Making Money isn’t difficult if you are mindful investor.
And today’s major investors are all mindful…
And as it turns out — most of them have seen that all the major fossil fuel companies such as British Petroleum, Exxon Mobil, and Royal Dutch Shell, have been stable and smart investments offering steady same high returns for decades. Their current prospects appear solid as well with record profits and new technologies such as fracking increasing returns from known reserves and other new reserves being found in difficult to be exploited areas such as the Arctic and elsewhere.
So people think this profitability scenario for the fossil fuel companies will continue to be the case, and fossil fuels will continue to be a Safe Harbour for our portfolios.
Yet that assumption has proven to be a fallacy, because Insurance Risk Analysis due to Catastrophic Climate Change is shattering that persistent Illusion.
Far from the Truth is where the crop of fossil fuel Investors set their sights.
The Environmental Parliament and the Green Banks have supported divestment in fossil fuel stocks not just as a viable financial strategy, but a necessary one. That’s because although we have more than enough fossil fuel reserves worldwide to depend on for some time, it would come with an unacceptably huge environmental cost.
That cost is runaway climate change and that means widespread climate chaos across the globe.
Yes, there are still ample reserves to continue building our economy based on fossil fuels, as we continue to slash & burn the rainforests, and we cut down all the trees from primary old growth forests for toilet paper too — but if we want to stabilize the climate and avoid the most catastrophic effects of climate change, we have to stop investing in extracting, refining and burning them.
Scientists and economists say that going forward we must leave 80 percent of the current coal, oil and gas reserves in the ground in order to stay below 2 degrees Celsius and avoid the worst effects of climate change (which, at current levels, we are expected to reach by 2052). According to the latest estimates, the fossil fuel industry currently holds 5 times more in reserves than we can safely burn.
Unless investors divest their current capital in fossil fuel companies, they plan on refining and burning existing reserves because they have been valued at approximately $28 Trillion dollars ($20 Trillion of this estimate, however, is considered a “carbon bubble;” more on this later).
Luckily, many investment professionals are realizing that business-as-usual cannot continue. “Climate change and the increasing scarcity of natural resources requires an investment strategy and carbon-sensitive portfolio that accounts for this transformation,” says R. Paul Herman of HIP Investor, a boutique wealth advisory and sustainability ratings firm that creates fossil fuel free portfolios for individual, family and institutional clients.
The first step is divestment and then a re-alignment of our investment strategies into carbon-neutral or negative solutions across industry classes: from agriculture to transportation to electricity.
There is a $20 Trillion “Carbon Bubble” and this is why Fossil Fuels Investments are Increasingly way too risky and can tip the Global Economy to Hell, because there is an inherent uncertainty surrounding the valuation of fossil fuel securities due to the proven carbon bubble. Thus, broader fossil fuel divestment, not only from equities but also from corporate bonds, can actually provide downside risk protection.
“Long-dated bonds of fossil fuel companies, some with maturities extending decades into the future, could readily become toxic financial assets as the credit quality of their issuers deteriorate in reaction to belated market responses to the harsh reality of stranded asset risk and systemic climate risk,” warns Joshua Humphreys of the Tellus Institute.
Market responses could include a carbon tax that will increase the price of fossil fuels and concurrently incentivize renewable energy investments. According to some estimates, average carbon prices could be more than $100 per metric ton if the full life cycle costs of carbon were assessed properly.
This isn’t just a viewpoint that small institutional investors are espousing. Groups as diverse as Shell, Mercer, HSBC, prominent insurance companies and re-issuers, Standard & Poor’s and the International Energy Agency have been giving clear warning signs about continuing to invest in fossil fuels. Experts leading the divestment conversation have different suggestions for pathways to fossil fuel divestment (see below).
From a fiduciary responsibility perspective, divestment also makes sense – as emerging risks to the value of portfolios become known, trustees and fiduciaries are obligated as prudent investors to incorporate this data into their investment allocation strategies.
Overall, if we examine fossil fuel investing from a risk and fiduciary responsibility perspective, divestment from fossil fuels should be viewed as a key for unlocking assets for much more creative and constructive uses of capital instead of a “constraint” on a manager’s investment universe.
This is what You can and should do as an Institutional Investor:
Because divestment Is The First Step along with the recognition that the long term value of Capital is Life.
Divestment is a critical first step in the transition into a carbon-neutral economy. Several road maps have been laid out that can help institutional investors navigate this process.
For investors concerned about extraordinary risk, Aperio’s report, “Building A Carbon Free Portfolio” has calculated that eliminating fossil fuel energy firms — from as few as the top 15 to as much as the entire fossil fuel production industry, does not create a significant potential penalty of theoretical return.
This report demonstrates the low risk of removing fossil fuels from portfolios, which combined with the high (and increasing) risks of holding onto fossil fuel investments makes a very compelling case that fossil fuel divestment can be a safe and effective action.
For investors who aren’t sure where to begin, Joshua Humphrey’s article, “Institutional Pathways to Fossil-Free Investing – Endowment Management in a Warming World,” creates a framework to rebuild portfolios on fossil-free investments and includes a number of institutional case studies, using three steps:
The first involves freezing fossil fuel investments in the 200 largest fossil fuel companies (measured by proven carbon reserves in oil, gas or coal). The second step builds on the first and reinvesting a minimum of 5% of the portfolio in fossil-free investments. The third and final pathway involves divestment and then strategic reallocation across all asset classes to manage climate risk and embrace sustainable investment opportunities.
For investors interested in going beyond fossil fuel divestment and beginning to do responsible investing, HIP Investor just released this report: “Resilient Portfolios and Fossil-Free Pensions,” that makes the case for fossil fuel divestment but also explains sustainable reinvestment options for each asset class, including the following key bench mark Assets: Public Equities (domestic and international), Hedge Funds, Infrastructure and Real Assets, Real Estate, Private Equity and Notes, Fixed Income (including corporate and government-issued) and Cash and Banking. There is an Appendix, which lists alternative funds and investments to consider for your portfolio and management Assets.
Because although they have been lucrative, fossil fuels are becoming increasingly risky investments, and the stakes have become too high to maintain a stable climate. A carbon-neutral, and eventually carbon-free, economy is not only possible; it has become imperative.
Divestment was started by the good folks from the Environmental Parliament a few year back. It was started as an Open Source Public Policy Initiative and it was embraced by several First People’s tribal organizations, and also by Churches and Environmental groups including Greenpeace and others. Yet it simmered quietly for a long time. Much like all overnight successes it still is ten years in the making.
Eventually Divestment came into it’s own when it hit the mainstream of the Meme-Sphere, some time late last year through the efforts of Greenpeace and the environmental nonprofit 350.org, who began advocating for Divestment, as a main angle of climate action campaigns. 350.org touts divestment as a powerful tactic in urging fossil fuel companies to begin scaling back on extraction and replace their product with sustainable alternatives such as solar and wind power.
The scientific consensus is that we have to leave untouched 80% of our coal, oil and gas reserves to keep average global temperatures from rising more than 2 degrees Celsius (3.6 degrees Fahrenheit) — the threshold for maintaining a stable climate. Yet according to the International Energy Agency, our emissions are already on a path that will increase average global temperatures between 3.6 and 5.3 Celsius (6.5 to 9.5 Fahrenheit) by the end of the century.
The threat of catastrophic climate change and its effects — flooding, drought and sea level rises — make continued investments in fossil fuel stocks risky at best. Current fossil fuel reserves may be estimated to be worth as much as $28 trillion dollars, but that constitutes a carbon bubble. Because fossil fuels, although they have been the most lucrative of investments – are becoming increasingly the most risky investment out there. That and the Corporate and Individual Leader Responsibility, along with the stakes have become too high. And your culpability is too dear — same as the likelihood to maintain a stable climate.
A carbon tax like the one levied by Australia, is also a probability everywhere across the Globe. This could raise the price of carbon to an average of more than a $100 per metric ton. This market expense, coupled with the increased costs associated with climate change, could make fossil fuels stocks toxic. And if you end up holding them — You are simply screwed.
In light of the evidence of the crippling impacts and expense climate change is expected to cause if fossil fuels continue to be burned at current rates, divestment has become a key word for environmentalists and savvy economists alike.
There are active divestment campaigns in more than 300 campuses and 100 cities and states in the United States, with six universities and 17 cities and towns already committing to divestment, including San Francisco, Seattle and Cambridge, Mass. Additionally, about a dozen religious congregations across the country have committed to divest.
It seems to me as a Long term Value Investor that the Era of Fossil Fuels is drawing to an end. And just like any other sinking industry — the blow out party and the greatest profits are a harbinger of this change…
The whole of the Fossil Fuel Industry is experiencing it’s last hurrah with the extraordinary profits to boot.
Yet the icebergs are circling as the party is going on.
Remember the Titanic?
Divestment is like fighting Apartheid. It is your moral responsibility to divest from fossil fuels. It is not an ethical question but rather a moral certainty and a duty to divest for all responsible investors.
This is my Message. And once this meme gets into the vernacular of American and International Politics we can see some real impact.
It is high time to start treating the fossil fuel companies like pariahs and willing genocidaires because of the Damage they do to our People, our Environment and perhaps most importantly — our Humanity.
As an important PE Investor — if you hold enough shares or got big funds to represent you — pull your self together and divest from all fossil fuel companies at once. This would surely impact a company’s equity value if done with panache and at the right time of the trading cycle.
But the problem with this option is that someone who doesn’t care about the issues will eventually buy those stocks at a lower price, and no attempt at proper change will be made by the company.
To clarify: The essence of shareholder activism is trying to change the actions or culture of a company in which you hold shares. And you can do this by becoming a large enough Investor and obtaining either Board positions or direct representation in the Company You seek to change. Once there you can demand change and the company’s shift away from fossil fuels and towards a sunnier future
Either way — you choose the path for Divestment — You are engaged in God’s work.
Now because corporations have so much power and so much money that government oversight doesn’t work, someone needs to hold companies accountable, and that someone is the shareholder. The Big Shareholder.
The Big Kahuna.
As such You have the right and the responsibility inherent in holding corporate shares to do the RIGHT THING.
The right to be involved in something you invested in and a responsibility to see that your investment does no harm to people.
Divestment campaigns, like boycotts, are what we think of first when we hear of corporate misdeeds. Don’t put your money into something that is harming people, the Earth, and our Civilization. And above all else please do not put your money where it harms your humanity. Because when You do this — you know Karma is coming your way and she is a tough bitch to run away from…
And much like anti-apartheid divestment efforts began in the 1960s in the Universities and picked up momentum in the 1980s throughout society at large and throughout corporate investors, today’s anti-fossil divestment campaigns have started in the churches and the Universities and are taking root.
Slowly yet surely we will win because there are student movements forming now in campuses all over US to encourage divestment from fossil fuel companies… and that brings about a sea change.
And You don’t want to get caught holding huge wads of worthless equities when the tide turns.
Don’t stay uncovered, because when the tide goes out — we get to see those swimming in the buff.
Trust that our Tomorrows will be glorious but we have to hustle today.
Our New Book CARBONOMICS is coming out soon and You can read it too.
This has just been an Introduction to some of the relevant Matters covered in the book…