Emerging Markets: Energy

The Apartheid Playbook: Activists Push Fossil Fuel Divestment


An organizer with the Sierra Club joins other University of North Dakota students during a demonstration at the UND campus in Grand Forks to get the school to end coal dependence and switch to wind power

Photograph by Eric Hylden/Grand Forks Herald via AP Photo

An organizer with the Sierra Club joins other University of North Dakota students during a demonstration at the UND campus in Grand Forks to get the school to end coal dependence and switch to wind power

Here’s a movement to keep an eye on: Clean-energy activists scored a political victory on April 23, when the San Francisco Board of Supervisors voted unanimously for the city’s $15.3 billion pension system to sell its investments in the fossil fuel industry.

350.org, a climate-change group founded by environmentalist Bill McKibben, is pushing oil and gas divestment on multibillion-dollar funds in municipalities and universities across the U.S. The group announced today that 10 mayors and city councils have signed on, including in Seattle, Madison, Wis., and Ithaca, N.Y. As with the campaign to divest from South Africa’s apartheid regime in the 1970s and ’80s, the idea is that forcing the big funds to sell their stakes will hurt the energy companies’ stocks and raise their costs of doing business.

The trick will be advancing the movement past granola-tier cities like Berkeley, Calif., Boulder, Colo., and Eugene, Ore., and up to the state level, where the pension funds—and their influence—get really big. It won’t be easy. On top of the general gridlock of the political process and the challenge of going up against what McKibben has called “the richest industry there ever was,” the divestment movement faces a big problem: Oil and gas stocks can be big earners for these funds, at a time when they desperately need the returns.

Endowments were the absolute worst-performing of any institutional investor class in the year ended June 30, 2012, according to the National Association of College and University Business Officers (Nacubo), returning ‑0.3 percent (PDF) after fees. More than 70 percent of schools responding to a survey said they did not consider environmental or social factors in their holdings. Endowment chiefs are actually looking more toward energy and natural resources, Nacubo found, along with distressed debt and other alternative investments in the search for yield at the multibillion-dollar level.

Pension funds have performed only slightly better. State and local government pensions ended their 2012 fiscal year up only 1.15 percent, according to an August report by Wilshire Associates. That means advocacy groups like 350.org will have a tough time convincing them to swear off oil and natural gas stocks, which make up about a tenth of the Standard & Poor’s 500-stock index by weighting. Oil companies can throw off big dividends. Two of the top four holdings in Vanguard’s High Dividend Yield ETF, for example, are ExxonMobil (XOM) and Chevron (CVX). The NYSE (NYX) Arca Oil Index, a grouping of oil exploration and production companies with a combined $1.36 trillion in market capitalization, has returned 15.9 percent over the last year, including dividend payments.

The fossil fuel divestment cause started last fall on college campuses, 350.org says. The American Petroleum Institute was concerned enough about the issue to commission a study (PDF), published in December, claiming that oil and gas stocks deliver above-average returns for university endowments.

It’s true that political passion can push funds to action. After South Africa, students successfully lobbied for schools to divest from tobacco companies and corporations that do business with Sudan. Recently, the teachers’ retirement systems in California and New York moved to shed their investments in firearms companies after the December massacre of schoolchildren in Newtown, Conn.

Some officials have cautioned against using pension allocations to make political statements. “Pension decisions should rarely, if ever, be based on other criteria except what’s best for pensioners, which should benefit taxpayers as well,” Raymond Sarola, New York Mayor Michael Bloomberg’s representative on the city’s pension board, said in a statement at the time. (Bloomberg is the founder and majority owner of Bloomberg LP, publisher of Businessweek.com.)

Pushing cities on fossil fuels is different, McKibben argues, because climate change is a direct threat to their existence. “Cities are divesting because they’re having to spend millions building seawalls or dealing with record downpours: Why would they stash their money in the companies that make that necessary?” McKibben wrote in an e-mail to Bloomberg Businessweek.

The San Francisco vote is nonbinding, and city board members warned that reallocating fossil fuel investments—estimated at $580 million—came with financial risks. “I just want to manage expectations,” Supervisor Malia Cohen said, according to the San Francisco Chronicle. “There is a very thoughtful but fairly long and drawn-out process.”

Summers_190
Nick Summers covers Wall Street and finance for Bloomberg Businessweek. Twitter: @nicksummers.

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