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April 08, 2013

From Divestment to a Sustainable Investment Strategy
    by Robert Kropp

The authors of Crossing Thresholds: From Fossil Fuel Divestment to Sustainable Investment argue for the inclusion of environmental and social thresholds in investment decision-making and corporate management.

SocialFunds.com -- When a capitalist who says that some of his political views "would be considered right-wing" assails President Obama for failing to adequately address climate change—"Where are Obama’s environmental experts hiding? Where was Obama himself on the climate bill?" asks Jeremy Grantham, co-founder of GMO, an investment management firm—then it's not hard to believe that we could well "unnecessarily ruin a pleasant and currently very serviceable planet just to maximize the short-term profits of energy companies and others."

Embedded in Grantham's piece is a box entitled Carbon Math Made Simple, in which he summarizes the findings of recent reports such as that of Carbon Tracker. The math really is simple: in order to keep climate change from spiraling disastrously out of control, 80% of the reserves currently on the books of fossil fuel companies will have to stay in the ground. In the meantime, those reserves are considered assets by companies and markets.

I was led to Grantham's piece by an article entitled Crossing Thresholds: From Fossil Fuel Divestment to Sustainable Investment. The articles co-authors bring a wealth of experience to the theory and practice of sustainable investment. Bill Baue is a former writer for SocialFunds.com who now consults with organizations on sustainability. Cary Krosinsky is a former Senior Vice President of Trucost and is now Executive Director of Network for Sustainable Financial Markets (NSFM). Mark McElroy is the Executive Director of the Center for Sustainable Organizations (CSO).

In a recent interview with SocialFunds.com, McElroy observed, "Most of what passes for mainstream sustainability measurement reporting fails to express sustainability performance in any literal or authentic way." An extreme example of this failure could be the presence of unburnable reserved as assets on the books of fossil fuel companies.

Mainstream attention to the issue can be attributed to the growing movement on college campuses in which students call on endowments to divest their holdings in fossil fuel companies. Crossing Thresholds explicitly congratulates Bill McKibben and 350.org for encouraging the divestment campaign, and adds, "This campaign establishes the notion of thresholds in the popular consciousness, which carries implications far beyond divestment."

Back when the Gulf of Mexico oil spill disaster made a mockery of BP's presence on lists of top sustainable companies, Krosinsky told me, "Divesting is a powerful tool, and if you don't use it enough you don't have it in your toolbox." But more importantly to the authors, "divestment ripples outward to more profound transformative implications for how business and investment function — namely, within a 'safe and just operating space for humanity' that respects not only planetary boundaries but also social equity."

Krosinsky also edited Evolutions in Sustainable Investment: Strategies, Funds and Thought Leadership, and in his foreword to that book he noted that the vast majority of capital invested sustainably continues to focus on exclusionary screens; however, he wrote, "Take a purely values-based approach, and you risk missing the very same practical opportunities in eco-efficiency and innovation, where the sustainability we require will come from."

The article's authors introduce the concept of thresholds as a means of moving beyond divestment in order to develop positive screens that would contribute to the practical opportunities referred to by Krosinsky. "Carbon screening is a complementary strategy that achieves the same ends through means that many fiduciaries will likely find more defensible, based in empirical methodologies," they write.

But thresholds-based screening, which in the environmental space is based on the amount of carbon that can be safely burned, can be applied to "all potentially material sustainability impacts." To apply thresholds to issues of social justice, the authors cite a 2012 paper authored by Kate Raworth of Oxfam UK, in which social impacts are visualized as being in the shape of a doughnut. The outer perimeter is supplied by environmental thresholds while the inner perimeter, or the foundation, consists of basic issues of social justice such as health, social equity, and income.

"The social foundation could be achieved for every person alive today with strikingly few additional resources," Raworth wrote. The objectives of eradicating poverty while reducing global resource use demand, she continued, "far greater global equity in the use of natural resources, with the greatest reductions coming from the world’s richest consumers."

Effective positive investment screens based on thresholds will drive changes in corporate behavior as well, the authors of Crossing Thresholds point out. "Applying thresholds at the company level may be complex, but it's not rocket science. Many companies are now doing it, and have been doing it since the mid-2000s."

At the heart of the authors' argument is the fact that the applications of thresholds to investing and corporate behaviors are inevitable if the crises facing us today are to be addressed. "We welcome this evolution, which brings the business and investment communities into closer alignment with real world limits and demands, finally decoupling finance from fantasy," they conclude. "Herein lies opportunity, as companies and investors that work within a safe and just operating space nurture a sustainable and thriving world, which is really our only option going forward."

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