Speech by Joe Keefe, CEO & President of Pax World Funds
Article Introduction: Recently, Pax World President and CEO Joe Keefe participated in a forum at the University of New Hampshire organized by a student group that is asking the university to divest its endowment from fossil fuel companies. Keefe outlined various approaches to the role of fossil fuels in a sustainable investment portfolio and provided an overview of Pax World’s hybrid approach to energy investments that incorporates a range of sustainability strategies. He also advocated that the student movement should focus not only on lobbying for total divestment, but also on engaging colleges and universities to take meaningful steps and embrace bridge strategies that at least begin to green their portfolios in a measurable way.
Below is a transcript of Keefe’s remarks from the January 24, 2013 forum as part of the Student Environmental Action Coalition Campaign to Divest UNH’s Endowment from Fossil Fuel Companies at the University of New Hampshire
Fossil Fuels and Sustainable Investing
Speech by Joe Keefe, CEO & President of Pax World Funds
The growing student movement focusing on divestment from fossil fuels, along with the work of Bill McKibben and 350.org more broadly, deserve encouragement and support – for making the debate about climate change more public, more pointed, more urgent, and hitting closer to home.
In the sustainable investment community, it has helped re-kindle an important conversation about the role of fossil fuels in a sustainable investment portfolio. While there is some disagreement between those advocating total divestment and those advocating other approaches, the result of this dialogue and debate, I believe, will bring more attention to this critical issue of how investments impact climate change – just as the tragedy in Newtown, Connecticut has focused attention on investments in gun manufacturers.
My own view is that we need to deploy a host of strategies – as citizens, consumers and investors – to address the developing catastrophe of climate change, and we must do so with a sense of urgency and resolve. Policy makers are simply not listening. The fossil fuel industry is not listening. Large institutional investors, foundations and endowments generally are not listening. So, we need strategies to break through.
As investors, there are essentially three strategies or approaches one can take to investing in fossil fuels, two of which incorporate climate and sustainability considerations into the investment process while one doesn’t at all:
Approach A: Invest in fossil fuels without any regard whatsoever to climate change or other sustainability issues.
Approach B: Full divestment from fossil fuels.
Approach C: Partial Divestment from fossil fuels coupled with a best-of-class/engagement approach to investing in energy companies, favoring those with stronger commitments to reducing carbon emissions and investing in renewable energy while also directly engaging corporate leaders through shareholder activism strategies.
Approach A is unsustainable and irresponsible in that it simply continues the status quo and fails to recognize the need for investors and capital markets to play a role in reducing carbon emissions and ameliorating climate change. It effectively aligns investments with those who deny the science on climate change or actively resist efforts to address it. By doing nothing, this investment approach helps guarantee that nothing will be done. Unfortunately, most mutual funds, pension funds, foundations, endowments and other institutional investors, as well as individual investors, follow approach A, meaning that they – or at least their investments – are part of the problem rather than part of the solution.
Approach B has been embraced by a minority of investors in the sustainable investment community but is now being urged as an alternative strategy by 350.org and the growing student divestment movement around the country.
Approach C is the approach taken to date by the majority of investors within the sustainable investment industry, where many regard a complete divestment from fossil fuels as impractical but a best-of-class approach– screening out the worst polluters while investing in the “better” energy companies that have made larger commitments to renewables and reduced emissions – coupled with shareholder engagement and public policy activism, is instead embraced as a bridge strategy that encourages investment in renewable energy and the transition to a sustainable energy economy.
Under Approach C, investor engagement through dialogues with companies, shareholder resolutions and other strategies typically encourages companies to reduce carbon emissions as well as other forms of pollution, optimize use of natural resources, including food and water, actively disclose their carbon and environmental footprints, and embrace other environmental policies and programs.
At Pax World, we employ a combination of approaches B and C. While we have historically taken a partial divestment/best-of-class/engagement approach (Approach C) for most of our funds, we also offer one fund that completely divests from or avoids investing in fossil fuels (Approach B). (By the way, we don’t invest in gun manufacturers either.)
Why do we take a hybrid approach to investing in energy companies and divesting from fossil fuels?
With respect to Approach B (complete divestment), many in the sustainable investment community have concerns about pursuing it as an exclusive strategy. First, we are not convinced that these large multi-national companies miss, or perhaps even notice, the small sliver of capital that is withdrawn. Indeed, when divestment occurs the shares are simply sold on the open market and someone else purchases them. While it’s possible that the price could be affected if large numbers of shareholders sell their shares, these companies are so large, and the number of shares that would need to be sold is so great, that is very unlikely that stock price will be affected at all.
(Parenthetically, my own view is that, if we really want to affect stock price and reduce the demand for fossil fuel company shares, a much better option would be a carbon tax – but that’s another conversation. I think it’s also critical that we demand that fossil fuel companies disclose their lobbying and political contributions so we know what they are doing with their shareholders’ money, whether they are misusing shareholder money to resist efforts to combat climate change, which politicians they are attempting to influence, etc. – but that’s probably another conversation as well.)
That said, I do believe a divestment strategy, if widely embraced, could have the effect of shaming companies, putting pressure on them to be more responsive, to embrace sustainability strategies, and to change. So, I think divestment has a definite place within the range of strategies that we need to deploy in order to marshal investment capital to be part of the solution rather than part of the problem.
Another concern about divestment as an exclusive strategy is that when you sell your shares you lose your seat at the table, your voice, your entitlement to vote your proxies at the Company’s annual meeting, your ability to support shareholder resolutions, including resolutions asking companies to disclose or reduce their carbon emissions, and so forth. The role of activist investors in prompting change should not be completely discounted.
For example, over the past year shareholder resolutions have been filed with companies such as Chevron, Exxon Mobil and Conoco Phillips asking these companies to review their exposure to climate change risk and to adopt quantitative goals for reducing greenhouse gas emissions. Resolutions have been filed with financial services companies such as JP Morgan Chase and PNC Bank asking them to assess the costs and adopt programs to address the carbon emissions related to their lending, investment and finance portfolios. In addition to these, shareholder resolutions have been filed calling on companies in the natural gas industry to address fugitive methane emissions, and companies in other sectors to address water use, electronics recycling and other critical environmental issues. And these are on top of numerous shareholder resolutions asking companies to issue sustainability reports disclosing their environmental, social and governance practices.
This is important work, but to file such resolutions, and generally to engage companies in these types of dialogues, you have to be a shareholder. Thus, my own view is that a complete divestment approach, while a necessary component to a broader strategy, is insufficient as an exclusive strategy, and needs to be supplemented with other approaches, and part of a more diversified, multi-pronged investment approach to addressing climate change.
Thus, in addition to lobbying for total divestment, it seems to me the student movement should be engaging colleges and universities to take positive steps and embrace bridge strategies that at least begin to green their portfolios in a measurable way. For example, if colleges and universities like UNH are going to study or consider their policy on fossil fuels, there is no reason why they cannot take interim steps to green their portfolio by investing a meaningful allocation of assets in fossil-free funds embracing Approach B as well as partial divestment/best-of-class investment strategies under Approach C. There are plenty of asset managers today who employ sustainable investment strategies, and a range of investment options for UNH or any other college or university that is serious about greening its portfolio.
Colleges and universities that profess to be committed to sustainability and a clean energy future quite simply have to take these steps. Otherwise, their investments are completely misaligned with their professed values.
In this respect, the canard that an endowment’s fiduciary duty means that its only obligation is to maximize return, regardless of the consequences or externalities, is utter nonsense. If a university’s lawyers or consultants are telling them that, I would suggest they get a second opinion. There is now a substantial body of research underscoring that companies with better environmental, social and governance (ESG) performance also tend to enjoy better financial performance:
• A joint study by Harvard University and London Business School found that, over an 18-year period ending December 2010, $1.00 invested in a value-weighted portfolio of “high sustainability” companies that had adopted certain environmental and social policies grew to $22.60 whereas a similar portfolio of “low sustainability” companies grew to only $14.50.
• A June 2012 report by DB Climate Change Advisors, Deutsch Bank “found overwhelming academic evidence within all (100%) of the studies showing that firms with higher ratings for CSR and ESG factors have a lower …cost of capital in terms of debt (loans and bonds) and equity.” Looking at actual fund returns in the SI space, “we found no academic studies that found underperformance at either the security or fund level.”
• A 2011 white paper, “Alpha from Sustainability, ”SAM Research, Robeco Quantitative Strategies concluded: “The results reveal a positive relationship between sustainability and financial performance, as measured by stock returns, demonstrating the superior alpha potential of the sustainability leaders….Value is created both by picking sustainability leaders and avoiding sustainability laggards…. Investing in sustainability leaders ultimately contributes to superior long-term investment results with improved risk-return profiles.”
• A July 2011 report by RCM, a global investment advisory firm and subsidiary of Allianz Global Investors, found: “The evidence indicates that investors’ portfolios are not negatively impacted by the introduction of ESG criteria into the stock selection process. But the results go further than that, and show there is a probability of outperformance over the longer term. Investors could have added 1.6 per cent a year over just less than five years to their investment returns by allocating to portfolios that invest in companies with above-average ESG ratings.”
I could go on, but you get the picture. There is now a well-established body of research underscoring the financial materiality of ESG factors, that is to say, the linkages between ESG performance, on the one hand, and financial performance on the other. Given this, one can only conclude that, when it comes to these issues, including the risks and opportunities associated with climate change, the “maximize return” crowd has it precisely wrong: it is ignoring these issues, rather than integrating them, which most likely constitutes a breach of fiduciary duty.
The narrow, misguided “maximize returns” approach to fiduciary duty engages in the sort of willful blindness that is necessary when one’s investments focus only on the short term, as if the future didn’t matter. As long as returns on fossil fuel stocks remain high (subsidized by the lack of a price on carbon pollution), they will remain highly attractive to asset managers seeking to maximize short-term gains. But these fiduciaries have a duty to meet the needs of their investors, students and future beneficiaries over the long term as well. They need to find a balance between an optimal risk/return trade-off in the short term and an optimal risk/return profile for the long term. Reducing investments in fossil fuel companies could help achieve this balance, protecting investors from climate risk in their portfolios over the long term while sending a clear signal to energy companies that they need to change.
Thus, integrating sustainability concerns into a university’s investment portfolio is completely consistent with a fiduciary’s duty to deliver optimal returns over the long term. It is a complete no-brainer that one should have proper regard for long-term interests and liabilities like climate change. Any responsible fiduciary needs to be thinking about and acting on these issues.
Colleges and universities should be endeavoring to reduce their fossil fuel dependency in as many ways as possible: setting targets for reducing carbon emissions, offsetting emissions, boosting energy efficiency, purchasing renewable power, embracing resource optimization in a broader sense, from electricity to water use, and greening their investment portfolios.
Every college and university, every foundation, every endowment, every institution of whatever kind that professes a commitment to sustainability, that claims to care about climate change, needs to assure that its investments are in alignment with those stated concerns. To accept the science on global warming, and to be committed to doing something about it, but to invest one’s resources in a way that wholly ignores that imperative, is the mother of all inconsistencies.
It is time for every college, every university, every philanthropic foundation, every institution, and every individual – all of us – to take, at the very least, some modest, measurable steps to green our investment portfolios, to be part of the solution rather than part of the problem. If your investment consultant or advisor, if your attorneys or investment committees, are telling you that you cannot do that, then they are simply wrong.
Moreover, if this university, or any university, or any of us as individuals, thinks that the answer is waiting for Washington to act, or waiting for the next international treaty or protocol, or otherwise passing the buck to someone else, thinking someone else is going to solve this problem for us, rather than looking at our own energy use, our own consumption choices, and taking responsibility for the way we invest our own money, then again, we are wrong. And we need to be right.
So, what you are asking of the University, you should also ask of yourselves. Sustainable investing needs to be a core component of any comprehensive strategy to address climate change. It needs to be a core component of the way we live our lives.
By raising this critically important issue in connection with the University’s endowment, you are taking a step in that direction. I would urge you to take the next step, and the next, and continue down this road, so that investors far and wide – in their mutual funds, in their IRAs and 401K and 403B retirement accounts, in their pension funds, in their university endowments – embrace sustainability as both a moral imperative and a financial imperative, so that our investments are no longer in conflict with, but are finally in alignment with our values.
For more information on Pax World and its mutual funds, etc go to- www.paxworld.com
