The Fossil Fuel Bubble?

An interesting phenomenon is happening in the world of philanthropy. 17 large and reputable Foundations, including the Ben & Jerry’s Foundation, The Educational Foundation of America, The John Merck Fund, The Russell Family Foundation, The Sierra Club Foundation, and the Wallace Global Fund, with assets totaling nearly $2 billion, have launched an initiative to divest from fossil fuel investments and place those funds into clean technology and organizations that beget a sustainable future.

This initiative, called Divest-Invest Philanthropy, has been created to raise awareness about the importance and urgency of moving away from fossil fuels and towards climate solutions. The Foundations involved in the Divest-Invest Philanthropy are joining environmental activist organizations like Bill McKibben’s 350.org as well as college students across the country (who are questioning en masse the endowment investment practices of their schools) to make a stand.

“Foundations are in a unique position,” said Richard Woo, Executive Director of The Russell Family Foundation, in a recent interview. “We are founded for the common good and have assets designed to achieve social purposes. We’re looking for meaningful ways to align our social mission with our investment portfolio. In the face of climate change, foundations are acting now, moving quickly, and shifting our investments to companies, organizations, and initiatives that support a lower carbon economy.”

The Russell Family Foundation, a Seattle-based organization that focuses on sustainable real estate, clean tech, green affordable housing, bio-carbon, and generation investment management, has been a pivotal influencer in the Divest-Invest Philanthropy movement.

During our conversation, Woo explained the methodology that the foundations have established as a part of the Divest-Invest Philanthropy initiative. First, the companies assess their exposure to climate risk and define the degree to which they’re invested in climate solutions versus fossil fuels. Next, they engage their board, staff, and other stakeholders to discuss alternative investment strategies and mission-based investment practices. Then, they set a timeframe to eliminate fossil fuels from their portfolio, beginning with the ‘Filthy 15’ (the largest, dirtiest coal companies in the US, which account for 40% of the coal consumed and 60% of the coal produced in this country), and make a commitment to invest increasing amounts of their funds into clean technologies and sustainable businesses.

Woo asserts that foundations are perhaps the easiest ships to turn because they have already made some kind of social commitment. They understand that sustainability plays into whatever mission they have, whether its education or community development or environmental protection.

“The impacts of climate change have a disproportional impact on poor, marginalized communities that don’t have the resilience to bounce back after an extreme weather event—or in the face of general environmental degradation—due to a lack of financial resources. The Divest-Invest movement offers the ability for the environmental groups to join forces with the social change community to build a triple bottom line economy. Through the momentum that we’re building, we’re seeing large investors, pension funds, and even individuals reassessing their investment strategies.”

Woo admits that some of his colleagues push back against the idea of divestment. “They begin to question basic economic assumptions. They ask, ‘Can I expect the same returns if I shift to a new paradigm? Am I exercising my fiduciary responsibility if I divest from my current stock holdings? Won’t there be people who will buy the stocks as soon as I divest, so what difference will my actions make?”

Woo counters with a logical retort. “First, I tell them about funds, like the Wallace Global Fund, which have fully divested from fossil fuels and are consistently outperforming similar funds. Next, I ask them to look realistically at risk of climate change and the limited value of fossil fuels. Then, I lay out a long term vision, explaining that we have a limited carbon budget for fossil fuels. If the end game is to use all of our fossil fuels, then we’ll make our planet unlivable, in which case all economic bets would be off.”

Woo insists that the value of fossil fuel companies is based on assets that are underground, which need to remain underground for the survival of the planet. He reasons that we’re eventually going to stop using fossil fuel either because we have come up with a more efficient solution, or because our air, water, and land will have become too polluted to support our current economic system. At that point, oil and gas companies will be forced to change their business models (or go out of business) through pressure imposed by market demand and/or regulation.

As fossil fuel companies continue to invest in polluting resources that won’t ultimately be used, they are amassing what will eventually become stranded assets. And what will happen to the valuation of these gigantic companies when the market realizes that they have significant amounts of stranded assets on their balance sheets? Will the fossil fuel bubble finally burst, resulting in a colossal market meltdown?

To avoid such a bubble and usher in a smooth transition to a low-carbon economy, Woo suggests that we support the Clean Trillion movement, which encourages investors to commit $1 trillion or more per year for the next 36 years into clean energy and climate solutions. “Divestment is important, but reinvestment is as important. We need to make our money work for us, as well as the planet,” says Woo.

Woo acknowledges that clean economy investments are still a work in progress. “We’re finding good opportunities, but we want to see more. We’re working with investors, advisors, and individuals who are willing to let go of old framework and redefine risk—that’s how the clean trillion will be realized.”

No doubt, it’s hard to envision a cleaner future while the fossil fuel-based companies have such a stranglehold on our economy. However, as fossil fuel assets become riskier and more expensive, foundations, pension funds, and large investors will find it easier to eliminate them from their portfolio. And unlike the tobacco industry, which certainly has a dramatic effect on personal health, fossil fuels have an undeniable and irreparable global impact that will undoubtedly affect local practices, national policy, international law. Divestment, which was once seen as an unrealistic demand by environmentalists and idealistic college students, is now entrenched firmly at the crossroads of public policy, consumer demand, and sound business practices.

Article by Sara Gutterman of Greenbuilder Media, appearing courtesy 3BL Media.