Should you divest from fossil fuels in your investment portfolio?
Listening to Jeremy Grantham speak at an Impact Investing Conference in New York City February 2020.
Fossil fuel divestment campaigns are making headlines.
Universities and pension systems are facing mounting pressure to divest from fossil fuels as protesters organize and engage in more aggressive tactics, such as the storming of the Harvard-Yale football game last November. There are high-profile supporters on both sides of the debate.
Jeremy Grantham is a billionaire investor who is pro-divesting from fossil fuels. He famously predicted the 2000 and 2007 market bubbles and argues that fossil fuel companies are overpriced in the market and removing them from your portfolio would not negatively impact your performance.
Bill Gates is a billionaire philanthropist who is against divesting from fossil fuels, arguing that divestment removes zero emissions. Rather, investors should focus on funding disruptive startups, such as Beyond Meat, that will have a measurable impact on the environment if successful.
The argument for divesting from fossil fuels:
Divestment advocates want the fossil fuel industry to become a pariah, similar to tobacco.
ExxonMobil, in particular, knew in the late 1970s that continued fossil fuel use was causing dangerous and irreversible climate change. Similar to the tobacco industry, they went to great lengths to hide their cutting-edge research and spread misinformation, deceiving the public. It took decades for public sentiment to shift towards Big Tobacco, eventually eroding their power in Washington. As a result of a series of Medicaid lawsuits, they were forced to agree to the largest settlement in U.S. history at $206 billion.
Divestment advocates want to initiate a similar shift with fossil fuel companies. Investors, such as Jeremy Grantham, consider divesting a prudent investment move given the risk of lawsuits, the likelihood of a carbon tax, and the loss of business as the world transitions away from fossil fuels.
The argument against divesting from fossil fuels:
Divesting doesn't hurt fossil fuel companies or improve the environment.
Divestment opponents believe in climate change and understand the pressing need for action, but they don't believe that divesting from fossil fuels is an effective solution. Previous divestment campaigns have shown that divestment does not materially affect share price in the long-term. Not only does it not work, but you also lose your seat at the table. If you are a shareholder, you can vote proxies, demand transparency, and continue to exert pressure to encourage forward-looking strategies. That power is lost when you divest.
ESG integration is a more holistic approach.
Systematically assess how all companies, not just fossil fuel companies, are performing on environmental, social, and governance issues.
Some fossil fuel companies are attempting to diversify and become leaders in the transition towards renewable energy sources. BP’s new CEO recently pledged to reduce its net carbon emissions to zero by 2050 and Shell is dipping its toe into low-carbon technologies. Others, like Chevron, are not. When you divest from all fossil fuels you are ignoring these nuances. Investors can utilize ESG (environmental, social, and governance) ratings as a way to keep companies accountable. Rating agencies, such as MSCI and S&P, will be watching to see if BP and Shell follow through on their promises.
Similar to a CrossFit leaderboard that is posted for everyone to see, ESG ratings provide a level of public transparency that can pressures companies to improve. Rating agencies are witnessing this in practice - companies will contact them, willing to provide more data than before and open to engagement because lower ESG ratings could mean missing out on investment dollars or being excluded from a benchmark. Between divestment and ESG integration, only ESG integration is actively working to improve a company’s operations.
Divestment is equivalent to walking away from a company and allowing them to operate in the shadows. ESG integration is a more calculated and less emotional approach. When you integrate ESG ratings into your investment process, you direct more of your money towards companies willing to make changes today that can benefit environment, society, and investors in the future.
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors. Follow her on Twitter.