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The Impact of Fossil-Fuel Divestment on Finance by Martin-Sebastian Abel

Under the auspices of the DZ BANK Fellowship on Transatlantic Business and Finance, Martin-Sebastian   Abel, a public affairs specialist at NRW.BANK, the state development bank of Germany’s largest state of North Rhine-Westphalia, is conducting research on divestment in the United States until July. He has interviewed professionals in finance, representatives from universities, as well as decision-makers on the local and state level about the impact of divestment, including fossil-fuel divestment, and the processes to divest pension or endowment funds in the U.S. and in Germany. Some of his initial findings follow here.

“At $8 trillion in endowments and portfolios, divestment has been described as the biggest corporate campaign of its kind in history,” Bill McKibben said proudly. The environmentalist and co-founder of 350.org wrote the article “Global Warming’s Terrifying New Math,” which was published in Rolling Stone magazine in 2012 and is considered by many as a starting point of the fossil-fuel divestment movement. McKibben pointed out recent developments and reactions to the momentum-gaining movement: Oil majors like Shell have publicly labeled divestment as a material risk, and coal executives say because of divestment it’s difficult or impossible for the companies to get investment capital. “A number of academic studies have shown that it affects both: the ability to raise capital, and it has also served a profoundly successful way to get climate change at the center of the global consciousness,” McKibben continued.

 

Indeed, as climate-related uncertainty has increased, institutional investors – such as universities, pension and endowment funds, insurance companies, and foundations – have begun to explore various approaches to managing this risk and capitalizing on its upside potential. With trillions of dollars moved out of oil and coal, the fossil-fuel divestment movement is already a powerful factor, economically and politically.

 

One school of particular interest in the area of divestment is Johns Hopkins University (JHU): Students from JHU created a Coalition for a Free South Africa in the early 1980s, whose goal was not only to get the university to end investments in South African companies but also to “campaign against banks’ investment in and loans to South Africa,” targeting Maryland National Bank and Citibank. JHU’s 2017 announcement to divest holdings in major coal producers until 2025 draws historic parallels between the South Africa divestment campaigns and coal divestment. “The university’s history of divestment is very interesting: a partial divestment in 1985 from South African companies during apartheid and a full divestment from tobacco in 1991. However, as the student proposal came to us in 2015, we had not only the discussion over the question ‘should we divest’ but, if we decide to do so, how do we do it. We also discussed very intensively over the impact of our actions. This is where we had to add to the institutional history and memory,” said Dr. Jeffrey Kahn, Andreas C. Dracopoulos Director of the Johns Hopkins Berman Institute of Bioethics and chair of the Public Interest Investment Advisory Committee (PIIAC). The resulting two-year debate process within the university was put into a remarkable scientific document, which deals with central ethical and financial aspects of divestment and evaluates the debates from peer institutions’ criteria, like Stanford and Duke. The recommendations of PIIAC resulted in the divestment of thermal coal by JHU in 2017, which fell in the wake of the Trump administration’s decision to withdraw the U.S. from the Paris climate accord.

 

On September 10, 2018, New York Mayor Bill de Blasio, along with Pittsburgh Mayor Bill Peduto, San Jose Mayor Sam Liccardo, and San Francisco Mayor London Breed, announced the launch of the International Fossil Fuel Divestment Partnership Network along with C40 cities around the globe. “We’ve allied more than 15 cities to join us in our effort to fully divest our pension funds from fossil fuel and hope to be able to host the C40 meeting in New York City in January,” said Lolita Jackson, Special Advisor for Climate Policy and Programs in the NYC Mayor’s Office. She pointed out the challenges of dealing with different pension systems in the process of aligning cooperation between the cities and creating a common path. “A current issue we face is also the ratings of sustainable investments. We have a fiduciary duty to protect pensions, so we’re very careful when new investments come with different asset classes. This is something we’re working on together with experts within the C40.” Jackson also administers activities for New York City’s participation in global climate and resilience networks, as well as the United Nations. She is part of the team responsible for OneNYC, NYC’s overall strategic plan for climate risk. The city’s roughly $191 billion pension system is made up of five separate funds, each governed by its own board of trustees. “Three of

 

the five boards – the New York City Employees’ Retirements System, Teachers’ Retirement System, and the Board of Education Retirement System – voted to pass the resolution. We do feel strong support from the unions in this process, which is very important for us to succeed in this together, as a coastal city facing climate risks at our doorstep.”

 

The fossil-fuel divestment movement has gained steam, with investors, churches, cities, and universities pulling their cash out of coal and oil companies – referring not only to their social responsibility and ethical concerns over the impact of their investments but also the fear of facing huge losses due to current political and economic developments. The strong consideration of environmental, social, and governance (ESG) indicators is already influencing investors, and the institutional push for harder ESG guidelines as well as their enforcement affects banks and insurance companies. Alessia Falsarone, SASB FSA, Head of Sustainable Investing at PineBridge Investments in New York, a private, global asset manager focused on active, high- conviction investing, summarizes the developments in recent years: “With not only scientific support but with the drive from government entities, the market has realized that climate risk is actually posing a serious financial risk through the stability of the world finance sector. Climate is one of the most pressing topics today and for the future.”

 

But with the sale of assets also comes the fact that the participation rights in a company are given up. There is no possibility to hold a company accountable for their actions. A concern that has been voiced on many campuses and also by investment managers: “Several years ago, before shareholder engagement was a common practice, our Investment Stewardship team reviewed the executive compensation plan of a large technology company. The plan raised some red flags for us. It wasn’t shareholder-friendly, it was too large relative to its peers’ compensation plans, and it lacked the kinds of long-term incentives that are good for Vanguard fund investors. We reached out to the company, expressed our concerns, and asked to meet with the board. We got no response. A few weeks later, the Vanguard funds cast an advisory vote against the CEO’s pay package. The company called to ask us why. We again expressed our concerns. The company replied: ‘Vanguard runs index funds. We didn’t think that you cared.’” A representative from Vanguard explained the company’s Investment Stewardship program. With over $5.3 trillion in assets under management, Vanguard is the second-largest provider of ETFs in the world.

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