Divestment refuseniks may yet save the planet

Do the math, the campaign slogan reads. There is growing pressure for asset owners to declare they will go "fossil free" in an attempt to halt climate change.

The campaign calls for pension funds and endowments to sell holdings in the 200 companies with the most potential carbon emissions stored in coal or oil reserves.

Students and environmental campaigners have been quick to join this pressure group, targeting universities and endowments in particular. Among others, Stanford University and the Rockefeller Brothers Fund have made commitments, but Harvard University and the Wellcome Trust have refused to sign up, making them the targets of furious criticism.

Closer inspection shows that in many cases the refuseniks may yet make a bigger impact on the fight to protect humanity from climate change than the funds that have joined up.

"One of the biggest problems with divestment is that selling the stocks means somebody is buying them. So you are putting more ownership in the hands of people who care less than you," says Gerrit Heyns, co-founder of Osmosis Investment Management, which specialises in sustainable investment. "If divestment is 100 per cent successful, nobody who cares will own those companies."

The campaign argues that only by selling the shares will things change. The shareholder engagement advocated by responsible investors "can be an effective tool to make small reforms at a company", says the Fossil Free website.

Fiona Reynolds, managing director of the Principles for Responsible Investment, is less dismissive of both shareholder action and divestment. "The divestment campaign has been important to bring focus to the issue. It has sent a strong message to the market and policy makers that investors are concerned."

Despite acknowledging the symbolic value of divestment, The PRI's work has focused on a harder challenge: "If we are going to need fossil fuels for the next 30 years, how do we manage that transition?"

The answer for many large asset owners is more nuanced than simply throwing a limited number of companies out of the portfolio.

The Wellcome Trust, the UK's biggest charitable foundation, has an £18bn endowment fund that aims to return 4.5 per cent a year in real terms. It has refused to sign up to the divestment campaign on the grounds that not doing so "maximises our influence as investors", says director Jeremy Farrar in a comment piece.

"We understand the attraction of the grand gesture," he says, "but such a gesture can be made only once. By maintaining our positions, we meet boards again and again, supporting their best environmental initiatives and challenging their worst."

He points out that the Wellcome Trust has already reached the positions Stanford and the Rockefeller Brothers Fund, the philanthropic foundation, have been lauded for aspiring to, with no investments in coal and tar sands projects or in thermal coal.

This is a significant point perhaps not fully understood by advocates of divestment: many of those making commitments are in fact making less comprehensive plans than their supporters might approve.

A typical commitment, according to Ms Reynolds, would involve no new investment in oil and tar sands and a promise to divest from companies with more than 50 per cent of their revenue from thermal coal over the coming five years.

Given that oil and tar sands are among the most expensive and inefficient ways to produce energy, and the current low oil price means they are unlikely to be profitable in the foreseeable future, these are hardly difficult investment decisions.

This is the thesis of the Carbon Tracker Initiative, a think-tank hoping to make capital markets take the economic and financial implications of climate change seriously. "What we support is the case that at some point the burning of fossil fuel will come to an end. The business model of oil companies is looking increasingly unsustainable," says Mark Campanale, founder of the CTI. "A lot of people think this is cyclical [because of the low oil price], but we are making the case it is structural."

Mr Campanale refuses to be drawn on the relative merits of divestment and engagement, saying only "all investors are doing is making a judgment call".

It is possible to marry divestment and engagement. This is the strategy of the New School, the New York university.

"The cookie-cutter approach, which gets a lot of play, is pretty unsophisticated," says Tokumbo Shobowale, chief operating officer at the New School. "If you care about carbon emissions, why would you own large automakers or plane builders?"

Although the New School's $340m endowment fund has stated it will reduce its holdings in the 200 companies on the divestment campaign's list of shame to less than 1 per cent of its assets within five years, this commitment is part of a wider initiative to reduce its own carbon footprint and study ways to reduce demand for carbon globally.

"Carbon is intrinsic to our entire global economy. If we were to go to zero immediately, that would have a devastating impact," says Mr Shobowale, who has done his own math.

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation