The re­spon­si­ble in­vestor’s guide to cli­mate change

Financial Mirror (Cyprus) - - FRONT PAGE -

Around the world, in­sti­tu­tional in­vestors – in­clud­ing pen­sion funds, in­sur­ance com­pa­nies, phil­an­thropic en­dow­ments, and uni­ver­si­ties – are grap­pling with the ques­tion of whether to di­vest from oil, gas, and coal com­pa­nies. The rea­son, of course, is cli­mate change: un­less fos­sil-fuel con­sump­tion is cut sharply – and phased out en­tirely by around 2070, in favour of zero-car­bon en­ergy such as so­lar power – the world will suf­fer un­ac­cept­able risks from hu­manin­duced global warm­ing. How should re­spon­si­ble in­vestors be­have in the face of th­ese un­prece­dented risks?

Di­vest­ment is in­deed one an­swer, for sev­eral rea­sons. One is sim­ple self-in­ter­est: the fos­sil-fuel in­dus­try will be a bad in­vest­ment in a world that is shift­ing de­ci­sively to re­new­ables. (Though there will be ex­cep­tions; for ex­am­ple, fos­sil-fuel devel­op­ment in the poor­est coun­tries will con­tinue even af­ter cut­backs are de­manded in the rich coun­tries, in or­der to ad­vance poverty re­duc­tion.)

In­deed, di­vest­ment by lead­ing in­vestors sends a pow­er­ful mes­sage to the world that cli­mate change is far too danger­ous to ac­cept fur­ther de­lays in the tran­si­tion to a low-car­bon fu­ture. Di­vest­ment is not the only way to send such a mes­sage, but it is a po­ten­tially pow­er­ful one.

Fi­nally, in­vestors may di­vest for moral rea­sons. Many in­vestors do not want to be as­so­ci­ated with an in­dus­try re­spon­si­ble for po­ten­tial global calamity, and es­pe­cially with com­pa­nies that throw their money and in­flu­ence against mean­ing­ful ac­tion to com­bat cli­mate change. For sim­i­lar rea­sons, many in­vestors do not want hand­gun man­u­fac­tur­ers or tobacco com­pa­nies in their port­fo­lios.

Yet there is also an eth­i­cally re­spon­si­ble and prac­ti­cal al­ter­na­tive to di­vest­ment that can help steer fos­sil-fuel com­pa­nies to­ward the low-car­bon fu­ture. As ac­tive, en­gaged share­hold­ers, in­sti­tu­tional in­vestors can use their own­er­ship (and, in the case of large in­vestors, their public voice) to help per­suade com­pa­nies to adopt cli­mate-safe poli­cies.

Amer­i­can uni­ver­si­ties are on the front line of this de­bate, pushed by their stu­dents, who are young enough to face the brunt of cli­mate change in the com­ing decades. The stu­dents are right to be frus­trated that most uni­ver­sity en­dow­ments have so far been pas­sive on the is­sue, nei­ther di­vest­ing nor en­gag­ing as ac­tive in­vestors. For ex­am­ple, Har­vard Uni­ver­sity Pres­i­dent Drew Gilpin Faust sharply re­jected di­vest­ment in 2013; the pur­pose of Har­vard’s en­dow­ment, she ar­gued, is to fi­nance the uni­ver­sity’s aca­demic ac­tiv­i­ties. Though she did say that Har­vard would be an ac­tive and re­spon­si­ble share­holder, she of­fered no de­tails about what such en­gage­ment might look like.

Har­vard and many other uni­ver­si­ties (in­clud­ing our own, Columbia Uni­ver­sity) have long been com­mit­ted to act­ing as re­spon­si­ble in­vestors. Sev­eral have com­mit­tees that ad­vise uni­ver­sity trustees on en­vi­ron­men­tal, so­cial and gov­er­nance (ESG) is­sues in their port­fo­lio, most com­monly when proxy votes in sup­port of ESG pro­pos­als are to be held. Yet, few so far have ap­plied the ESG prin­ci­ples to their en­dow­ment’s fos­sil­fuel hold­ings.

To­day’s stu­dents make co­gent ar­gu­ments that the case for fos­sil-fuel di­vest­ment looks sim­i­lar to the case for tobacco di­vest­ment. Both rep­re­sent mas­sive risks to hu­man well­be­ing.

Be­fore di­vest­ing from tobacco com­pa­nies, Har­vard wrote to them, re­quest­ing that they ad­dress the eth­i­cal is­sues in­volved in sell­ing tobacco and their ad­her­ence to World Health Or­gan­i­sa­tion guide­lines. The com­pa­nies ei­ther were un­re­spon­sive or chal­lenged the ev­i­dence that smok­ing was linked to dis­ease.

Sim­i­larly, in de­cid­ing whether to di­vest, re­spon­si­ble in­vestors like uni­ver­si­ties should ask four key ques­tions of the oil, gas and coal com­pa­nies in their port­fo­lio: - Has the com­pany pub­licly and clearly sub­scribed to the in­ter­na­tion­ally agreed goal of lim­it­ing global warm­ing to 2 de­grees Cel­sius above pre-industrial lev­els, and to the lim­its on global car­bon-diox­ide emis­sions needed to meet that goal? - Will the com­pany pledge to leave busi­ness groups that lobby against ef­fec­tive cli­mate poli­cies to achieve the 2C limit? - Will the com­pany agree to end any ex­plo­ration and devel­op­ment of un­con­ven­tional re­serves (for ex­am­ple, in the Arc­tic and much of the Canadian oil sands) that science has shown to be in­con­sis­tent with the 2C limit? - Can the com­pany demon­strate that it re­mains a good in­vest­ment, de­spite the tran­si­tion to low-car­bon en­ergy sources and tech­nolo­gies (for ex­am­ple, by demon­strat­ing its own plans to make such a tran­si­tion or high­light­ing its con­tri­bu­tions to poverty re­duc­tion)?

If com­pa­nies can give con­vinc­ing an­swers to th­ese four ques­tions, they may in­deed re­main part of the port­fo­lio, and re­spon­si­ble in­vestors can work with them as part of the cli­mate so­lu­tion, rather than con­clud­ing that they are part of the prob­lem and part­ing ways. For those com­pa­nies that duck the ques­tions, in­clud­ing by claim­ing that the world will not in fact en­force the 2C limit, di­vest­ment would make sense on both fi­nan­cial and eth­i­cal grounds, as such com­pa­nies are clearly not pre­pared to con­trib­ute to cre­at­ing a low-car­bon econ­omy.

Of course, the need for cli­mate ac­tion does not stop with in­vestors; sus­tain­able con­sump­tion and pro­duc­tion prac­tices by busi­nesses and in­di­vid­u­als must be part of the so­lu­tion as well. The tran­si­tion to a safe, low-car­bon fu­ture re­quires all parts of so­ci­ety to act re­spon­si­bly and with fore­sight. As lead­ers in ed­u­ca­tion, re­search, and prob­lem solv­ing, uni­ver­si­ties have a unique re­spon­si­bil­ity and op­por­tu­nity to lead, in­clud­ing as re­spon­si­ble and eth­i­cal in­vestors.

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