The fossil fuel divestment movement is taking hold as 26 colleges and universities, 40 cities, 72 religious institutions, 31 foundations and 19 other institutions have committed to divesting from their portfolios companies that extract and process fossil fuel. There are a number of reasons a portfolio fiduciary would consider divesting. Here are few.
We are experiencing a changing climate. Our CO2 production has made a major contribution to that fact. We can’t control the weather, but we do have control over the extraction and combustion of fossil fuels. As individuals, we have control over how we encourage or discourage the extraction of fossil fuels through the efficient use of the fuel we consume and the oil companies that we invest in or divest from.
There is plenty of fossil fuel, but according to the scientific understanding of our biosphere, in order to keep the planet habitable, 80 percent of it must stay where it is. If humanity is serious about preserving itself, the fossil fuel industry will be significantly reduced. This means that fuel deposits will eventually become “stranded assets” and stripped of their value. When that value is removed from a company’s books, the value of the company itself will be significantly reduced, creating significant losses for investors. The announcement of divestiture by the Rockefeller Brothers Fund, the family heirs to the mother of all oil companies Standard Oil, is an indicator investors are taking this risk seriously.
Investing in oil can influence policy. In the last five years, the oil and gas industry spent more than $700 million lobbying our legislators to support their cause in reducing regulation, increasing production and protecting their interests through public misinformation. For example, hydraulic fracturing is exempt from the Safe Drinking Water Act due to industry lobbying efforts. Funding the manipulation of the legislative and public conversation about public safety and the reality of climate change comes from company capital, which is in part owned by shareholders. A prudent shareholder would ask if this kind of company spending actually creates long term return on investment value.
Companies dedicated to reducing fossil fuel consumption require capital investment for research, development and production. Investing in these companies will finance innovation and implementation of a cleaner and conflict free energy economy sooner. Replacing fossil fuel holdings with alternative energy holdings increases a portfolio’s diversification within the energy sector and reduces risk by removing a potentially volatile industry.
Consider the falling price of oil. Supply has outpaced demand driving the crude oil barrel price down by 66 percent from its peak in 2008 (WTI (NYMEX)). Until 2007, U.S. oil consumption and GDP were linked, now GDP continues to rise and oil consumption continues to fall. The U.S. is consuming the least oil per dollar of gross domestic product in more than 40 years (Bloomberg). For example, newer energy efficient cars and appliances are reducing fuel consumption as well as behavior of large populations; Baby Boomers are driving less and Millennials are using public transportation more than previous generations. Additionally, the U.S. production of alternative energy is increasing at an average of five percent per year and currently accounts for about 12 percent of our total energy consumption (U.S. Energy Information Administration). Our demand for fossil fuel will continue to decline, increasing the risk and decreasing the productive value as an investment.
For the long-term investor, as investing is inherently long term, divestment of fossil fuels removes the risk of unknown short-term consequences while acknowledging the long-term obsolescence of an industry. While divesting is fiscally responsible, the ethical considerations cannot be overlooked. Much of our political and military involvement in the Middle East has been directly or indirectly connected to the oil reserves there. As long as there is pressure to get oil out of the ground as cheaply as possible, there will always be risks of spills and contaminations. With as many trains of tanker cars that come through town, and the frequency of accidents around the country, an explosive derailment in the middle of town is a possibility. FBN
By Eric Souders
Eric Souders is an accredited wealth management advisor (AWMA). He has worked with NAU faculty and business owners for more than 18 years. His YouTube video series, “What’s Up With the Economy?” explores the current economy and factors influencing it. Securities offered through Geneos Wealth Management. Inc. (Member FINRA/SIPC). Advisory services offered through Geneos Wealth Management, Inc. and Ascendant Financial Solutions.