Jeremy Grantham is cofounder and chief investment strategist of Grantham Mayo van Otterloo (GMO), and he’s one of 50 individuals individuals identified by Bloomberg Markets magazine in 2011 as having the “the ability to move markets or shape ideas and policies.” His reputation was made in large part by his ability to detect, and avoid being crushed by, market bubbles. He is also a committed environmentalist whose foundation supports Bill McKibben’s work. In April 2013, he told The Guardian:
[W]e are getting close to the decision [at GMO] not to carry coal stocks and anything that has a material amount of tar sands…. I have written in Fortune magazine that those extreme, dangerous, carbon-intensive, and polluting resources run the very substantial risk of being stranded assets, because, on one hand, I think the progress of solar and wind is moving faster than most investors realize and, on the other, I expect the continuous rise in the price of hydrocarbons as we continue to move through the cheap stuff and move on to the more expensive stuff in terms of getting it out of the ground. And I don’t think that if you put billions of dollars into a new tar sands project that you will see a decent return on it. It will be underpriced by solar, wind, and other alternatives which are moving at considerable speed. And point two is they will slap a carbon tax on coal and tar sands, which increasingly countries here and there will do — and, eventually, the U.S. in the hopefully not-too-distant future — and that will be a death blow.
Grantham says he has an “honest disagreement” with McKibben over which sectors should be targeted for divestment. He believes that the divestment campaign should exclude conventional oil, because “60 – 70%” of the damage is going to come from coal and tar sands, and that divestment of the latter is more doable because they comprise about 1% of a typical portfolio. “Far better to nail that and send a very powerful signal. And why wouldn’t the colleges sign up, because it’s very good business. I love the idea when you have an environmental argument backed by a good economic argument.” (For further insight into Grantham’s thinking, see Climate Change Scenarios – Implications for Strategic Asset Allocation, a 132-page analysis authored by Mercer Responsible Investments with Grantham’s support.)
It’s Raining Tactics
California billionaire and former hedge fund manager Tom Steyer is another climate change advocate who has also come out in support of divestment. According to the Vermont Digger web site, in a letter to Middlebury College’s board of trustees, Steyer said divestment is feasible, important, and a good investment strategy. “At the moment, other investors have not fully realized the risk that carbon reserves will become a stranded asset,” he wrote. “If you settle for some mild measure like ‘voting your proxies,’ let me assure you that the leverage of your economic power…will be de minimis, a small peep that will be easily drowned out.”
While we appreciate Steyers’ passion, it’s unfortunate to see divestment advocates snipe at those who take the time, care, and expense to vote their proxies in favor of change. There are merits to both approaches, and as we have argued elsewhere (in fact, in this very newsletter issue), companies do heed proxy votes. Ironically, the act of divesting, by its nature a one-time event, is equally vulnerable to the charge of being a “a small peep that will easily be drowned out.”
Doing The Investment Math
The bottom line for most investors tempted by the prospect of divestment is how big a risk will be imposed upon their returns if they shun 350.org’s “Filthy Fifteen” or the organization’s broader list of the largest 200 fossil fuel companies. We know of one quantitative study on this issue to date, published by Aperio Group, an investment firm specializing in indexing strategies. Do the Math: Building A Carbon-Free Portfolio looks at the impact of removing fossil fuel companies from a Russell 3000-based index. According to their calculations, removing a broad number of such stocks would increase absolute portfolio risk by 0.0133% and introduce a theoretical return penalty of 0.0044% and a tracking error of 0.69% (which, they point out, is “very low compared to active stock picking”). Says Clean Yield President Rian Fried of these risk projections, “This is a pleasant but not altogether unexpected finding. We have managed fossil-fuel-free portfolios for years and haven’t noticed that it affected long-term performance at all.”
Meanwhile, CarbonTracker.org, the British organization whose research helped reveal the carbon bubble, has just released Unburnable Carbon 2013: Wasted Capital and Stranded Assets, which reports that there may be up to £674 billion a year (about $1 trillion U.S.) in wasted capital assigned to develop potential stranded assets. CarbonTracker founding director Mark Campanale said the report “look[s] at what this means for equity analysis and credit ratings. We explore a number of options for investors but conclude that ultimately regulators need to get a grip on exposing this contradiction sitting on the markets.” Also funded by Grantham’s philanthropies, the report report has been endorsed by HSBC, Moody’s, and Bloomberg New Energy Finance, among others.
The diversity of these responses, from Grantham’s to Steyer’s to our own, illustrates how the fossil fuel divestment movement has achieved its first successes even before the first billion has been divested. In a time when seemingly all news about climate is bad, it is heartening to see the investment world, after so much procrastination, face the ultimate elephant in the room.
* Clean Yield’s testimony in support of a divestment bill before the Vermont state legislature can be found here.