Ethical finance — Pullback Blog

On 11 August 2015 the United Church of Canada announced that it will divest from fossil fuels. This means that it will sell $5.9 million in fossil fuel assets and commit to building an investment portfolio that promotes renewable energy. This is big news, as the United Church is one of the largest religious groups in Canada.

As an Albertan, I am deeply aware of the trade-offs implied in moving away from fossil fuels: leaving oil in the ground might be necessary to avert climate change but this could have steep implications for many workers in Canada’s resource-dependent economy. The point of this post is not to proselytize about the virtues of divesting from fossil fuels. Instead, I want to use this opportunity to explain divestment; the fossil-free divestment movement; and the likely impact of this move by the United Church of Canada.

This post is a bit different than the previous two, as it does not focus on a specific product (don’t worry: I’ll be putting out a piece on sustainable seafood very soon).

Explaining Divestment

“Divestment” or “divesting” is a socially motivated activity that can be undertaken by private wealth holders. These can be individuals or groups (such as university endowments, foundations, and public pension funds). When actors divest, they withhold their capital from companies that are viewed as contributing to the identified social harm. Perhaps the most famous ongoing divestment movement is the BDS Movement pertaining to Palestine, but divestment campaigns have also targeted Apartheid in South Africa, Darfur, and tobacco.

Evidence suggests that the direct financial impact of divestment is limited, and this is likely to be the case for fossil fuel divestment. However, such campaigns typically generate indirect effects, such as increased public awareness and dialogue, new legislation, and spillover market consequences.

Divestment is often undertaken by groups set up to serve a social purpose, rather than private companies. For this reason, foundations, faith-based groups, governments, and universities have traditionally been key sources of divestment.

Up for debate: is divestment a legitimate choice for a foundation to make, or should endowment managers seek to maximize the financial return that can then be given out as a grant to socially beneficial projects?

There is an ongoing debate about the legitimacy of divestment (and other forms of socially responsible investment) for foundations, an organization type that commonly engages in divestment. Decisions by foundations to divest (or not) matter because these organizations operate by investing sizeable endowments in the market, using the annual return to give out grants for socially beneficial projects. Foundation endowments are sometimes very large: In the U.S., 85 philanthropic foundations have total assets above $1 billion USD. The Gates Foundation, which is the largest philanthropic foundation, has over $41 billion in total assets. These are sizeable funds being invested to serve an ostensibly social mission.

Endowment managers often feel compelled to maximize returns and minimize risk, as the size return that they acquire may dictate how much that foundation can spent on providing grants over the next year. However, it has been increasingly argued that foundations have a responsibility to manage their investments in a way that accords with their social missions. However, it is not always easy to translate this aspiration into practice, partially because the social impact of businesses is often diffuse. This is all linked to the emergence of a similar, but distinct, issue: social finance. If you’re interested in learning more about social finance, check out the articles I wrote here and here.

An example may help to put in perspective how difficult it is to balance the social mandate of the foundation with socially responsible investment decisions. The Gates Foundation – the mission of which is to improve the quality of life of individuals worldwide – has stated that it directs its investment managers not to invest in companies whose activities contribute centrally to egregious activities. As such, it does not invest in tobacco stocks. However, this does not mean that the endowment is only invested in socially responsible companies: the Gates Foundation was recently criticized for investing $1.4 billion USD of its endowment in fossil fuels.

While some foundations have opted to divest from fossil fuels, many others may feel that this issue is not sufficiently close to their social mission; may disagree with the divestment approach; or may feel that maximizing funds available to disburse as grants are most important. These same considerations often influence the decision of other socially-oriented organizations, such as faith groups, non-profits, universities and government agencies, as well.

The Fossil Fuel Divestment Movement

Fossil fuel divestment (going “Fossil Free”) is a divestment movement launched in 2012 under the mantra that “if it’s wrong to wreck the climate, then it is wrong to profit from the wreckage.”[1] The movement has since grown globally to reach $50 billion in divestment commitments from 800 global investors as of October 2014.[2] It is, however, worth noting that many commitments have not yet resulted in the actual reallocation of investment capital.[3]

According to gofossilfree.org, 349 institutions are currently divesting. As the chart below shows, the four largest groups of divesting organizations include: foundations, faith-based groups, governmental organizations, and education institutions (colleges, universities and schools).

This movement is also growing in Canada, albeit more slowly than in some other countries.

The fossil fuel divestment movement is growing across Canadian universities: there are 34 active divestment campaigns operating on campuses across nine provinces. While more than 30 universities worldwide[4] have divested from fossil fuels, none of these are Canadian institutions. University of Toronto may become the first Canadian university to divest from fossil fuels (although Concordia University has initiated a $5 million sustainable investment fund). Following a petition submitted by a student group (Toronto350.org) University President Gertler struck an advisory committee in November 2014. The committee will bring its recommendations to President Gertler by December 2015. The University of Toronto currently has $32 million invested in fossil fuels, of a $1.5 billion total endowment.

Amongst municipal governments, Victoria is leading the charge toward fossil fuel divestment. In July 2015 the city council voted to pursue options to divest from fossil fuels.

While the fossil fuel divestment movement has gained momentum, it remains controversial, including amongst experts. Although some advocate further support for this movement,[5] others argue that it could draw attention from more effective ways to encourage low-carbon energy.[6] Still others posit that it is unrealistic to expect that all fossil fuels be left in the ground, and instead argue for divestment against coal specifically (coal has the most negative environmental and public health effects of any fossil fuel). Coal divestment has gained momentum recently, with two notable victories: the movement was endorsed by Sir Mark Moody-Stuart, the former chairman of Royal Dutch Shell[7] and Norway’s gigantic sovereign wealth fund (the largest in the world, at $890 billion) agreed to divest from coal.[8]

Churches for Action to End Climate Change

The United Church of Canada is by no means the first faith group to go fossil-free. As noted above, faith-based groups account for a quarter of all fossil fuel divestment. And Christian groups specifically have been among the leaders of the fossil-free movement. Other notable divestment commitments this year have come from the Church of England (opted to blacklist coal and oil sands investments) and the U.S. Episcopal Church (voted to divest from fossil fuels).

The United Church of Canada is not the first faith group to pledge to divest from fossil fuels. Eight other Canadian faith groups have made divestment commitments, including one other nationwide faith group: the Canadian Unitarian Council, which divested from fossil fuels in 2012. Nonetheless, this is big news as the United Church of Canada is the largest Canadian faith group to divest from fossil fuels to-date.

Why now? An important background condition might be the upcoming Paris summit on climate change (COP21), which will take place in December 2015. If it is successful, this summit could break the deadlock to deliver a meaningful multilateral climate change treaty, following a weak agreement at Copenhagen in 2009 and the arguably failed Kyoto Protocol.

Some faith organizations, including several Christian denominations, have taken a very active stance against climate change ahead of this climate summit. They have framed ending climate change as a moral imperative, a call to conscience. As an example of this, Pope Francis has released a papal encyclical on the environment in which he demanded swift action on climate change.

The divestment commitments made this year by the United Church of Canada and other faith groups can be seen as a way to signal the importance of this issue and to raise public awareness about climate change ahead of COP21. Only time will tell whether this is an effective strategy. For the moment, the $5.9 million that the United Church of Canada will divest from fossil fuels is a noteworthy new commitment in a country that has been sluggish on going fossil-free.

NOTES

[1] Ritchie, Justin and Dowlatabadi, Hadi. (January 2015). Fossil Fuel Divestment: Reviewing Arguments, Implications and Policy Opportunities. Victoria: Pacific Institute for Climate Solutions at p.5.

[2] Politics and Government Business. (9 October 2014). Divest-Invest; Fossil Fuel Divestment Hits $50 Billion Mark. NewsRx.

[3] Ritchie and Dowlatabadi supra note 1.

[4] Tollefson, Jeff. (6 May 2015). Fossil-fuel Divestment Campaign Hits Resistance. Nature 521(7550).

[5] Rusbridger, Alan. (15 April 2015). Scientists Must Speak Up on Fossil-fuel Divestment. Nature 520(7547); Darby, Megan. (14 August 2015). Former EU Climate Chief Hedegaard backs Fossil Fuel Divestment. The Guardian.

[6] Tollefson supra note 3.

[7] Matthews, Chris. (5 June 2015). Shell’s Former Chairman Made a Startling Comment About Climate Change. Fortune.

[8] Schwartz, John. (5 June 2015). Norway will Divest from Coal in Push Against Climate Change. The New York Times.