It’s a vexed question, and one which the investment industry remains incapable of answering in any kind of useful way. So we end up with the same undifferentiated soup of Socially Responsible Investment (SRI) products, and the same inability of investment houses and advisers to explain to their clients exactly what the difference is between a “normal” portfolio and a screened one, other than the vague warm glow you get from not bankrolling nasty industries.
That’s probably a bit harsh. Product providers, and especially the big US-based institutional money managers, have got much better at providing useful data on their basis for screening, their stock selection and exclusion decisions over time, and the projected return differential created by the screening process, which makes life for a financial planner a whole lot easier. In other words, a good start but small-scale and client-centric. And the large elephant in the room is the other side of the equation – what difference does it actually make for the environment?
ExxonMobil, in its recent report to shareholders on carbon risk, gives an insight into the collective denial of the big energy firms, which suggests the answer might be “not much yet”.
They were responding indirectly to the work of the NGO Carbon Tracker, and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics. Their research has done an excellent job of highlighting the incompatibility between global emissions goals and the “risk” posed by such decisive action for the many listed companies which hold carbon reserves (and the markets they are part of).
In theory, these reserves could as a result become valueless, a possibility which the markets have arguably failed to recognise and discount appropriately.
In summary, Carbon Tracker’s work illustrates the likelihood that if governments are really committed to limiting global temperature increases to 2oC above pre-industrial levels (which they say they are), then we are unable to burn even currently known reserves of fossil fuels.
The possible outcomes range between two extremes. On the one hand, that those government targets are merely lip service and that when it comes to the crunch the next 20 years will be business as usual, with a bit more CSR1 reporting thrown in. And second, that vast amounts of fossil fuels held by listed companies are unburnable, valueless, and that anyone investing in those stocks is part of a gigantic case study in the Greater Fool Theory (investing knowingly in doomed stocks because someone less prescient will buy them off you, for more, before they inevitably collapse).
Of course, it’s also possible that markets are pricing other outcomes we haven’t even thought about; say a technology solution that enables us to burn the carbon after all.
And it’s also worth mentioning, in the interests of balance, the progressive approach taken by institutional investors such as Norway’s Government Pension Fund, Stanford University and the British Medical Association, which are all pursuing fossil fuel divestment strategies (the BMA confirmed theirs just last week). Such examples challenge the traditional idea that institutional investors tend to be short sighted beasts.
Nevertheless, ExxonMobil’s response is predictable and wearying. Referring to a “low carbon scenario”, where the world makes good on its stated plans to limit global temperature increases to 2oC, it concludes that the impacts “are beyond those that societies, especially the world’s poorest and most vulnerable, would be willing to bear”.2
Its stance, effectively, is to ignore the guff about CO2 reduction and trust long term projections that emissions will naturally plateau around 2030.
This is depressing for several reasons. Firstly, it makes no mention of the effects of such predicted carbon concentrations on the environment. And secondly, it confirms a terrifying fact – big energy firms are basing their business plans on conveniently encouraging 20 year predictions about carbon emissions, despite the fact that humans are notoriously, consistently unable to predict markets in anything over 20 years. It’s one thing when central banks get it wrong on inflation, another when it’s potential drivers of change getting it wrong on climate catastrophe.
This raises a couple of really thorny issues. One is the “right” of the developing world to follow the same polluted path to economic growth that we did, which is morally insoluble, but clearly puts the emphasis on the developed world to do more helping and less telling.
Second is the traditionally uncomfortable relationship between markets and the real world they exist alongside, where anything that can’t be factored into narrow economic models gets discarded as an “externality”, a polite word for something that doesn’t matter much because it doesn’t affect returns.
Externalities result when the people who enjoy the benefits of something don’t bear the costs, and the costs of the losers outweigh the gains of the winners. Where the market doesn’t lead to a good outcome due to an externality the government has to step in and regulate.
The problem when it comes to climate change is that governments have different interests and can’t agree, and the share price of ExxonMobil (for example) would appear to reflect the high probability that they will continue to disagree until the problems are impossible to ignore.
This leads to a wider debate about the primacy of the markets in the current model, and the weaknesses of liberal democracy as a means of tackling them through adequate regulation.
Not exactly a new tension, and there’s a thread running directly through William Forster Lloyd’s lectures on the overuse of common land by herders in the 1830s, a phenomenon later described by influential ecologist Garrett Hardin as the Tragedy of the Commons.
So what can a concerned investor do? Firstly, follow the work of organisations like Carbon Tracker, who produce excellent research. Their work is shining a light on the issue of stranded carbon and if it makes energy companies respond to the issue, however defensively and inadequately thus far, it can only be a good thing.
Can you avoid stocks whose performance is linked in some way to action on carbon? Almost definitely not. But you can have a screened portfolio which systematically overweights good guys and avoids bad guys based on robust sustainability measures, which is actually a recent, and undoubtedly positive, development. You can get involved in shareholder activism. Bring your charitable giving in line with your portfolio strategy, to achieve maximum impact.
It’s not perfect, but, like all decisions in the SRI arena, it’s a trade-off between your goals for yourself, your goals for the world, and engagement with imperfect markets in a way that ticks as many of the boxes as possible if not all of them.
1Corporate Social Responsibility
2Source: ExxonMobil reports to shareholders on managing climate risk, http://corporate.exxonmobil.com/en/environment/climate-change/managing-climate-change-risks/carbon-asset-risk
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