Should “green” funds invest in fossil fuels?

Bill McKibben’s groundbreaking Rolling Stone story (Global Warming’s Terrifying New Math) and 350.org’s “Do the Math” divestment campaign raise important and difficult questions about fossil fuels. One that is starting to roil the world of socially-responsibly investing is this: How should mutual funds that strive to be “green” or “sustainable” or “socially responsible” deal with the fossil fuel companies in their portfolios? Should they divest, as McKibben argues?

That was the topic of a column I wrote last week for the Guardian Sustainable Business, which generated some noteworthy responses. It’s part of the British newspaper The Guardian, which has one of the most popular English language media websites in the world. Here’s how the column begins:

“We’re going after the fossil fuel industry,” Bill McKibben tells about 1,800 cheering fans in a Washington, DC, theatre. “They’re trying to wreck the future, so we’re going after some of their money.”

Al Gore notwithstanding, McKibben – an author, academic and founder of the grassroots climate group 350.org – is America’s leading environmental activist. His 21-city Do The Math tour begins a campaign to persuade colleges, churches, foundations and governments to divest their holdings in coal, oil and natural gas companies.

“It does not make sense,” McKibben tells the Washington audience, “to invest my retirement money in a company whose business plan means that there won’t be an earth to retire on.”

He’s right about that, but the divestment campaign raises a thorny question: where can investors who worry about climate change put their money?

Divest for our Future, 350.org’s divestment website, recommends “environmentally and socially responsible funds“. The trouble is, the biggest and best-known mutual funds that call themselves environmentally and socially responsible also invest in fossil fuel companies. They evidently haven’t heard McKibben’s message.

Is this green?

The column–you can read the rest here–goes on to report that the Parnassus Equity Income Fund  holds about 14% of its assets in oil, natural gas companies and electric utilities that burn fossil fuels, that the TIAA-CREF Social Choice Equity Fund owns shares in dozens of oil and gas firms including Hess, Marathon and Sunoco, and a pair of shale gas giants, Devon Energy and Range Resources, that the Calvert Equity Portfolio  has about 10% of its portfolio in fossil fuels, including  Suncor, which says on its website that it was “the first company to develop the oil sands, creating an industry that is now a key contributor to Canada’s prosperity,” and that the Domini Social Equity Fund has, among its top 10 holdings, Apache Corp, an oil and gas exploration and production company.

Are you surprised to learn that these funds invest in oil and gas companies, including those in the Canadian Tar Sands? Perhaps naively, I was. [click to continue…]

Investments in genocide, hidden from view

Here’s what Eric Cohen, the chairperson of Investors Against Genocide, told a congressional hearing today:

It has been over 12 years since the U.S. imposed sanctions on Sudan and noted serious human rights abuses, seven years since the Darfur genocide began, six years since Congress declared it a genocide, and five years since the movement for targeted divestment from Sudan began Yet most financial institutions are still investing in the worst companies funding the genocide, and, through the fund offerings of these investment firms, millions of Americans are caught in the web of these problem investments, almost always unknowingly and without the possibility of choosing.

Tragically, he’s got a point. Better, he’s got a proposal–a requirement that mutual funds disclose whether they chose to be “genocide-free,” which is simpler than it sounds. Better yet, he had a receptive audience on Capitol Hill–Rep. Gregory Meeks of New York and Gary Miller of California, who are the chairman and ranking member of a subcommittee of the House Committee on Financial Services, as well as such interested legislators as Mike Capuano of Massachusetts, who has been active on Sudan issues. Congress could act to mandate fuller disclosure from the mutual fund industry next year.

Genocide in Darfur

Investors Against Genocide has been campaigning against money management firms that own stock in companies that do business in Sudan since 2006. (See Fidelity’s Sudan Problem at fortune.com and  Fidelity, Vanguard and the genocide in Darfur) The group has asked financial institutions to avoid investments in foreign firms that are known to substantially contribute to genocide or crimes against humanity, an approach it calls “genocide-free investing.” (U.S. companies can’t operate in Sudan) Socially responsible mutual fund families Calvert Investments and Domini Social Investments have also taken a leadership role, cleansing their portfolios of companies doing business in Sudan and asking others to do so. As Domini’s general counsel, Adam Kazner, told the submcommittee:

Investors are not simply passive actors in this system – they are playing a critical capital allocation role, and should be mindful of the implications of their investment decisions.

Congress has stepped up to the plate before. In 2007, it passed the Sudan Accountability and Divestment Act (SADA), which prohibits the government from contracting with companies doing business in Sudan and supports state and local divestment efforts. Thirty-five U.S. states have enacted legislation or adopted policies affecting investments related to Sudan, primarily in response to the Darfur crisis and Sudan’s designation by the U.S. government as a state sponsor of terrorism.

So what’s the problem? Essentially this–a small group of foreign companies continue to operate in Sudan. According to Cohen:

In Sudan, the CNPC group (including PetroChina), the Sinopec group, Petronas and ONGC are internationally recognized as providing the government of Sudan with the funding needed to support the genocide in Darfur. The government of Sudan has used 70% of its oil revenue to provide arms and funding for the genocide. Some of these same problem companies are also active in Burma and Iran.

Some U.S.-based mutual funds then invest in those companies. Fidelity, Vanguard and Franklin Templeton have been singled out by Investors Against Genocide for holding shares in Chinese oil companies.

No one from the  fund industry testified before Congress. Fidelity has said that stopping the genocide is a matter for government officials, not mutual fund managers, while Vanguard has said it has a human rights policy, while continuing to invest in companies doing business in Sudan.

Shareholder proposals calling for divestment were defeated at Vanguard and Fidelity funds, but that’s no surprise since most mutual funds investors automatically vote their proxies with managements. It’s safe to say that most investors would rather not see even a tiny fraction of their money supporting genocide in Sudan, or winding its way to Iran or Burma, with their terrible human rights records.

Investors Against Genocide has scored a couple of big victories. TIAA-CREF, to its great credit, first lobbied the Chinese oil firms to get out of Sudan and then sold its holdings. (Here’s the fund’s announcement.) The American Funds group also sold its stock in PetroChina, but did so without explanation.  Cohen told me: “I congratulate them even though they won’t say anything publicly.”

Some investors have taken note. Last May, the Unitarian Universalist Association’s Board of Trustees announced that it would end a 10 year relationship with Fidelity and move their $178 million retirement accounts to TIAA-CREF in order to be genocide-free.

You can read all the testimony, as well as a GAO report on the issue, here. Cohen’s testimony provides specifics on how genocide-free disclosure would work. Mutual funds would be required to disclose if they have a policy prohibiting investments in countries that have been subject to U.S. government sanctions for human rights violations. Right now, they report on their holdings only once a quarter, and their human rights policies, if any, can be hard to find.

Says Cohen: “Right now you need a doctorate in research to have a clue about who’s on what side.”

This seems like a classic example of investors’ right to know. Transparency would shed some light on the values of the investment firm, and we can hope that markets would do the rest.

Social funds: BP, the 1960s, and greed

Recently, after posting a column about BP and socially responsible mutual funds (See Social Funds and BP: How embarrassing!)  I heard from Adam Kanzer, who is managing director and general counsel at Domini Social Investments. While Domini has never owned shares of BP, Adam and I began a conversation about the role  of socially-responsible mutual funds. Adam, who has been in the fund business for twelve years, is a smart and committed executive, but we don’t always agree, so we decided to engage in a dialog about social funds.

Adam Kanzer

Adam Kanzer

Marc: Adam, let’s start with BP. Why did Domini exclude the company? Do you hold any other oil or coal companies?

Adam: Domini has consistently excluded BP from our portfolios because of our concerns about their safety record. Our initial review followed the Texas City explosion in 2005, but our decision was quickly reinforced by the Prudhoe Bay spill the following year.  We met with BP to discuss these and related issues with them. And each time we revisited BP, we found more violations.

We’re looking to identify the key sustainability challenges each company faces. For the oil and gas industries, worker safety and environmental compliance are among a handful of core issues we consider.  I should also note that we have consistently excluded Transocean and Halliburton, both of whom played a role in the Deepwater Horizon project. In addition we have also consistently excluded Massey Energy, the other current poster-child for disaster, as well as Toyota for substantial safety, employee relations and human rights concerns.  We discuss these decisions on our website. And yes, we do hold other oil and gas companies, although we set a high bar for entry. We do not invest in companies whose core business is coal mining.

Marc: Any thoughts on why BP was so widely held by other socially-responsible funds?

Adam: As CEO of BP, Lord Browne made very important statements about the reality of climate change at a time when others in his industry were denying its existence. That was important. In addition, BP has been committed to transparency on its social and environmental performance. I can’t speak for other firms, but I can see how those factors may have led some to hold BP. We felt that the safety and environmental issues outweighed these positives.

If a fund’s benchmark is heavily weighted towards oil, then an SRI manager will need to consider that. This tyranny of the benchmark certainly led many to hold BP and other oil companies that in a perfect world they would have preferred to avoid.

Which brings me to the important question that I have not heard – why did all of the so-called ‘mainstream’ investors buy BP? Why did investors allow this company to become one of the largest in the world by market capitalization? At least social investors weighed these issues and came to a decision. The rest of the market acted as if there was no problem.

Marc: That’s an excellent point, and it makes me wonder why people pay mutual fund managers such high fees. They missed the housing and Wall Street bubbles, and didn’t see or care about the safety issues at BP. Clearly most  funds aren’t very good at managing risk.

Turning to another topic, many SRI funds have their roots in the anti-war movement of the 1960s and 1970s as well as in faith-based investing. So funds like Domini exclude companies that make weapons, alcohol, tobacco and nuclear power. My question is, why? Let’s start with weapons. Don’t we need companies that make weapons in the post 9/11 era?

Adam:   First, it is important to understand that we divide those industries into two general categories – companies that provide addictive products and services, and companies whose products contribute to geopolitical instability. We place military weapons manufacturers and nuclear power in the latter category. We do not consider investments in addiction and global instability to be productive uses of capital.

National defense is too important to be placed in the hands of the same system that brought us the financial crisis. When Eisenhower issued his warnings about the growth of the military-industrial complex, he wasn’t questioning our need for a strong national defense. Yes, we need weapons, but do we need publicly traded companies manufacturing weapons? Are the capital markets an appropriate mechanism for providing these goods, or have the markets distorted our national priorities? That’s a critical debate our nation needs to have.

There are also categories of weapons that violate international humanitarian law because they cannot distinguish between military and civilian targets. These include landmines, clusterbombs and nuclear weapons. These ‘products’ make the world more dangerous, and landmines have caused incalculable misery to innocent civilians – including children – around the world. As investors, we have a responsibility to choose wisely. Our Funds’ shareholders choose not to profit from these violations, so we exclude these manufacturers and companies that manufacture nuclear weapons delivery systems.

Marc: What about nuclear power? Some environmentalists, notably Stewart Brand, say we need to seriously consider nukes in light of the climate crisis? [click to continue…]