If the purpose of your existence is to make the world a better place, why would you invest billions of dollars in the companies which make the greatest contribution to global climate change?
Sadly, perhaps, there isn’t a simple answer to that simple question. It would be nice, in a way, if we could just ascribe all of these investments to some kind of misplaced avarice. But that doesn’t even make sense on its face: it’s not like buying shares in these companies is some kind get rich quick scheme. Indeed, oil and gas companies have significantly underperformed the market as a whole over one year, three years, five years, ten years — you name it.
The real answer is more complicated function of priorities, pragmatism, politics, and portfolios.
For one thing, trusts like Wellcome and the Gates Foundation tend to have a very wide gap between the people investing their assets, on the one hand, and the people spending them, on the other. In the case of the Gates Foundation, for instance, all the assets are managed by a separate entity, the Bill & Melinda Gates Foundation Trust. The people managing the money are not guided solely by profit maximization: there’s a formal investment philosophy which singles out tobacco and Sudan as areas where the Trust will not put any money. But the reason for the separation of responsibilities is clear. The job of the investment managers is not to directly make the world a better place. That’s the job of the foundation proper. The job of the money managers, by contrast, is just to be good stewards of the foundation’s assets. The greater the amount of money the foundation has, goes this theory, the more good it can do in spending that money.
On this view, it’s downright counterproductive for the investment arm of any foundation to care on an ethical or idealistic level about what exactly it’s investing in. By cutting off any potential investment, the total portfolio becomes financially suboptimal, which could end up hurting the amount of money available for program activities.
Such arguments are very easy for foundations’ portfolio managers to make. The people who manage foundations’ billions are highly-paid professional money managers, and they are generally very good at what they do. They scour the world for investments, and they try to invest on the “efficient frontier”: the place where you can get the perfect balance of high returns and low risk. But in order to do that, they need to be able to move their money around more or less at will. The more no-go areas there are, the further away from the efficient frontier they will find themselves, and the more frustrated they tend to become.
An earlier version of the Gates investment philosophy went into substantial detail about why the foundation was wary of divestment campaigns in general. Much of it was a “slippery slope” argument: if the Gates Foundation divested from every company which failed a series of social-responsibility tests, pretty soon there’d be almost nothing left to invest in. That in turn would violate the need for the foundation to be diversified, “so that our programs will always have a stable base of funding”.
Things are changing, slowly. The latest version of the Gates investment philosophy gives more shrift to those who say the Foundation’s investments should, in general, reflect its mission: “When instructing the investment managers,” it says, “Bill and Melinda also consider other issues beyond corporate profits, including the values that drive the foundation's work.”
As well they might. Like most foundations, the Gates Foundation is designed to live in perpetuity. While the annual donation from Warren Buffett has to be spent in full each year, the Gates Foundation Trust itself only gives away 5% of its assets annually — the bare minimum to qualify for charitable status. As a result, 95% of the money being put to work in any given year is being invested in financial assets, rather than spent on charitable activities. If a substantial part of that 95% is being invested in pumping carbon into the atmosphere, thereby helping to ruin the planet for all living things, it’s easy to see how the negative effects of the foundation’s investments could end up being greater than the positive effects of its charity.
Even if you’re granted that, however, you’re still not going to make the foundations divest. Because all you do is run into another obstacle, which is that charitable foundations, by their nature, love to make a difference. They want to be able to draw a causal connection between their actions, on the one hand, and some improvement in the state of the world, on the other. If they sold their shares in fossil-fuel companies, carbon emissions would not fall, and neither would the proven carbon reserves of those companies, or the profits that those companies make. Even the share price of the companies would barely budge.
The Guardian is making a really big ask, with its Keep It In The Ground campaign: oil, gas, and coal constitute between them an enormous proportion of the global economy, and avoiding them entirely is genuinely extremely difficult if what you’re doing is trying to maximize risk-adjusted returns. That might not seem like a huge deal to you or me — fine, we’d say, we’ll just move our investments that much further away from the efficient frontier. Some things are more important than marginal investment returns. But we’re not the kind of people who end up managing multi-billion-dollar portfolios. And the people who do end up managing those portfolios find such thinking borderline incomprehensible.
Those people, when asked to consider divesting from fossil fuel companies, naturally start thinking about the costs and the benefits. The costs they can work out, in terms of those reduced marginal investment returns. When it comes to fossil-fuel companies, it’s not so much that they’re great investments in and of themselves. (Indeed, in recent years, they haven’t been.) It’s more that they’re investments which can reliably generate income, the all-important cash which is spent each year on charitable activities. If you have oil and gas companies paying hefty dividends, then you don’t need to liquidate any of your other stocks to give money to the foundation.
In other words, this isn’t a question of whether or not shares in fossil-fuel companies are “a good investment”, in terms of shares which will go up fast, outperforming the market. They might or they might not, no one knows for sure. But a well diversified portfolio needs energy exposure, given how important energy is to the economy.
What’s more, while it’s possible to replace coal energy with renewable energy in the real world, you can’t really do that in a portfolio. Commodity / resource companies, on the one hand, are an entirely different asset class to “green tech” companies, on the other. (Which, incidentally, have also proved to be pretty bad bets of late.) Renewable technology pays no dividends, has no obvious path to long-term profitability, can easily get disrupted, and controls no resources. (You can’t buy up a large chunk of the world’s wind capacity.) In any case, a huge amount of the research and development being done in the renewable space can be found in the very companies from which the Guardian is asking the fund managers to divest.
Still, couldn’t the Gates Foundation and the Wellcome Trust be more like Generation Investment Management, the multi-billion-dollar socially-responsible investment fund run by David Blood and Al Gore? Well, for one thing, it’s entirely possible that Generation already invests a bunch of Gates or Wellcome money. But all the tenets of responsible investing say that it would be downright irresponsible for an endowment to put all of its money into such a strategy.
Generation is in the business of making big, concentrated bets. That’s an inherently risky strategy which has both big upside and big downside. It has its place within a broader diversified portfolio — which is exactly how it’s used in practice. It’s socially responsible to give Generation some of your money to invest. But at the same time it’s financially irresponsible to give Generation all of your money to invest.
The people running the world’s big endowments don’t tend to like to make what’s known as “big macro bets” about things like the likelihood of a global cap-and-trade system being introduced and the concomitant likelihood that fossil-fuel companies would fall in value as a result. For one thing, the endowment managers don’t have any particular “edge”: a reason to believe that they’re smarter than the market as a whole on such matters. And for another, in the markets, being early is the same as being wrong. The knowledge that something is going to happen is very low-value information, unless you know when it’s going to happen. One big reason why it’s hard for big money managers to divest from fossil fuels is exactly the same as the reason why it’s hard for you or me to divest from fossil fuels: it’s silly for us to think we’re smarter than the market as a whole, that we can outperform by anticipating future events. So we end up investing in everything, through index funds and the like, and fossil fuels are a very large part of that everything.
As a result, it’s quite easy for fund managers to see real and quantifiable costs to divesting from fossil fuels. Yet conversely, when they turn to the benefits, they’re going to see very little which is quantifiable at all.
The result will be a typical quant question: if you’re going to do something which costs X million dollars, wouldn’t you rather go to Africa and use the money to save tens of thousands of lives? Instead of simply transferring ownership of a bunch of stocks to someone else who will probably put less pressure on those companies to improve their environmental bona fides?
It’s not a bad point. As the Wellcome Trust’s Jeremy Farrar says, if you want to make a measurable difference, you’re probably going to have more of an effect through engagement than you will through divestment. If a company owns a lot of coal or oil which is in the ground, it might well be more effective to use your clout as shareholder to try to persuade them to keep it there, rather than to simply wash your hands of the company entirely, leaving them to extract and burn as much of it as they can. (The 200 companies on the Guardian’s list are the ones with the largest fossil-fuel reserves.) Engagement is pretty weak tea, for the most part: the chances of the Wellcome Trust being able to change the behavior of ExxonMobil are decidedly slim. But divestment is weaker still, in terms of its practical effects: it just transfers shares to investors who don’t care at all.
The big point that the endowment managers are missing, however, is about the limits of pragmatism, especially when it runs straight up against basic ethical idealism. The reason to divest from fossil fuel companies is not that, looked at on a cost-benefit basis, divestment is likely to make a bigger difference than engagement. Instead, the main reason to divest from fossil fuel companies is simply that it’s the right thing to do. By owning shares in these companies, the Gates and Wellcome foundations are profiting from activity which is destroying the planet. They don’t need to do that, so they shouldn’t.
Doing the right thing is often a powerful force for good in the world. Maybe not in the way that foundations like to look at it, in the sense of “can we measure the difference that we’ve made, with this specific action”. But if the Gates Foundation and the Wellcome Trust divest from all of the biggest fossil fuel companies, that sends a very clear message. Neither of them invest in tobacco companies, because tobacco is harmful and kills people. Divestment from fossil fuel companies is a statement that carbon emissions are just as harmful, and that they’re not something these foundations want to associate themselves with.
Fossil-fuel divestment is a political gesture, rather than a costed-out charitable expenditure. It’s idealistic, rather than technocratic. It’s the right thing to do even if it turns out to be utterly futile. And that’s why the foundations aren’t doing it: that’s not how they think, how they operate.
Both the Gates Foundation and the Wellcome Trust employ many skilled professionals whose job is to make the world measurably better, who judge actions by results. They might be motivated by idealism, but their day-to-day work is resolutely pragmatic. A campaign like this one speaks to their hearts, to their ideals, even as people like Bill Gates ultimately make decisions with their heads.
The Guardian’s campaign, then, is, I’m afraid, not going to work. Which is to say, it’s not going to actually succeed in persuading the Gates and Wellcome foundations to divest from fossil fuels. And yet it’s hardly a waste of time and effort. In a very real sense, it has already worked. Some 180,000 people have signed the petition, with more names being added by the minute. The idea is out there: it’s going viral. We’re changing the way that the world thinks about fossil fuels and we’re changing the way that the world thinks about the companies which profit from them. Which means that we have changed the world for the better. Let’s keep it up.
This article was first published at the Guardian.