April 05, 2013
On Divestment and a Portfolio Free of Fossil Fuels
by Robert Kropp
The debate over the investment implications of divestment continues, but the Green Century Balanced
Fund has a carbon footprint less than half that of the S&P 500 without sacrificing financial
The conversation about investing and the fossil fuel industries has taken a dramatic turn in recent
months. Spurred in part by an article
authored by Bill McKibben of 350.org and published in
Rolling Stone last summer, students on campuses in the US are organizing to pressure their colleges
and universities to divest their holdings in fossil fuel companies.
The argument for divestment makes
sense on a number of grounds, not the least of which are the long-term prospects for investment
portfolios. A recent an
alysis by Patrick Geddes of Aperio Group found that even a portfolio that excluded all fossil
fuel companies would incur significantly less financial risk than would the practice of active
"Screening negatively affects a portfolio's risk and return," Geddes
concluded, "but…the impact may be far less significant than presumed."
And such an
analysis does not even take into account the long-term investment implications of the argument that
if climate change is to be limited to a global increase in temperatures of two degree Celsius, no
more than 20% of all fossil fuel reserves accounted for at present can be burned. "Governments and
global markets are currently treating as assets, reserves equivalent to nearly five times the
carbon budget for the next 40 years," a 2011 report from Carbon Tracker asserts.
"There are more fossil fuels listed on the world's capital markets than we can afford to burn
if we are to prevent dangerous climate change," the report continues.
The changing nature
of reality does not appear to be deterring mainstream institutional investors from pursuing a
course that largely ignores critical issues such as climate change. At a meeting of the Quantitative Work Alliance for Applied Finance,
Education and Wisdom (QWAFAFEW) scheduled for April 16th in Boston, Mark Kritzman of Windham
Capital Management will speak on The Cost of Socially Responsible Investing.
the issue of divestment from fossil fuel companies, Kritzman wrote, "Recent public discourse,
unfortunately, seems to ignore the inarguable truth that divestment would be costly."
financial cost of excluding investments based on criteria other than expected performance can be
substantial, potentially amounting to hundreds of millions of dollars," he continued. "Even if they
conclude that countering climate change would warrant such a sacrifice, proponents of divestment
should offer some evidence or reasoning that it is the best course of action."
Zevin of Zevin Asset Management took issue with
aspects of Kritzman's analysis, stating, "If one believes, as many do, that the long term prospect
for fossil fuel companies is dismal because of increasingly expensive and dangerous extraction
methods and the inevitability of having to bear the environmental costs of their product through a
carbon tax, or permit, or subsidy to renewable competitors, then one might have an argument that
divestment is both effective at hastening better behavior from companies and a better educated and
proactive citizenry AND a wise investment decision."
And on the subject of divestment,
John Fullerton of the Capital Institute wrote, "There
is no denying that the annual financial returns of a portfolio restricted from investing in one of
the largest sectors of the economy will indeed behave differently than the benchmarks against which
endowments have traditionally chosen to measure themselves."
However, Fullerton continued,
"It is clear that business as usual with regard to our fossil fuel based energy system takes us
well past two degrees of warming and represents a clear and immediate threat to the future of
civilization…logic is not working. We know what we need to do logically to avoid the catastrophic
consequences of climate change, but we are way off course."
According to Fullerton, "By
raising divestment as a call to action, the students have opened the door to the really important
conversation university endowments and all institutions with responsibility over large pools of
capital should be wrestling with at this pivotal moment in history."
contemplating a portfolio free of fossil fuel components, reliable options already exist. One is
the Green Century Balanced
Fund offered by Green Century Capital
Management. Not only has the Balanced Fund largely outperformed the S&P 500 Index over the past
five years; according to a recent analysis undertaken for Green Century by Trucost, the Fund's carbon footprint is 49.5% less carbon
intensive than that of the S&P 500.
"The Balanced Fund's low carbon intensity continues to
be directly tied to the Fund's avoidance of the Oil and Gas, Utilities, and Basic Resource sectors,
as well as stock selection within the Insurance sector," Green Century stated.
Green Century became the first mutual fund in the US to analyze and make public its carbon
footprint. "Companies with lower carbon intensities will likely be best positioned to maintain
financial competitiveness in a carbon constrained economy," Green Century stated. "Investors may
also benefit from a higher standard of transparency and disclosure from the financial services and
mutual fund industries."
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