Keep it in the ground: Why this is a matter of basic ethics - our response to the guardian

As part of its ‘Keep it in the ground’ campaign – aimed at persuading the world’s two biggest charitable funds (the Bill and Melinda Gates Foundation and the Wellcome Trust) to divest from fossil fuels – the Guardian recently published an article by financial journalist Felix Salmon as to why charitable trusts might be able to offer good short-term reasons for not following this particular course of action.

As part of its ‘Keep it in the ground’ campaign – aimed at persuading the world’s two biggest charitable funds (the Bill and Melinda Gates Foundation and the Wellcome Trust) to divest from fossil fuels – the Guardian recently published an article by financial journalist Felix Salmon as to why charitable trusts might be able to offer good short-term reasons for not following this particular course of action.

Our response to the paper, outlining our view as to why we believe there is an investment rationale – as well as a moral one – for such bodies to move their money out of coal, oil and gas companies was published in the guardian on 22 April 2015.

"While Felix Salmon (‘Keep it in the ground: why this is a matter of basic ethics’, 13 April) concludes that your campaign remains valid despite concerns about its ‘idealism’, he struggles to make the investment case for divestment.

For many of the investors we represent, the moral case would be justification enough – it would be inconceivable for them to invest in a company or sector in conflict with their personal values or views on climate change.

However, is the investment argument really so strongly stacked against divestment?

As managers specialising in ethical and sustainable investment, we have been directly engaged in the environmental, social and governance issues of fossil fuel investment for almost two decades. With over £700m in funds under management – a significant proportion of which is invested for charitable trusts – we have seen a gradual convergence of the moral and investment arguments in favour of divestment.

Mr Salmon notes that fossil fuel investment has not provided attractive returns relative to the market over a variety of periods and highlights this as evidence that the sector is not necessarily a home for ‘avaricious’ investors.

However, while not all investors are necessarily avaricious, it is fair to say that they invested because they expected more positive financial returns than have been realised during a period that has concluded with a sharp fall in the oil price. Is it fair to say that renewables cannot provide the same level of financial returns as the oil and gas sector during more ‘normal’ periods of oil price performance?

Although at a much earlier stage in its development than the oil and gas industry, there are growing opportunities in the renewable energy sector to benefit from the positive financial returns now being achieved not only by manufacturers of renewable energy equipment (which have been volatile and relatively high risk in the past) but also by renewable energy generators.

Diversification (as much a pillar of modern investment management as seeking the ‘efficient frontier’) may make the risks of investing in emerging technology more palatable, while the establishment of infrastructure funds investing in operational wind and solar assets offers the opportunity to benefit from attractive levels of income now being generated by more mature renewable assets.

The arguments in favour of divestment should consider risk and reward as well as moral judgements. The risks of not being invested are clear: if the oil and gas sector performs well financially, portfolios without exposure to it may suffer.  However, as the performance figures already noted indicate, positive returns are not guaranteed at a sector level.

At a company level, too, expansion into more extreme areas of production as conventional reserves are depleted is not without risk – as was amply illustrated by BP’s Gulf of Mexico disaster. Could drilling in the Arctic or extracting shale gas be considered less risky than generating power from wind or solar energy?

Besides, the relative performance of ‘divestors’ will depend on where the capital released from investments in fossil fuels has been reallocated. This may be a challenge for index trackers but is an opportunity for stock pickers. 

There is a danger in assuming that all investors are equal and apply the same investment strategy. Let’s not forget that money can be made by investors in any market – there will be plenty of hedge funds that have benefitted from falls in the oil price and oil company stocks by selling short.

But for long-term, ‘long-only’ investors, the attractions of fossil fuels may be starting to wane. And, for investors such as charitable foundations with very long-term time horizons, being late could be just as inexcusable as being early.

For some types of investor, perhaps this is an example of when doing the right thing morally is also the right thing financially."