Things to Consider When Reinvesting Out of Fossil Fuels

By Benjamin Bingham, CEO of 3 Sisters Sustainable Management.

The divest/invest movement is gaining traction, particularly since The Guardian’s recent announcement that it will cut fossil fuels from its own sizable endowment. The Guardian is campaigning to influence large foundations to follow suit.

So far this movement has been focused mostly on the divestment side: institutional investors are unloading the worst companies, particularly in relation to pollution and fossil fuels.

The largest sovereign wealth fund in the world, Norway’s, is primarily funded by offshore drilling of fossil fuels, and for many years the fund spent most of its research dollars on discovering which were the worst companies in the world. If the companies changed their strategies, they could get back on the list of 8,000 or so public companies that the fund owned. This was an active approach to divestment, but it was not an active approach to invest in solutions. Now Norway is beginning to invest in clean solutions on a small scale. With only 5% of the world powered by renewables, surely this is a huge growth area.

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Since the 1980’s, many progressive investors have done their own angel investing or venture investing to change the world for the better — what I call: “one-off investing” — in projects they loved. They were often hurt. Great ideas don’t always make money; good management and enough capital are also essential. And timing can be everything.

After a bad experience in one-off clean or green investing, it’s natural to return to a traditional style of investing. Then, if you want to make a difference, the simplest thing to do is to make sure you are not invested in companies that are hurting the environment or people. So divest. But what now?

First of all, you don’t want to lose your diversification. You don’t want to be in a monoculture, and you don’t want to risk everything in a small universe; so even if you stay in public markets, it’s important to replace the quality, from a financial perspective, of the companies you are selling with companies that have similar attributes and that will act similarly in your portfolio. That’s the first step.

So, if you are cutting fossil fuel based companies that have big dividends, you might want to find renewable energy companies to give you exposure to the energy sector, and also find other companies with big dividends. That combination can replace the fossil fuel position.

In such a scenario, you still have energy market exposure, and as renewables take over from the dinosaur age of fossil fuels, you will be well positioned for growth. You also have something to replace the dividends you received from the oil companies.

That’s just one example and one industry. If we are going to follow this model of divest/invest, we can begin to look into each industry for a key idea or strategy to replace the old paradigm.

Every investor will have their own key ideas, covering what’s most important to them, what do they see as the future, and what’s the long-term value.

As another example, look at health care. If we are going to avoid chemical compounds that do not occur naturally, simply from a precautionary perspective, then it becomes necessary to consider natural remedies, homeopathic remedies, prevention and wellness programs.

The decision tree that we use in our family of impact funds is based on the “Natural Step” process developed in Sweden in the last part of the 20th century. Although it was widely known in the 1990s, it seems to be largely forgotten now. I believe it is time to reconsider this approach.

The “Natural Step” formula was developed by a research scientist in Sweden who became compulsive in his concern about the fact that most cancers are environmentally caused. He had come to the belief that we wouldn’t have to suffer most of the cancers that occur in the world if we were to merely change our way of thinking.

Over five years, he and his research association members went back and forth in deciding what was most important to say to the world. What could be done, and what simple framework would guide people to make decisions that would not harm the environment and lead to cancers?

The outcome was a simple formula that could be expressed in a short elevator ride. It is a formula that would change more than the reduction of environmentally caused cancer. It could be the basis of a whole slew of improvements for our world. The formula has four steps, with the first three being avoidances:

1) Number one is to avoid the extraction of substances from below the earth’s crust. The reason for this is that most environmental problems are a result of extraction, because the biosphere is not prepared to handle the materials that belong below the earth’s surface.

2) The second step is to avoid chemical compounds that do not occur in nature. Many such compounds show up in organisms in the natural world where they should not be, sometimes decades later. It is well known that many pharmaceuticals end up in the water table, for example. That’s without meaning any harm. These pharmaceuticals may not be designed to be toxic to nature, unlike pesticides, herbicides and GMOs that more obviously should be avoided.

3) The third step is to avoid processes that are degrading to nature. Examples include direct pollution such as the spilling of oil, but there can be many more subtle ways of degrading nature.

4)  The fourth step is the one that we prioritize. It seems simple:  take care of human needs. However, when you begin to think about this standard, it is not so simple. The Natural Step worked within Chilean economist Manfred Max-Neef’s framework, which, unlike Maslow’s pyramid of needs, values all human needs equally.

We all need the security of a home, food, clothing — all the obvious physical needs. Then on an emotional level, there is a universal need for belonging, a need for community, a need to be part of something. And finally, on the level of the individual, we all need to be unique, to be creative and free to express ourselves.

So in looking at each industry we suggest that investors consider this first: what human needs are being taken care of by a particular approach, with the products and services under consideration as an investment, and why might they be the most beneficial, the ones that will last the longest and be the most useful in the long run.

My book Making Money Matter includes such research reflections on what is most important to consider in each industry. Our Scarab Funds now have a three year track record using this approach in multiple asset classes. We believe this approach can one day become the norm.

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