to addressing climate change.
Thus, in addition to lobbying for total divestment, it seems to me the student movement should
be engaging colleges and universities to take positive steps and embrace bridge strategies that at
least begin to green their portfolios in a measurable way. For example, if colleges and universities
like the University of New Hampshire (UNH) are going to study or consider their policy on fossil
fuels, there is no reason why they cannot take interim steps to green their portfolio by investing
a meaningful allocation of assets in fossil-free funds embracing Approach B as well as partial
divestment/best-of-class investment strategies under Approach C. There are plenty of asset
managers today who employ sustainable investment strategies, and a range of investment options
for UNH or any other college or university that is serious about greening its portfolio.
Colleges and universities that profess to be committed to sustainability and a clean energy future
quite simply have to take these steps. Otherwise, their investments are completely misaligned with
their professed values.
In this respect, the canard that an endowment’s fiduciary duty means that its only obligation is to
maximize return, regardless of the consequences or externalities, is utter nonsense. If a university’s
lawyers or consultants are telling them that, I would suggest they get a second opinion. There is
now a substantial body of research underscoring that companies with better ESG performance also
tend to enjoy better financial performance:
•
A joint study by Harvard University and London Business School1 found that, over an 18-year period ending December 2010, $1.00 invested in a value-weighted portfolio of “high sustainability” companies that had adopted certain environmental and social policies grew to $22.60 whereas a similar portfolio of “low sustainability” companies grew to only $14.50.
•
A June 2012 report by DB Climate Change Advisors, Deutsch Bank2 “found
overwhelming academic evidence within all (100%) of the studies showing that
firms with higher ratings for corporate social responsibility (CSR) and ESG factors
have a lower cost of capital in terms of debt (loans and bonds) and equity.” Looking at
actual fund returns in the sustainable investing space, “we found no academic studies
that found underperformance at either the security or fund level.”
•
A 2011 white paper, “Alpha3 from Sustainability,”4 SAM Research, Robeco Quantitative
Strategies concluded: “The results reveal a positive relationship between
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Robert G. Eccles, Ioannis Ioannou and George Serafeim, “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance,” Working Paper 12-035, Harvard Business School, November 5, 2011.
2
DB Climate Change Advisors, “Sustainable Investing: Establishing Long-Term Value and Performance,” June 3, 2012.
3
Alpha is a coefficient measuring risk-adjusted performance, considering the risk due to the specific security, rather than the overall market.
4
SAM Sustainable Asset Management AG, “Alpha from Sustainability,” 2011.
1
4 | FOSSIL FUELS AND SUSTAINABLE INVESTING
sustainability and financial performance, as measured by stock returns, demonstrating the superior alpha potential of the sustainability leaders... Value is created both by picking sustainability leaders and avoiding sustainability laggards... Investing in sustainability leaders ultimately contributes to superior long-term investment results with improved risk-return profiles.”
•
A July 2011 report by RCM5, a global investment advisory firm and subsidiary of
Allianz Global Investors, found: “The evidence indicates that investors’ portfolios are
not negatively impacted by the introduction of ESG criteria into the stock
selection process. But the results go further than that, and show there is a probability
of outperformance over the longer term. Investors could have added 1.6 percent a
year over just less than five years to their investment returns by allocating to portfolios
that invest in companies with above-average ESG ratings.”
I could go on, but you get the picture. There is now a well-established body of research
underscoring the financial materiality of ESG factors, that is to say, the linkages between ESG
performance, on the one hand, and financial performance on the other. Given this, one can only
conclude that, when it comes to these issues, including the risks and opportunities associated
with climate change, the “maximize return” crowd has it precisely wrong: it is ignoring these
issues, rather than integrating them, which most likely constitutes a breach of fiduciary duty.
The narrow, misguided “maximize returns” approach to fiduciary duty engages in the sort of
willful blindness that is necessary when one’s investments focus only on the short term, as if the
future didn’t matter. As long as returns on fossil fuel stocks remain high (subsidized by the lack
of a price on carbon pollution), they will remain highly attractive to asset managers seeking to
maximize short-term gains. But these fiduciaries have a duty to meet the needs of their investors,
students and future beneficiaries over the long term as well. They need to find a balance between
an optimal risk/return trade-off in the short term and an optimal risk/return profile for the long
term. Reducing investments in fossil fuel companies could help achieve this balance, protecting
investors from climate risk in their portfolios over the long term while sending a clear signal to
energy companies that they need to change.
Thus, integrating sustainability concerns into a university’s investment portfolio is completely
consistent with a fiduciary’s duty to deliver optimal returns over the long term. It is a complete
no-brainer that one should have proper regard for long-term interests and liabilities like climate
change. Any responsible fiduciary needs to be thinking about and acting on these issues.
Colleges and universities should be endeavoring to reduce their fossil fuel dependency in as
many ways as possible: setting targets for reducing carbon emissions, offsetting emissions,
boosting energy efficiency, purchasing renewable power, embracing resource optimization in a
broader sense, from electricity to water use, and greening their investment portfolios.
CONTINUED
5
RCM, “Sustainability: opportunity or opportunity cost?”, RCM Sustainability White Paper, July 2011.
5 | FOSSIL FUELS AND SUSTAINABLE INVESTING
Every college and university, every foundation, every endowment, every institution of whatever
kind that professes a commitment to sustainability, that claims to care about climate change,
needs to assure that its investments are in alignment with those stated concerns. To accept the
science on global warming, and to be committed to doing something about it, but to invest one’s
resources in a way that wholly ignores that imperative, is the mother of all inconsistencies.
It is time for every college, every university, every philanthropic foundation, every institution,
and every individual—all of us—to take, at the very least, some modest, measurable steps to
green our investment portfolios, to be part of the solution rather than part of the problem. If your
investment consultant or advisor, if your attorneys or investment committees, are telling you that
you cannot do that, then they are simply wrong.
Moreover, if this university, or any university, or any of us as individuals, thinks that the answer is
waiting for Washington to act, or waiting for the next international treaty or protocol, or otherwise
passing the buck to someone else, thinking someone else is going to solve this problem for us,
rather than looking at our own energy use, our own consumption choices, and taking responsibility
for the way we invest our own money, then again, we are wrong. And we need to be right.
So, what you are asking of the University, you should also ask of yourselves. Sustainable investing
needs to be a core component of any comprehensive strategy to address climate change. It needs
to be a core component of the way we live our lives.
By raising this critically important issue in connection with the University’s endowment, you are
taking a step in that direction. I would urge you to take the next step, and the next, and continue
down this road, so that investors far and wide—in their mutual funds, in their IRAs and 401(k)
and 403(b) retirement accounts, in their pension funds, in their university endowments—
embrace sustainability as both a moral imperative and a financial imperative, so that our
investments are no longer in conflict with, but are finally in alignment with our values.
Pax World Management LLC
Pax World Management LLC, investment adviser to Pax World Funds, is a recognized leader in
sustainable investing, the full integration of environmental, social and governance (ESG) factors
into investment analysis and decision making. In addition to the Pax Ellevate Global Women’s
Index Fund, the first mutual fund in the U.S. focused on investing in companies that invest in
women, Pax offers a family of six mutual funds, ESG Managers® Portfolios, multi-manager asset
allocation portfolios powered by Morningstar Associates, LLC, and separately managed accounts.
Across all of its funds, Pax World withholds support from all-male corporate board slates, and
working with other institutional investors, actively engages with companies to embrace gender
diversity on their boards and advance women in the workplace.
6 | FOSSIL FUELS AND SUSTAINABLE INVESTING
The statements and opinions expressed are those of the author of this report. All information is historical and not indicative of future results
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