"Should I invest in companies that I know are wrecking the planet?"
In simpler times, "serious investors" didn't worry with the social aspects of investing in tobacco or alcohol or defense contractors. Our pragmatism stated that legal products were acceptable investments in a free society.
That was prior to our knowledge of climate science... before the flooding of Pacific islands and Alaskan coastal towns... and well in advance of breaching 400ppm of CO2 in the atmosphere -- a level not seen in the totality of human history... That was before we learned that the publicly traded energy companies own enough of the stuff in the ground to literally cook the planet in its own juices.
This one is harder to ignore.
So, true to form, college students are leading the charge, as they did in the mid-1980's -- pressuring the big college endowments to divest from companies doing business with a regime that perpetuated the now infamous apartheid system of discrimination. Their little stunt turned into shareholder resolutions and ultimately changed history.
The kids are getting some traction again. Ten US cities have pledged to divest their modest sums invested in fossil fuel companies. (The real test will be when their massive public employee pension plans are confronted with the same lobbying.) Brown University's investment committee just recommended divestment from all coal companies. Other smaller schools have taken more aggressive steps toward full divestiture. Individual investors are taking notice.
Over the past few months, we at Boardwalk Capital have been struggling with this conundrum. Clearly, the current path is unsustainable. But how would divestment impact performance? And would divestment have any real impact on these companies or the planet? After all, these companies won't really feel the pain of our selling these shares. The real pressure would come from using less of their products.
In the end, two arguments did sway our thinking: Risk and Reputation.
The risk element is real. Were climate/energy policies to change over time to ensure that most of these reserves remain in the ground, then upwards of 60 - 70% of these companies' market value would be impaired. Since oil, gas and other energy firms account for about 15% of the world's stock market value, this could be a massive hit to savings, pension plans and other investment pools. This is serious "fiduciary duty" stuff, and boards would be wise to consider the issue. If nothing else, market investors may demand a discount to account for increasing regulatory risk (putting downward pressure on share prices.)
Reputation is another issue. Oil and gas companies have carefully cultivated their corporate reputations. Despite spills, disasters and explosions, they remain decent corporate citizens in the eyes of the public. Should divestiture programs take on an "apartheid" flavor, the valuations accorded to these firms could be decreased. "Rogue industry" status seldom carries a P/E premium.
With these risks in mind, and the societal costs clearly before us, Boardwalk Capital undertook a research project to determine the performance impact of a zero fossil fuels portfolio. In this exercise, we proportionately increased other economically sensitive sectors to account for the missing "beta". The results were surprising -- no performance penalty was evident and volatility was only modestly higher.
So, investors then need to ask a different question: If past performance is similar, and certain specific risks are reduced, what's holding you back?
What do you think? How should investors attack this monumental challenge?
And what if there were a performance penalty? How much is "too much" to pay for a livable planet?
