Investors turn two shades of green in fossil-fuel strategies
One boutique investment firm screens out fossil fuels. Another invests in fuel producers to persuade them to go cleaner
By: GUY DIXON
Date: May 24, 2017
In ethical investing, two very different strategies exist.
Both want the same thing, such as not turning a blind eye to polluting companies when choosing stocks. But one strategy addresses it one way, the other goes about it completely differently. And both think they’re right.
Wayne Wachell, chief executive of Genus Capital Management in Vancouver, which manages a suite of fossil-fuel-free investment funds, notes that divestment is the obvious way to make a change environmentally.
Generally speaking, this is how the ethical investing industry works. Polluting companies are typically screened out of investment funds that are environmentally minded. Those screens can shift according to the severity of the pollution, how directly a company contributes to the pollution and so on. In other words, it’s about how much an investment fund may be willing to tolerate.
And divesting out of energy-company stocks doesn’t have to hurt overall investment returns, if that money goes instead toward other sectors following the same economic trends. Genus Capital picks information technology, financial services, consumer discretionary and telecom as good energy alternatives.
In creating fossil-fuel-free funds (it has other funds which aren’t bound by an environmental ethos), Genus was reacting to a push by clients such as the David Suzuki Foundation for this kind of divestment alternative.
“You’ve got to draw the line somewhere, and our clients draw it at companies that produce, refine and transport [fossil fuels],” Mr. Wachell said. Banks are still allowed, despite their investment in energy companies, although a bank might be screened out if it were heavily invested in, say, a major pipeline project, he said.
The mounting divestment movement around the globe is impacting oil producers’ behaviour, Mr. Wachell said. “Oil executives see the writing on the wall. They want to clean up their portfolios, and they’re all moving toward LNG [liquefied natural gas], cleaner forms of energy.”
On the other side of the equation, institutional investors, such as Genus’ clients, are also cleaning up their portfolios. “If you’ve involved in sustainability, if that’s part of your brand, [such as] corporations that are basically tying their brand to sustainability, you’re taking some brand risk if you have a dirty portfolio,” Mr. Wachell said. “Your portfolio should be aligned with your brand.”
So, divestment is one obvious strategy. Michelle De Cordova, director of corporate engagement and public policy at NEI Investments, also in Vancouver, sees it very differently, though.
She emphasizes a very different, activist investing approach, making change from within energy companies.
Yet she quickly clarified that “we’re not activist for the sake of being activist. We are activist because we are institutional shareholders, because we are running mutual funds, and we take action because we see issues that we feel need to be addressed.”
She understands the divestment rationale, but “we’re not sure it’s the right strategy to actually get the outcome that people want.”
The approach at her firm is to create change through pressure from within those companies by shareholders. “From our perspective, the outcome needs to be that somehow we transition the economy to a more sustainable footing. And ultimately, that has to be a low-emissions, low-carbon strategy. They [energy producers] are walking away from coal and heavy fuel,” she said.
However, this approach has two major caveats. The first is that NEI avoids investing in companies that don’t want to change. And second, NEI assumes a great deal of hands-on involvement with the companies it works with. It has what it calls its “focus list” of “targeted, in-depth dialogues” with those companies.
“Our approach has been a kind of selective divestment approach, where we avoided investing in some of the companies that have been particularly outspoken against the climate issue, and investing in the ones that have had a more progressive position on climate change,” Ms. De Cordova said. “You can’t change a company you don’t have a stake in,” says one of NEI’s mottos.
Ms. De Cordova noted that NEI has a strong investment in Suncor Energy Inc. because of its openness on climate policy, such as disclosing how its bottom line would fare if carbon were more aggressively taxed.
“They did that and came to the conclusion that they could stand up to carbon pricing, which is one of the reasons that Suncor and certain other companies came out in support of Alberta’s climate policy,” she said.
Yet, NEI’s approach isn’t just activist, but a combination of selective divestment from some fossil-fuel producers and intense engagement with others, plus investment in companies taking advantage of new energy approaches. “It doesn’t fit in a sound bite,” Ms. De Cordova said.
The seemingly more straightforward divestment strategy isn’t easily sound-biteable, either.
With some major oil companies, such as Royal Dutch Shell, pulling out of the Alberta oil sands and selling to local producers, the energy sector is a complicated investment picture. Companies participating in cleaner fuel and leading energy transition make divestment choices more difficult.
Simple divestment from old fuels such as coal was easier to fathom. “If you look at divestment behaviour, those areas tend to be stigmatized. It’s already happened to coal,” Mr. Wachell said. “Coal has been effectively stranded. I don’t care what Trump says. People just don’t want to go there.”
The same is now happening with the oil sands, he argued. Divestment and investment, no matter the strategy, are all having an aggregate impact on major producers. “Everyone on the margin has an impact and can make a difference,” Mr. Wachell said.
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