If 350.org founder Bill McKibben says it, we in the cleantech world generally listen. So, when McKibben outlined recently how new data affirm the solidity of fossil fuel divestment, we were awake and engaged. And why not? While it’s important to direct our investments into ethical spaces, we also want to make sure we’re making a good financial move when we do so.
How Have Original Hypotheses Played Out About Divestment As a Good Financial Move?
When the idea of divesting from fossil fuels was introduced about a decade ago, most green advocates were supportive of the idea. However, to ground the divestment movement as a good financial move, 2 questions emerged.
- Would divestment achieve tangible results? Minimally, it seemed as if the divestment movement would fracture the gloss of the fossil-fuel industry. In the long term, lessened stockholder support would constrain the industry’s ability to raise investment money. McKibben says this goal has “been borne out over time,” noting that stock picker Jim Cramer revealed on CNBC a year ago, “I’m done with fossil fuels. . . . They’re just done. You’re seeing divestiture by a lot of different funds. It’s going to be a parade. It’s going to be a parade that says, ‘Look, these are tobacco, and we’re not going to own them.’ ”
- Would investors lose money? Early proponents such as the investor Tom Steyer argued that, because fossil fuel threatened the planet, it would come under increased regulatory pressure, even as a new generation of engineers would be devising ways to provide cleaner and cheaper energy using wind and sun and batteries. The fossil-fuel industry fought back—the Independent Petroleum Association of America, for instance, set up a website crowded with research papers from a few academics arguing that divestment would be a costly financial mistake. One report claimed that “the loss from divestment is due to the simple fact that a divested portfolio is suboptimally diversified, as it excludes one of the most important sectors of the economy.”
McKibben had been a college student when divestment campaigns helped undercut corporate support for apartheid. To him and his cohort, divestment “seemed a similar fight.” And the battle began. In July, 2012, he published an article in Rolling Stone calling for a broader, large-scale campaign. The philanthropic Rockefeller Brothers Fund said that divestment had not adversely affected their returns, and the investment-fund expert Jeremy Grantham published data showing that excluding any single sector of the economy had no real effect on long-term financial returns. Yet McKibben notes that the Rockefeller Brothers and Grantham were active participants in the fight against global warming, so the fossil-fuel industry intimated that they might have been biased in their conclusions.
Fast forward to 2021, and portfolios and endowments have committed to divest nearly 15 trillion dollars. Just this month, the University of Michigan and Amherst College made pledges to divest. Carbon Tracker, which helps markets understand and quantify implied risks from fossil fuels, indicates that solar and wind potential is far higher than that of fossil fuels and can meet global energy demand many times over, unlocking huge benefits for society. Their research says that, with current technology and in a subset of available locations, we can capture at least 6,700 PWh pa from solar and wind, which is more than 100 times global energy demand.
Blackrock Report Rallies the Climate Risk Constituency
BlackRock CEO Larry Fink released a letter to clients at the beginning of this year, saying that climate risk would lead them to “reassess core assumptions about modern finance.” A recipient of the the first Institutional Investor of the Year award by Institutional Investor magazine, Fink acknowledged that the climate crisis will now be the most significant determining future factor of every business — it will prompt a massive movement of global capital. “I think people will look back in 2021 and find that those companies that are not focusing on climate change and how it impacts their company will trade at a lower and lower P/E, and companies that are front-footed and focused on it will be trading at higher P/Es,” Fink said in a congratulatory interview.
BlackRock carried out research over the past year for 2 major clients who were interested in divestment but wanted to make sure the it was a good financial move: the New York City teachers’ and public employees’ retirement funds. A Freedom of Information Act disclosure revealed that “divestment actions by hundreds of funds worldwide” showed that investors “experienced no negative financial impacts from divesting from fossil fuels. In fact, they found evidence of modest improvement in fund return.”
The report’s executive summary states that “no investors found negative performance from divestment; rather, neutral to positive results.” At the end of the report came the piece de resistance: divested portfolios “outperformed their benchmarks.”
McKibben believes these findings will gradually filter out into the world’s markets, “doubtless pushing more investors to divest.” He calls upon BlackRock to act on its findings as the investment house that handles more money than any firm in the world. He argues that, given the climate emergency, “it would be awfully useful if, over a few years, BlackRock eliminated the big fossil-fuel companies” from its indexes.
And McKibben takes it one step further, too. Since BlackRock is the biggest asset manager on earth, with about 8 trillion dollars available to it, it might utilize its Aladdin software system more efficaciously to assist the divestment movement. Last year, the Financial Times called Aladdin the “technology hub of modern finance” and reported that public documents from just a third of Aladdin’s clients show assets topping $21 trillion. Casey Harrell, who works with Australia’s Sunrise Project, an NGO that urges asset managers to divest, believes that the BlackRock system likely directs at least $25 trillion in assets. “BlackRock’s own research explains the financial rationale for divestment,” Harrell told McKibben. “BlackRock should be bold and proactively offer this as a core piece of its financial advice.”
Just this week, US President Joe Biden announced at the Leaders Summit on Climate the commitment to cut US greenhouse gases 50% to 52% below 2005 levels. If Blackrock’s Fink truly wants to live up to his Investor of the Year status, he will support the Biden-Harris administration toward these goals and direct the assets and technologies within the umbrella of the Blackrock reach toward climate action. What a difference that decision would make — both for the planet and for those looking for assurance that green stocks are a good financial move.
Photo by Carolyn Fortuna