Divesting from Fossil Fuels: The Growing Fiduciary Case
This week, the San Francisco Retirement Board (SFERS) held a "special meeting on fossil fuels divestment" to consider the environmental and fiduciary implications of eliminating the securities of fossil fuels companies from its equity portfolios. As active practitioners of fossil-free equity investing, we offered the below written testimony, limited to fiduciary arguments, in support of positive action on the part of SFERS to divest of equities of fossil fuels companies, system-wide. We republish it here as an open letter to SFERS and anyone interested in the subject of sustainable economics. Thanks to our friends at 350.org for encouraging us to testify.
Date: February 19, 2014
To: The Retirement Board of the San Francisco Employees' Retirement System
Victor Makras -- President
Malia Cohen -- Vice President
Joseph D. Driscoll, CFA
Herb Meiberger, CFA
30 Van Ness Avenue,
San Francisco, CA 94102
From: Garvin Jabusch, Co-Founder and Chief Investment Officer, Green Alpha® Advisors, LLC
Re: Testimony in submission to the SF Retirement Board special meeting on fossil fuels divestment, February 19th, 2014
Dear SFERS Board Members,
In contemplating the role of the securities of fossil fuels firms in equities portfolios, those of us with fiduciary responsibility over participant and client assets are required to consider many factors in addition to the fundamental environmental concerns raised by these companies' business models. In short, we are required to seek the likeliest path to competitive risk-adjusted returns appropriate to our clients' risk tolerances, investing time horizon and other criteria. In that light, I'm submitting this testimony to develop a key point: that equities of fossil fuels companies, far from being the relatively secure source of risk-adjusted returns that they were in the past, now represent substantial systematic portfolio risk.
The portfolio risks of holding fossil fuels securities over the medium and (especially) long term are becoming increasingly apparent. The primary driver of these risks is that while the costs of fossil fuels are notoriously volatile and tend to trend upwards over time, costs for renewable energies, particularly solar, behave more like electronics and other semiconductor-based technologies, and have been trending sharply downwards. Broadly speaking, the intersection of costs between fossil fuels and renewable energies occurred in 2012 or 2013, and from that moment forward, fossil fuel prices will continue to become less and less competitive over time.
On this point, legendary investor Jeremy Grantham, in his most recent shareholder letter, spoke for many of us working to safeguard client assets in portfolio management:
"the potential for alternative energy sources, mainly solar and wind power, to completely replace coal and gas for utility generation globally is, I think, certain…That we will replace oil for land transportation with electricity or fuel cells derived indirectly from electricity is also certain, and there, perhaps, the timing question is whether this will take 20 or 40 years. To my eyes, the progress in these areas is accelerating rapidly and will surprise almost everybody, I hope including me. Because of this optimism concerning the technology of alternative energy, I have felt for some time that new investments today in coal and tar sands are highly likely to become stranded assets, and everything I have seen, in the last year particularly, increases my confidence… Even when considering oil, with enough progress in alternatives and in electric vehicles one begins to wonder whether this year's $650 billion spent looking for new oil will ever get a decent return… The real oil problem is its cost -– that it costs $75 to $85 a barrel from search to delivery to find a decent amount of traditional oil when as recently as 15 years ago it cost $25. And fracking is not cheap. The fact that increased fracking has been great for creating new jobs should give you some idea: it is both labor- and capital-intensive compared to traditional oil. Also, we drill the best sites in the best fields first, so do not expect the costs to fall per barrel (although the costs per well drilled certainly will fall with experience, the output per well will also fall). No, fracking, like extracting tar sands, yields a relatively costly type of oil that you resort to only when the easy, cheap stuff is finished. Fracking wells also run off fast…[and] are basically done for in three years."
Small wonder then that economists at Bloomberg New Energy Finance are predicting that "By 2030, the growth in fossil fuel use will almost have stopped," and subsequently that, "[e]nergy growth will continue, just not fossil fuels' contribution. Investment in new energy capacity will double by 2030. About 73 percent of that investment, or $630 billion annually, will be devoted to renewable energy." One can't help but notice that this will not leave much capital capacity to support the share prices of either fossil fuels or nuclear power firms.
Meanwhile, on the regulatory side, the risks of remaining invested in fossil fuels are no longer going unnoticed. As former SEC Commissioner Bevis Longstreth recently wrote:
"For fiduciaries, the planet's present condition and trajectory pose major, and growing, portfolio risks. Prudence requires that they be well informed about these risks and act with the requisite caution and care...fiduciaries have a compelling reason on financial grounds alone to divest these holdings before the inevitable correction occurs. I'm certain any reputable investment manager, if directed by an endowment to accept that assumption, would agree with this conclusion… Anticipatory divestment in recognition that at some unknown and unknowable point down the road, markets will suddenly adjust the equity price of fossil fuel company shares downward to reflect the swiftly changing future prospects of those companies, however wise today, is probably not yet compelled in the exercise of prudence. At some point down the road towards the red light of 2 Degrees Centigrade, however, it is entirely plausible, even predictable, that continuing to hold equities in fossil fuel companies will be ruled negligence." (Italics mine.)
When I think about Green Alpha Advisors' portfolios, I have to ask myself the obvious question: do I want my clients' assets in the 18th century technologies that are shrinking from providing ~80% of the world's energy mix today to perhaps as low as ~16% over just the next 16 years? Or in the technological innovations that will grow from single-digit percentages of the world's energy mix today to more than half by 2030? Asked in this way, the question appears rhetorical at best. Of course I want my clients' assets in solar energy stocks (among other things, but that is an asset allocation discussion outside the purview of this testimony).
In summary, fossil fuels investments, in next economy terms and indeed in general economic terms, no longer appear to be the attractive source of risk-adjusted returns they were historically. Our clients, members and other vested parties are increasingly and justifiably asking us what we are doing to address the systemic, potentially catastrophic risk posed by these unstable assets. For us, the answer is simple: we're avoiding them outright.
I urge SFERS to take action to minimize these risks to its members' assets, and join us in leading the inevitable transition away from fossil fuels and into more economically competitive, indefinitely renewable energies.
Garvin Jabusch is cofounder and chief investment officer of Green Alpha® Advisors, LLC. He is co-manager of the Shelton Green Alpha Fund (NEXTX), of theGreen Alpha Next Economy Index, the Green Alpha Growth & Income Portfolio, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club's green economics blog, "Green Alpha's Next Economy."