ESG: When Divesting Fossil Fuel From Portfolios Causes More Harm Than Good

Opportune LLP

March 2020

Why divesting fossil fuels in the name climate change may have broader implications in the larger context of Environmental, Social and Governance (ESG) initiatives.

By Patrick Long

As the debate around climate change continues to heat up, more and more institutions and investment funds are dropping fossil fuels from their portfolios. These bodies are succumbing to internal and external pressures from students, staff and workers to change their investment strategies in hopes of affecting the overall climate and our environment. For many, the victory in pressuring a company to withdraw funding from fossil fuel companies is a way to restore balance to sustainability and avert climate change. However, while that might look good on paper, it’s worth thinking through the implications of these actions in the larger context of Environmental, Social and Governance (ESG) initiatives.

Recent examples of educational institutions pulling out of fossil-based investments include the University of California dropping fossil fuels from its $80 billion portfolio in September 2019. On November 23, 2019, Harvard and Yale students took to the football field at halftime demanding that both universities divest funds from fossil fuels, calling attention to climate change. On February 5, 2020, Harvard faculty voted in favor of the endowment divesting from fossil fuels. On February 6, 2020, Georgetown University announced that it would make no new investments in companies whose business is fossil-fuel dependent. Georgetown will freeze investments in fossil fuels and divest within 5-10 years completely from existing investments. On the financial side, on February 25, 2020, JP Morgan announced that it would withdraw support for some fossil fuels.

"By divesting from companies that focus on fossil fuels, investors hurt sustainable opportunities concentrating on Social and Governance initiatives."

Each of these examples focuses solely on Environment, ignoring the Social and Governance components of ESG. Over the years, pop culture and music have given rise to important trios. The three stooges are one of the first to come to mind. The comedy of Larry, Curly and Moe worked as slapstick because of the trio. What about the complex relationships that guided the mythos of Star Wars with Luke Skywalker, Princess Leia and Han Solo? Can you imagine two of these characters without a third? So too is the notion of ESG. ESG is a combination of all three components, not just conveniently picking and choosing one over the other.

With universities, corporations and individuals divesting from fossil fuel companies, they’re focused almost entirely on only one aspect of ESG – namely the “E” component. These companies openly tout a divestiture from fossil fuels. They openly push sustainable agendas. However, in fact, with a blanket divestiture from all fossil fuel companies, these funds are, in fact, doing a disservice to the Social and Governance aspects. It’s like revising Clint Eastwood’s classic movie to be “The Good” without “The Bad or The Ugly.” It just doesn’t work to conveniently exclude those aspects where the energy industry is focused and pretend that these companies lack empathy or concern for sustainable practices.

In March 2019, the American Fuel & Petrochemicals Manufacturers shared a vision for the industry that included several sustainable goals. One such goal was the development of new gasoline and fuels to support more stringent emissions standards. Another goal focused on diversity in the workforce, especially in the C-suite. A third goal focused on producing more fuels to meet higher demands while at the same time reducing emissions by 70%. Included in this vision was also the development of the more stringent IMO 2020 low-sulfur fuel for ocean-going vessels and marine traffic.

ESG: No Silver Bullet To Combating Climate Change

Are these goals perfect? Not completely. Are they the panacea or silver bullet to end climate change? No, not exactly. However, they do offer hope for an industry that has been demonized by investors and those choosing to only focus on the environmental issues.

By divesting from companies that focus on fossil fuels, investors hurt sustainable opportunities concentrating on Social and Governance initiatives. Social Sustainability issues include equality of benefits for all employees, parental leave, improved labor/management relations, occupational safety and health, improved training and education for part-time and full-time employees and diversity and gender equality initiatives. Governance Sustainability issues include the ability for companies to positively influence environmental, social and economic development as a result of governance practices and market presence. Companies develop a long-term perspective and focus on sustainability goals, making it a vision that’s core to the business. 

British Petroleum (BP plc) announced on February 12, 2020 that it would be carbon-neutral by 2050. Though somewhat vague on the details, the ambitious plan covers many facets, including investing in renewable energy and produce lower-carbon products. The company touts it’ll be a strong voice advocating for progressive climate policies.

Canada-based Cenovus Energy is another company focused on ambitious targets and goals by 2030. The company plans to reduce emissions by 30% and keep absolute emissions flat. It also plans to invest $1.5 billion of additional spending with indigenous businesses and it has declared it’ll reclaim 1,500 decommissioned well sites, as well as complete a $40 million caribou habitat restoration project.

Chevron Energy Corp.’s website touts its global initiatives that feed directly to the United Nation’s Sustainable Goals. For example, Chevon has focused on gender equality as evidenced by a 2018 study that noted women are paid 99.9% of their male counterparts. While not 100%, this goes a long way toward sustainability and social equality. Partnerships worldwide in impoverished areas like Bangladesh, Kazakhstan and Niger have worked to pump investment dollars into infrastructure and local businesses.

"Instead of taking the politically expedient and easy route of publicly removing these stocks from portfolios, advocate for more transparency and more focus on Social and Governance aspects."

These companies are a small sampling of hundreds and hundreds of others that are doing their part locally or globally in support of sustainability goals linked to the United Nations’ ambition of combating climate change. Are these programs and initiatives enough to completely reverse climate change? Probably not on their own. However, they represent an industry that’s working hard to push towards sustainability even as world demand for natural resources continues to increase.

So, instead of taking the politically expedient and easy route of publicly removing these stocks from portfolios, advocate for more transparency and more focus on Social and Governance aspects. Hold companies accountable to their words for Environmental improvements. But, as the saying goes, “don’t cut your nose off despite your face.” In the end, that’s short-sighted and will only harm the larger sustainable positive strides that energy companies are making.

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Patrick Long is a Director in Opportune’s Process & Technology practice. Patrick has over 20 years of experience in providing clients with energy trading and risk management, packaged software implementation, trading and risk processes and business process automation. Patrick leads the BI initiative within the firm. He focuses on applying BI tools (e.g., Spotfire) to client data in order to allow proper insight for management around both upstream and downstream business issues. His current focus for clients is making sense of inventory and the supply chain to address management questions. Prior to joining Opportune, Patrick worked in the energy consulting trading and risk systems practice at Accenture where he managed project teams through the entire process of software selection to successful implementation of trading and risk management systems for energy trading entities.

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