Clean Yield to Testify for Massachusetts Fossil Fuel Divestment Bill


Testimony regarding H.2269 before the

Massachusetts Joint Committee on Public Service

June 9, 2015

My name is Shelley Alpern, and I am here to testify in favor of House Bill No. 2269.
I am the Director of Social Research and Shareholder Advocacy at Clean Yield Asset Management, a registered investment advisory firm based in Norwich, Vermont (although I live, work and pay taxes in Massachusetts). Clean Yield manages socially and environmentally screened investment portfolios for high net worth individuals and families. We have approximately $300 million in assets under management, and have a large Massachusetts clientele.
We testified in favor of this bill nearly two years ago and are pleased to do so again. Much has happened in this short time. A growing number of large institutional investors are taking measures to divest some or all of their fossil fuel holdings, the latest being Norway’s $890 billion government pension fund; the Church of England; the Rockefeller Brothers Fund; and dozens of cities and towns including Seattle, San Francisco, Portland (OR), Minneapolis, Cambridge and 8 other Massachusetts towns. Philanthropies managing over $4 billion have divested. Stanford University, the Rhode Island College of Design and Syracuse University have divested. This is just the beginning of what the University of Oxford has observed to be the fastest-growing divestment campaign in history.
We believe that is the case because the financial case for fossil fuel divestment is at least as compelling as the moral one.
Since Clean Yield’s launch more than 25 years ago, we have managed fossil fuel-free portfolios for many of our clients; our chief investment officer formerly managed an environmental mutual fund with a fossil fuel-free mandate. Even before climate change scientists began to sound the warning about the risks of what is increasingly “unburnable carbon,” Clean Yield and its clients felt there were valid reasons to avoid fossil fuel investment. Oil, gas and coal extraction have always been highly polluting, and fraught with negative environmental and social impact. As the world’s remaining fossil fuel reserves are mostly in remote places, or increasingly difficult to extract — e.g., the tar sands, hydrofracking and Arctic drilling – these so-called “negative externalities” will not go away.
Some say that shareholders who care about these collateral impacts should remain invested in these companies and press them to act more responsibly. We have experience in this area. Where our clients have held stock in fossil fuel companies, we have used our ownership positions to engage with management to press for strict environmental and human rights policies, and we have sometimes filed shareholder proposals. But we have found that while fossil fuel companies have made some marginal improvements to some of their environmental practices as a result of these pressures, none have ever come close to acknowledging that it has simply become too dangerous for the world to buy and use their products in perpetuity. Every oil and gas company continues to predict increasing demand for their product. Every oil and gas company also continues to assert that even while the world gets ready to impose international carbon constraints in Paris later this year, that their company will come out ahead of the game. This is true even of those who recently stated their support for a carbon tax.
It is also a fact that the world’s major oil companies continue to invest billions into exploration. The bottom line is that fossil fuel companies’ core business models are on a collision course with the urgent need to reverse the upward trend in global carbon emissions, and those core business models aren’t changing. Shareholder proposals have made no dent on these companies’ worldview. Continuing to invest in fossil fuel companies amounts to a vote of confidence in their plans, a vote that is profoundly inconsistent with Massachusetts’s admirable initiatives to curb greenhouse gas emissions and protect our vulnerable coastal cities and towns.
The February 2015 report No Time to Waste by the Massachusetts Senate declared, “Massachusetts leads the nation when it comes to addressing climate change.” The 67-page report identifies the specific threats that climate changes poses to Massachusetts, including the impact of rising temperatures and increasing storms on agriculture; damage to the seafood industry from rising ocean temperatures; the impact of extreme heat days on vulnerable populations; risks to public health from an increase in illness-bearing insects; infrastructure damage; and more.[1]
Massachusetts has responded to these challenges with the Global Warming Solutions Act, the Green Communities Act, and with its participation in the Regional Greenhouse Gas Initiative, to name a few efforts. Massachusetts is not in denial about the fact of climate change or its seriousness.
So we ask you today: does it make sense for Massachusetts to invest in the very companies whose activities contravene all of the state’s efforts to stem climate change? Does it make sense to invest state employees’ and pension beneficiaries’ long term holdings in companies whose long term futures cannot be profitable and growth-oriented without consigning the planet to steadily rising temperatures? Who for that very reason will face, at some point, a deflation in value that has come to be known as the “carbon bubble”?
Will Fossil Fuel Divestment Put Massachusetts At Financial Risk?
Some claim that fossil fuel divestment would place PRIT at undue risk, add costs, and hurt performance. Some of these arguments have been based on faulty premises, which we unpack below.
Risk. In the investment world there are many types of risk. Three types are most relevant here. The first two are volatility of portfolio value and tracking error versus a benchmark index. Divestment of a broad sector of the equity investment spectrum like fossil fuel stocks rightly triggers concerns about increased risk. Fortunately, a 2014 study by Aperio Group[2], an investment management firm specializing in custom indexing, shows that avoiding the Oil, Gas and Consumable Fuels industries would result in tracking error versus the Russell 3000 benchmark of just 0.77% and increased volatility of just 0.13%. That is, after removing fossil fuel companies from their universe of stocks, they were able to build a portfolio with an annual standard deviation from the benchmark of just over three quarters of one percent but which overall was virtually no riskier in terms of total volatility. It is important to note that tracking error cuts both ways. Half the time tracking error works in one’s favor (outperforming the benchmark), and half the time works against you (underperformance).
One may flip this risk question, however, to ask what is the downside risk of continuing to invest in fossil fuels? The Aperio study doesn’t examine this, and neither do many critics of divestment. But as it becomes starkly clear that we must drastically reduce the burning of fossil fuels or face dire repercussions, government policies and regulations that substantially raise the costs of extracting and burning fossil fuels are increasingly likely in the coming years. The International Energy Agency stated in its World Energy Outlook 2012, “No more than one third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2°C goal, unless carbon capture and storage (CCS) technology is widely deployed.”[3] That means that two thirds of the proven reserves that fossil fuel companies have on their balance sheets must remain in the ground if we are to maintain a livable planet. Society may yet decide that we cannot let those reserves be extracted and consumed at any cost. Just yesterday the G7 leaders agreed that the burning of fossil fuels must be phased out by the end of the century, though scientists tell us we need to do it sooner than that. Investing in companies with these potentially stranded assets on their balance sheets carries substantial risk that is not yet reflected in their stock prices. So while the quantitative figures above may point to some marginal increase in risk by divesting from fossil fuels, there may well be a risk reduction in avoiding owning assets that will one day be written down in value because that value cannot be realized. Indeed, Standard & Poors Ratings Services issued a report stating, “The financial models that use past performance and creditworthiness may be insufficient to guide investors looking to understand the possible effects of future carbon constraints on the oil sector.”[4]
Closely related is the opportunity cost of tying up capital in fossil fuel investments at the expense of forgoing potential returns from less carbon-intensive alternatives. As one report stated, “In this light, placing bets against the house on the long-term profitability of fossil-fuel companies looks more like speculation than long- term capital stewardship.”[5]
Performance. Now to the so-called return penalty of divestment. The Aperio study showed that during the 26-year period of the study there was no return penalty. In fact, the fossil fuel free U.S. stock portfolio they constructed outperformed the market by 0.05% annually from 1/1/1988 to 12/31/2013. The point is not that the fossil fuel free portfolio will necessarily outperform in the future, but rather that it is totally feasible to construct fossil fuel free portfolios that perform almost exactly in line with the broad stock market.
Transaction costs. Purchasing and selling stock involves transaction costs. That brings me to the subject of the hard costs of divestment. In calculating transaction costs for divestment, we have observed that some critics have estimated transaction costs to be 4-5 times greater than what we ourselves have experienced when unloading positions.[6]
On the other hand, the costs could be more substantial for exiting comingled or alternative investments. In addition, management fees are likely to be higher on actively managed funds than passive index funds. The investment industry is already responding to the demand for fossil fuel free portfolios, but the development of passive vehicles is in its infancy. This is certainly an area of real concern that deserves more study as fossil fuel free offerings emerge to meet the needs of institutional investors.
In our view, the five-year time frame set out in S. 2269 is a reasonable one that allows adequate time to responsibly transition out of fossil fuels. The key is not to speedily divest, but rather to prudently get on a path to divestment.
What good will divestment do?
In summary, divesting from fossil fuels will reduce exposure to stranded assets whose value is increasingly at risk in a world that is beginning to recognize and act upon the reality that most fossil fuel reserves cannot be burned. It will stop putting Massachusetts’ dollars to work financing energy sources that perilously undermine our ecological support systems. Divestment will signal fossil fuel companies that unless they re-conceptualize themselves as energy companies and act accordingly, they can’t take investment dollars for granted. It will signal federal policy makers that Massachusetts unequivocally supports strong action on climate change. And it can be undertaken without putting the retirements of state workers in jeopardy.
For these reasons, we urge this Committee to support S. 2269 and put Massachusetts on a path to divesting its public pension funds of fossil fuel stocks. Thank you for your time.
[1] No Time To Waste: Our climate clock is ticking and our natural resources, public health and the future of our economy are at stake, a report of the Senate Committee on Global Warming and Climate Change at
[2] Building a Carbon Free Equity-Portfolio – Updated available at
[3], p. 3.
[4] , p. 2.
[5] Humphreys, Joshua, Institutional Pathways to Fossil-Free Investing: Endowment Management in a Warming World, May 2013. The report is sponsored by 350, Responsible Endowments Coalition, Sustainable Endowments Institute and Tellus Institute.
[6] “Preliminary Analysis of Potential Impact of Energy Sector Divestment,” memo from NEPC, LLC to Vermont Pension Investment Committee, February 22, 2013. In this analysis of the potential costs of fossil fuel divestment to Vermont state pension fund, NEPC assumed transaction costs of 0.20% for U.S. large cap stocks. In our own recent experience, this fee came to 0.045%.