We read with interest an article in The New York Times on 12/5/12 entitled “To Stop Climate Change, Students Aim at College Portfolios”. In short, there is growing movement among college students lobbying the overseers of university endowments to purge investments in fossil fuel companies. This effort is being compared to the anti-apartheid campaign to pressure endowments to divest from companies doing business in South Africa. Endowments and their consultants are obviously reluctant to completely divest their fossil fuel investments as there is significant benchmark risk associated with avoiding such a large swath of the investment universe.
In a recent whitepaper, we have argued that energy is the lifeblood of economic growth. Cheap and abundant energy is necessary to foster economic development in emerging economies. And as the population in these emerging economies raises their standard of living, consumption of energy increases. The conundrum is that the cheapest and most abundant source of energy today is fossil fuel. Complete avoidance of fossil fuel companies, as suggested by the activist college students, is difficult today without profoundly negative economic impacts. Yet the engagement of the student activists also highlights the fact that fiduciaries also have an obligation to consider the environmental impact of burning fossil fuels. The answer is to supplement portfolios with investments that can mitigate and eventually solve these significant environmental issues.
For the near term at least, the world still needs fossil fuels. But we can mitigate the associated environmental risks through intelligent investment in new technologies that will make the use of the existing fuels cleaner, through investment in energy efficiency initiatives, and through new development of economic sources of clean and sustainable energy. Essex’s Global Environmental Opportunities Strategy (“GEOS”), which invests in companies tackling these challenges, is positioned at the nexus of finance and the environment – we pursue impact investing with economic returns on capital. Endowments and consultants have a responsibility to consider investment opportunities and not merely avoid risks.