An Engaged Conversation on Divestment

Blog entry Jack Ehnes

A movement to divest from fossil fuel companies stirs the emotions of many. The urgency behind such requests reflects increasing concern about global warming. While there is no doubt about the underlying devastating risks of climate change driving this advocacy, the question of divestment versus engagement as an effective strategy warrants exploration.

At the Ceres Conference this May 2013, a panel consisting of David Blood, Cofounder and Senior Manager of Generation Investment Management LLP, Bill Mckibben, Environmental Activist/Author and President/Cofounder of 350.org, and I, offered insights on investment strategies to address climate change. During our discussion, it was pointed out that substantial research firmly demonstrates rising temperatures in our global climate threaten to permanently alter our environment for the worse.

Despite the evidence, businesses and policy-making bodies are either moving too slowly, ineffectively or not at all to reduce fossil fuel consumption. As a result, an emboldened younger generation has launched a grassroots effort calling for dramatic and immediate action to divest from fossil fuel companies. Their belief is that divestment by investors, institutional and individual alike, can create financial market pressure to bring about carbon-use change. Much like a tough love approach, the idea is to compel movement towards responsible alternative energy sources.

The discussion became intrinsically more complex when it was pointed out that the core business practices of the vast majority of companies either directly produce or benefit from fossil fuels. Clearly, American dependency on fossil fuels dominates every facet of businesses both willing and unwilling to engage in alternative energy solutions. Without an alternative, the motivation to surrender an extremely lucrative and foundational endeavor complicates any incentive to change. Divestment in this situation is akin to asking a coffee shop to stop serving coffee. 

Divestment’s Track Record

Divestment can occur either because of an investment strategy or for social, moral or political purposes. The divestment from fossil fuels as proposed by divestment activists operates similarly to a boycott. It’s a voluntary abstention from investing, profiting, and dealing with an organization or business as an expression of protest. In this case, divestment bears the risk of adversely affecting an investment portfolio and severs any chance to advance positive change through shareholder advocacy.

The comparison used to promote divestment as a social, moral and political strategy takes root in the South African Anti-Apartheid movement in the 1980s. At the time, economic pressure was viewed as the vehicle to influence change. Divestment, along with legislation, boycotts and national consensus, were employed and are collectively credited by many with the success of this campaign.   

CalSTRS largely eliminated investments in the tobacco industry in 2000 when it changed its investment benchmarks, and in 2009, completely divested from tobacco based on our divestment policy and the 21 investment risk factors identified in our investment policy for mitigating environmental, social and geopolitical risks. The 21st risk factor, the risk to an investment’s long-term profitability from business exposure to an industry that makes a product that is highly detrimental to human health so that it draws significant product liability lawsuits, government regulation, United Nations sanctions and focus, and avoidance by other institutional investors, was the basis of our separation from an industry that profited at the expense of clear human health risks.

CalSTRS is a patient, long-term investor, and the ultimate economic impact of divestment from tobacco cannot yet be determined. Similarly difficult to assess is the social impact of this action. What we do know is that CalSTRS no longer exerts institutional strength in this market sector and cannot attempt to leverage that financial strength to achieve reform.

Engagement Proves Effective

Based on our experience, an effective strategy to mitigate risk, such as climate change, is through engagement. Aligned interests working in concert can influence capital market change. Engagement operates under the principle that inappropriate actions call for correction.

Last year CalSTRS targeted 100 companies in the Russell 1000 index portfolio which lacked sufficient disclosure of energy and water use management. More than 30 companies responded with evidence of their desire to either release efficiency efforts or consider alternative approaches. On the heels of this progress, we’ve expanded our engagement to fossil fuel valuation. 

CalSTRS strongly believes the issues presented in Carbon Tracker’s Unburnable Carbon 2013: Wasted capital and stranded assets report call for action. Of the top 200 global fossil fuel companies listed on the Carbon Tracker website, CalSTRS has engaged 44 U.S. companies held in our portfolio requesting disclosure. Engagement through educated dialogue will be far more productive in accomplishing our goal that these companies publicly price the risk posed by unburnable fossil fuels.