The divestment movement finds itself fighting on a new, unexpected front. Fossil fuel interest groups (big oil and gas) have been regrouping their lobbying efforts after losing their key allies in the White House. Disappointed by the recent changes made by the federal administration to prioritize climate and environmental protection above get-rich-quick schemes for these businesses, they are now refocusing their efforts at the state level. Texas is enthusiastically taking up the gauntlet and leading the charge.
Texas legislators are considering a bill, Texas’ Senate Bill 13, which would force the state’s retirement systems and pension funds—responsible for well over $200 billion in assets—to divest from any company that refuses to invest in fossil fuels.i The proposed legislation seeks to target institutional investors that have recently pledged to avoid and/or divest from fossil fuel companies as part of their goal to become net-zero of carbon emissions over the next few decades.
The idea to “divest the divestors” seems to have been first raised by The Texas Public Policy Foundation, a think tank that has long pushed the most extreme denier views (including the idea that coal was responsible for ending slavery).ii The proposal would require the Texas Comptroller of Public Accounts “to prepare and maintain a list of all companies that refuse to deal with, or otherwise penalize another company because the company invests in or assists in the exploration, production, utilization, transportation, sale, or manufacturing of fossil fuel-based energy,” state Sen. Brian Birdwell’s office stated.iii
The bill seeks to prevent companies, retired beneficiaries, and others from suing the state over the divestments.iv The reason for the insertion of this language is clear in our view. By not only ignoring sustainability factors, but purposely excluding sustainable investments, the state will be neglecting the fiduciary duty they owe to the very beneficiaries whose funds they are entrusted to protect. The fiduciary obligation above all is meant to preserve and increase capital in a prudent manner. As the numbers below indicate – investor managers need to be considering these factors as part of their investment process as fiduciaries.
Sustainable investing, a cornerstone of which focuses on divesting or limiting exposure to fossil fuels, has built an impressive track record of outperformance.* In 2020, U.S. sustainable equity funds outperformed their traditional peer funds by a median total return of 4.3%.v According to Morningstar, over three, five- and ten-year periods, most sustainable strategies have outperformed their non-ESG brethren.vi It has become more and more obvious that sustainability factors are no longer just a personal decision, but also a valid metric that can drive long-term outperformance.vii As such we view fossil fuel divestment as not just a moral decision, but also a strong business and investing strategy.
A growing number of banks and investment firms have decided to pull their financial support from the riskiest fossil fuel investments in the Arctic and elsewhere. Their logic is unassailable – the free markets are signaling that these projects will be a terrible place to allocate resources for financial returns. This is driven by cost parity (or better pricing) for solar and wind energy generation. Renewables fell below the cost of coal in 2018. Even without green subsidies, the latest estimates of the total cost of building and operating an electricity producing facility over its lifetime shows renewables beating fossil fuels by ever-larger margins.viii In other words, it is now cheaper to save the climate than to destroy it.
It is clear in our opinion that the tides have shifted, and the market is responding. Divesting from fossil fuels has transcended from a moral imperative to a prudent consideration for a smart asset allocation strategy. The idea that oil will play a smaller role in the economy is becoming more of a fact than crazy prognostication. The transition to this new economy will occur despite all the kicking and screaming of the old guard, as it has become all but inevitable. By embracing this shift, we cannot only create a better environment but also sustainable economic growth. It is still early enough in the game for the U.S. to capture the next generation of high paying jobs in these new industries. Texas has taken the first step with building up its arsenal of wind and solar installations. Only through embracing the new paradigm do we have a shot to succeed in the new economy as it transitions from its reliance on oil and gas. To ignore the call not only serves to breach fiduciary duty but hinders the long-term growth prospects of the economy.
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Investment and insurance products and services are offered through INFINEX INVESTMENTS, INC. Member FINRA/SIPC. Amalgamated Investment Services is a trade name of Amalgamated Bank. Infinex and Amalgamated Bank are not affiliated. Products and services made available through Infinex are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value.
*Past performance is not a guarantee of future results.