Since our work began in 2013, the Presbyterian Foundation has created a fossil free screened option for Presbyterian bodies. You can start the process of moving to that fund by visiting their website.
Click here for more information about the fossil free option offered by The Board of Pensions.
Value of Presbyterian Investments: Our denomination has approximately $10 billion in investments overseen by two entities, the Board of Pensions (BOP) and the Presbyterian Foundation. A relatively small percentage less than 3% in each program is invested in fossil fuel stocks, but we are still talking about a big number. As of August 31, 2013, BOP staff reported that it had investments in 45 of the companies listed in the Carbon Tracker 200 list1 for a market value of $176 million. It also held 6 bonds with a market value of $10.4 million for a total of $186.4 million. Based on 2013 data, we learned that our Foundation had around $47 million in fossil fuel holdings. This is over $200 million of our money being used to produce and market greenhouse gases.
Dual Function of Investments: According to the General Assembly, “our investments function in two different ways in relation to the church’s objectives. First, they are a source of income for the support of the mission or institutional objectives of the church. Such a purpose clearly seeks maximum sustainable financial return and preservation of the capital base within generally accepted restraints. Second, investment holdings are in themselves a resource, an instrument for pursuing mission objectives of the church directly. Investments represent a certain degree of power and influence. They bring access and rights with other social institutions. We can use them to support enterprises engaged in endeavors that the church finds worthy and we can decide to bar our investments or divest holdings to influence the activities of businesses which are contrary to church missions.” 2
What Owning Stocks Means: When we own a stock it means that we embrace the company business model and we believe it will provide a financial return. In the past we have recognized that certain companies’ business models such as those in alcohol, gambling, pornography and in some military/defense related businesses are not compatible with our beliefs and we have gotten rid of those stocks or refused to invest in them. The duality of our investments has not been a problem for us in the past, nor should it be for fossil fuel companies whose business model if played out would make the planet unlivable. We clearly have a history of aligning our investments with our values.
What Divesting Fossil Fuel Holdings Means: You might say that Wall Street is in the business of divesting daily, as they sell stocks all day long and reinvest in others. It is the opposite of investment. It means we will sell our fossil fuel holdings. Divesting fossil fuel stocks over a five year period which the overture calls for is part of our fund managers’ fiduciary responsibility. In fact, according to Judith Freyer,3 Senior Vice President, Treasurer and Chief Investment Officer with our Board of Pensions noted that our holdings change on a daily basis. With divestment they would be guided not just with economic signals, but with physical signals from nature, i.e. climate change, and with the moral positions of the denomination.
Risks with Divesting: There are always risks associated with managing funds, but skilled fund managers over time generally can minimize risks. Theoretically the risk to our overall holdings with divesting fossil fuel stocks could be minimal given that our fossil fuel holdings are a relatively small portion of our portfolios; the divestment overture asks for it to be done over a five year period; and the money can be reinvested wisely. Administrative costs will occur, but they are part of the business of managing investments and cannot be avoided.
The good news is that multiple studies have shown that portfolios without fossil fuel holdings can do as well as those with fossil fuels or even better. 4 Losing out on future performance is of concern but research by IMPAX5 demonstrated that replacing Morgan Stanley Capital International Energy (eliminating fossil fuel holdings) with FTSEs6 Environmental Opportunities Energy Universe there would have been no impact on performance over the seven year period modeled with a tracking error7 of just 1.6%. This is compared to an industry average tracking error of 5% for actively managed portfolios.
Morgan Stanley Capital International8 (MSCI) conducted two back tests9, a 5 year and a 10 year comparing an index with fossil fuels from the Carbon Tracker list with one without. In its 5 year study, the fossil fuel reserve-owning companies in the MSCI ACWI(All Country World Index) Select Energy Producers IMI(Investible Market Index) ended the period with lower returns relative to the MSCI ACWI IMI (without fossil fuels). A 10-year time series study showed a similar overall result to the 5-year time series. There was a 1% tracking error.10 In other words, the fossil fuel free portfolio did slightly better.
All of this in combination is good news that illustrates that not having fossil fuels in one’s portfolio does not equate to financial loss.
Risks with not Divesting: Risks with not divesting may be greater than with divesting. There are signals everywhere from nature and from financial institutions that our future will be different from our past and if we continue to model our investments on the past, we will lose money.
IMPAX Investment Management issued a report last year which said, “Within the mainstream financial community, energy-focused professionals are raising concerns about the financial risks posed to investment portfolios by climate change. Mainstream analysts are building on research from the Carbon Tracker Initiative, http://www.carbontracker.org (a London-based NGO that has carried out ground-breaking work linking climate science and the potential value at risk in the world’s listed fossil fuel companies from efforts to tackle climate change). Carbon Tracker has warned that regulations to limit carbon emissions could significantly impact the market value of fossil energy companies as it becomes uneconomic to extract their fossil fuel reserves. (These are referred to as “stranded assets”). Carbon Tracker has calculated that 80% or the world’s proven fossil fuel reserves cannot be consumed without exceeding the international target to keep global warming under 2 degrees centigrade. This implies that the world’s listed fossil fuel companies, whose share prices are partly based on their proven reserves, are grossly overvalued.” 11
A Hong Kong and Shanghai Banking Corporation (HSBC) report showed that there is a devaluation risk up to 60%.12 The biggest impact, says HSBC, will be on lower prices caused by reduced demand for their product, particularly oil.
The October 30, 2013 Wall Street Journal lead opinion piece was entitled, “The Coming Carbon Asset Bubble”. Its message was that fossil-fuel investments are destined to lose their economic value. Investors need to adjust now. Leading investors, such as Jeremy Grantham and others say that the battle over climate change has left the science and now is on market shares.
A rational investor would consider this worth exploring and perhaps a warning that we may be dealing with a “carbon bubble”, not dissimilar to the tech or housing bubbles which devastated many financially over the last few years. The tech bubble wiped out $5 trillion of assets in just a couple years and the housing bubble wiped out $7 trillion devastating the middle class and destroying 30% of the value of most homes. $12 trillion disappeared. And, indeed, it was in the news that the financial community wants the dangers of climate change to investors quantified. The Carbon Asset Risk Initiative, a coalition of seventy investors collectively managing more than $3 trillion signed letters last September to 45 of the world’s biggest fossil fuel-dependent companies asking them to study and disclose the risks that climate change poses to their investments. Those signatories include the state treasurers of California, Maryland, Oregon, Vermont, Connecticut and Rhode Island, as well as the comptrollers of the state and city of New York. Investment firms in Scotland, Great Britain and Australia also signed onto the letter.
Fossil Fuel Free Investing is an Opportunity: Specific investment options are NOT being recommended, but are being presented as an illustration that there is a wealth of new opportunity for reinvesting our funds. Clean tech investing in water, housing, waste reduction, agriculture, transportation and energy issues is one option with tremendous growth potential. Examples of investment opportunities in water include desalinization, reuse, waste water treatment, infrastructure maintenance and replacement to pump technology. There is hope that a combination of factors will see demand for low carbon energy, products and services accelerate in the coming years, creating enormous demand for capital and many opportunities for investors. 13 During this transition period, MSCI ESG14 has custom indexes and is in the process of producing a fossil free index.
And One Last Word: We recognize that our fund managers may be uncomfortable taking this step and feel that it is risky and costly. We ask all considering divestment to carefully weigh the costs and time involved in changing our portfolios against the staggering costs of climate change to our brothers and sisters and all of creation and its devastating permanence.
Leviticus 19: 16 “Do not do anything that endangers your neighbor’s life. I am the Lord.”
1 Carbon Tracker 200 List: The list is from the Carbon Tracker Initiative which aims to improve the transparency of the carbon embedded in equity markets. This is done by identifying the scale of unburnable carbon currently listed on stock exchanges around the world in order to demonstrate the systemic risk to markets. To read more go to: http://www.carbontracker.org/team/about-us
2 The Divestment Strategy: Principles and Criteria. 196th General Assembly. 1984. Pages 196-197.
3 February 20, 2013 email response to Pam McVety requesting list of fossil fuel companies in the BOP portfolios.
5 Beyond Fossil Fuels: The Investment Case for Fossil Fuel Divestment. IMPAX Asset Management. 2013.
6 Financial Times and the London Stock Exchange (FTSI) is a share index of 100 companies listed on London Stock Exchange with the highest market capitalization.
7 Tracking error is a measure of how closely a portfolio follows the index to which it is benchmarked.
8 Morgan Stanley Capital International compiles influential indexes tracked by thousands of fund managers. MSCI's indexes cover thousands of stocks under various categories and are used as benchmarks to measure the performance of portfolios.
9 Back testing is jargon used in financial industries to refer to testing a trading strategy or predictive model using existing historic data. It seeks to estimate the performance of a strategy if it had been employed during a past period.
10 Responding to the Call for Fossil-fuel Free Portfolios. MSCI ESG Research. Frequently Asked Questions. December 2013.
11 “Beyond Fossil Fuels: The Investment Case for Fossil Fuel Divestment. IMPAX Asset Management. 2013
12 Oil and Carbon Revisited: Value at risk from unburnable reserves. January 25, 2013. http://gofossilfree.org/files/2013/02/HSBCOilJan13.pdf.
13 “Beyond Fossil Fuels: The Investment Case for Fossil Fuel Divestment. IMPAX Asset Management. 2013.
14 MSCI ESG Research provides in-depth research, ratings and analysis of the environmental, social and governance-related business practices of thousands of companies worldwide.