Fund manager raises fossil fuel divestment doubts

Environmental upside of draining investment dollars from oil and gas companies debated

Investors are under increasing pressure to divest their stock in fossil fuel companies, but some analysts say divestment is an ineffective tool against climate change | QiuJu Song/Shutterstock

Campaigners pushing university endowments and other major investment funds to divest their portfolios of fossil fuel companies won’t turn the tide against global carbon emissions.

So says an executive of a major Canadian mutual fund company focused on socially responsible investments.

Bob Walker, vice-president of Ethical Funds and environmental, social and governance services for NEI Investments, said investors who merely pull dollars out of fossil-fuel companies forfeit the opportunity to work with them to improve their environmental performance and help the global energy system find cleaner alternatives.

However, the divestment movement and concerns over fossil fuel investment continue to gain momentum.

According to a recent Financial Times story, 66% of respondents to a OnePoll survey of 2,000 adults across the United Kingdom agreed that fossil-fuel investments are getting increasingly risky.

In this country, student and faculty-driven divestment initiatives have thus far taken root in 30 Canadian universities, including the University of British Columbia (UBC), where earlier this year faculty voted 62% in favour of the institution divesting its fossil fuel holdings.

A lot of money is riding on divestment decisions.

UBC’s endowment fund, for example, is valued at roughly $1.1 billion.

According to a Pacific Institute for Climate Solutions (PICS) fossil fuel divestment white paper written by UBC researchers Justin Ritchie and Hadi Dowlatabadi, the average university or pension fund portfolio holds 10% in oil, gas and coal investments.

Published earlier this year, Fossil Fuel Divestment: Reviewing Arguments, Implications and Policy Opportunities points out that there’s an estimated US$50 billion in the investor portfolios of more than 180 institutions and 656 wealthy individuals pledging to go fossil-fuel-free.

But Walker, who hosted the “‘Manning Up’ for Tackling Climate Change” session with Preston Manning at the May 31 to June 2 Responsible Investment Association conference, pointed out that divesting from natural resource and energy companies, especially for Canada-focused investors, is a challenge in part because those companies make up a significant percentage of the Toronto Stock Exchange listings.

According to Vancouver-based Genus Capital Management, fossil fuel extractors, transmitters and emitters account for an estimated 30% of the S&P/TSX composite index.

Fossil fuels still meet more than 80% of primary global energy demand, and because they’re also fundamental to global transportation systems and economies, Walker said moving to viable alternatives is going to take decades, “not six months. … We don’t have a magic bullet at this stage.”

That reality is echoed by major global energy companies.

Earlier this year, Suncor Energy’s (TSX:SU) vice-president of investor relations participated in a climate forum panel discussion at the University of Victoria co-hosted by PICS.

In a company blog post after the event, Steve Douglas said his question-and-answer session with the university’s students “was not very constructive.”

Most students, he said, chose to ask “polarizing ‘gotcha questions,’ which didn’t contribute to a constructive conversation. This was disappointing.”

Were people to dig deeper into the divestment movement, Douglas said, they would find that divestment is an ineffective tool for addressing climate change.

“Even if the campaign were wildly successful, it wouldn’t result in reduced fossil fuel usage or greenhouse gas emissions. … People who take the time to genuinely understand the issues will recognize that solutions will come from a combination of education, conservation, regulation and adaptation.”

From an investment perspective, however, oil’s recent price plunge has helped the divestment argument.

As of March 31, Genus Capital’s Genus Fossil Free Dividend Equity and Genus Fossil Free CanGlobe Equity funds had returned 22.3% and 25.5%, respectively, since they were launched in April 2013.

The returns, according to Genus, compare with a 21.7% return for the investment management company’s blended benchmark made up of 40% S&P/TSX composite, 30% S&P 500 and 30% MSCI EAFE (Europe, Australia, Far East).

Dowlatabadi, a Canada Research Chair and a UBC professor in applied mathematics and global change, said that had the university divested from fossil fuels five years ago, “we would have been in a better financial position.”

But he agreed that shifting from fossil fuels to low-carbon alternatives, especially in transportation, poses a far bigger challenge than previous divestment campaigns that successfully targeted such issues as South Africa’s apartheid government.

He also conceded that because the electricity generated to drive alternatives like electric vehicles often comes from coal and other heavy emitters of greenhouse gases, they’re not as green an alternative as they appear.

But he pointed to emerging technologies, including Audi’s “blue crude” synthetic diesel-like liquid distilled from atmospheric carbon dioxide and Calgary-based Carbon Engineering’s $4.5 million CO2 extraction plant being built in Squamish, as the way forward.

He disagreed that investor activism to change companies from within is a better strategy than withdrawing investment support from them.

Dowlatabadi said divestment’s principle of public shaming, a big part of its success in the court of public opinion, coupled with the advent of viable investment alternatives like fossil-fuel-free green bonds, will do more to achieve the goal of bursting the “carbon bubble.”

He said major energy companies will eventually be responsible for the transition out of fossil fuels, “but they won’t move until they see the writing on the wall.”

A growing number of corporate leaders, including executives of major fossil fuel companies such as Royal Dutch Shell and BP, see carbon pricing as key to weaning the world from fossil fuel dependence.

Walker agreed.

“We all recognize that a price on carbon is the most effective way we can address the challenges.”

Proceeds of that pricing system, whether from a cap-and-trade or other system, he said, should be funnelled into an innovation fund to underwrite clean-energy research and development.

But according to the International Energy Agency’s 2015 Energy and Climate Change: State of Play report, global carbon-trading markets face significant geographic and market-reform challenges. It estimated that 2014 carbon emissions trading initiatives had an aggregate value of US$26 billion and covered only 11% of global energy-related carbon dioxide emissions.

Walker added that one of the divestment movement’s major flaws is its “presumption that fossil fuel companies, and Canadian business in general, stand in the way of government coming up with mechanisms to impose that [carbon] price. The fossil fuel industry in this country, including the fossil fuel industry association [Canadian Association of Petroleum Producers], have expressed for a number of years now support for a price on carbon, as has the business community in this country at large.” 

He added that depoliticizing the environment should be a major initiative on both sides of the debate.

“Right now, it’s a polarized situation, and that is not helpful.”