What Professionals Considering ‘Sustainable Investment’ Policies Should Know
Climate Change Weekly #311
Professional investment fund managers, including those managing university endowments and public pension funds, are being increasingly pressured to adopt so-called “sustainable investment” policies, such as investing the funds entrusted to them in renewable energy projects or divesting from fossil fuels.
A long-time friend, Paul Driessen, has powerfully argued giving in to the siren call of sustainable investment is morally fraught and is devastating to the poor in developing countries. Speaking on a panel discussing sustainability and sustainable investment at The Heartland Institute’s 12th International Conference on Climate Change in 2017, Driessen argued the sustainability movement is currently the greatest threat to continued human progress, especially to raising billions of people in developing countries out of poverty, because sustainability advocates focus all their attention on the potential harms of fossil-fuel use and new innovations, like genetically modified medicines and crops, while ignoring the tremendous benefits they provide.
As a result, Dreissen said, sustainability and sustainable investment policies “are not just wrong: They are unethical and unsustainable. They insult human dignity, reduce human living standards and lifespans, … are inhumane, eco-imperialistic, and even genocidal. True sustainable development … allows people freedom to use technologies and practices that conserve resources, reduce waste and pollution, and ensure current generations maintain their living standards in industrialized nations and have the energy and resources needed in poor countries to end the poverty, disease, and malnutrition that for too long have made life there nasty, brutish, and short.”
Not everyone is convinced of the immoral nature of adopting sustainability as the guiding principle of investment. Some may feel the plight of the poor in developing countries is beyond the scope of their moral concern, or they may take sustainability, regardless of its consequences for the poor, as a moral guidepost for how to live, including how to invest.
In addition to ethical considerations, portfolio managers and institutional investors have two other reasons not to adopt sustainable investment polices: (1) they most often will reduce portfolio returns, costing their clients money; and (2) pursuing investment policies for reasons unrelated to improving portfolio performance, except in rare circumstances, violates the fiduciary duty fund managers have, potentially opening them up to lawsuits. That’s the conclusion of a new report by The Heartland Institute, “Fallacies of So-Called ‘Sustainable’ Investments,” by Martin Hutchinson, who worked as a merchant banker for decades for top European and American financial firms.
Hutchinson examines efforts by anti-fossil fuel activists to pressure portfolio managers, often with government support, to invest according to the United Nations-initiated “Environmental, Social, and Governance” (ESG) investment criteria. Approximately $12 trillion are currently invested in accordance with ESG criteria, with nearly $2 trillion explicitly aimed at achieving environmental goals.
Hutchinson shows although ESG is meant to guide managers in ways they can promote a better world while growing their clients’ wealth, it has become a major tool for those who believe humans are causing catastrophic global warming to destroy the fossil-fuel industry in favor of allegedly sustainable alternatives like wind and solar industrial facilities, often at the expense of portfolio returns.
If individuals are willing to accept lower returns or higher risks on their investments because they morally endorse the idea of sustainability or because they fear supposed human-caused climate change is the greatest threat facing civilization, they are welcome to invest in ways that promote their agenda. Indeed, there are entire investment funds guided by sustainability principles they can invest in. That’s their business, Hutchinson notes, but that’s not true of the vast majority of investors.
“Professional investors managing institutional portfolios for others, especially large retirement funds, have a legal and moral obligation to look first and foremost to their fiduciary duties to their clients,” Hutchinson writes. “They are ‘playing with other people’s money,’ not engaging in an exercise to promote their personal values.”
Hutchinson notes sustainable investments have two sources of risk: the normal risk any investment faces that the companies invested in do not make sufficient money in the marketplace to provide competitive returns or even to survive; and in the case of many “sustainable” investments, risk stemming from the fact the companies invested in are often supported heavily by government subsidies, incentives, and even mandates, income at risk of disappearing if the political winds change.
For instance, dozens of companies in the renewable energy industry involved in the manufacture, sale, and installation of wind turbines and solar panels have gone bankrupt as government support was reduced or withdrawn entirely, harming investment portfolios.
Hutchinson concludes, “Investing in ‘sustainable investments’ is a good way to lose money.”
Previous research confirms Hutchinson’s analysis. For instance, a report by Compass Lexecon, a large economic consulting firm, determined the decision to divest fossil fuel stocks from portfolios will reduce returns to the portfolios that embrace divestment, hurting retirees, public employee pension funds, and other institutional and individual investors. This is especially dangerous in the case of public pension plans, which in many instances are already woefully underfunded and thus need to maximize their rate of return to avoid either having shortfalls or requiring substantial taxpayer bailouts of the funds.
Compass Lexecon compared the performance of diversified stock portfolios and endowments that included the stocks and bonds of companies in the fossil fuel industry to funds lacking any fossil fuel holdings over a 50 year retrospective sample period. It found “an optimal equity portfolio including fossil fuel stocks outperforms a portfolio of equal risk divested of energy stocks by an average of 0.5 percent per year,” resulting in divested portfolios over a 50 year period having 23 percent lower value than diversified portfolios including fossil fuel-related companies. This amounts to trillions of dollars in foregone gains.
Digging into the details, the Compass Lexecon study analyzed the potential effects of fossil fuel divestment on 11 public pension funds, including CalPERS, the largest such fund in the United States, and various public employee pension funds in Chicago, New York City, and San Francisco. Over the 50 year sample period, had all 11 pension funds fully divested their portfolios of companies in or financing the fossil fuel industry, they would have experienced $4.9 trillion in lower returns, with CalPERS alone suffering $3.1 trillion in losses.
Research conducted by the National Association of Scholars examined efforts by radical environmental lobbyists to persuade colleges and universities to divest from fossil fuels and adopt sustainability programs on campus, finding most universities have rejected divestment calls and those that adopted sustainability goals have, in many instances, lost money on their investments. Harvard University, for example, lost more than $1.1 billion on so-called green investments.
In short, “sustainable investment” is a loser from an ethical, economic, and, for portfolio managers with fiduciary duties, legal perspective. My (informal and unofficial) advice to professional portfolio managers considering instituting sustainable investment policies to guide their management of their clients’ funds is, “Just say No!”
- H. Sterling Burnett
IN THIS ISSUE …
Prominent meteorologist J. Ray Bates has written a detailed critique of the Intergovernmental Panel on Climate Change’s (IPCC) October 2018 Special Report which claims climate change is proceeding more rapidly than previously estimated, and that to avoid catastrophic changes, governments must radically transform the world’s economy to achieve zero carbon dioxide emissions by 2050.
In “Deficiencies in the IPCC’s Special Report on 1.5 Degrees,” Bates writes, “Given the extremely costly and highly disruptive changes this course of action would entail, the rigor of the underlying scientific case should be beyond question.”
Bates says the special report fails to exhibit scientific rigor, ignoring data and lines of evidence indicating no climate catastrophe is in the offing, with current changes in climate and temperature being within the historic range of natural variability.
Among the crucial lines of evidence Bates finds the IPCC’s special report ignores is the most accurate source of temperature data—satellite temperature data—which shows warming slowed or even plateaued for nearly 20 years despite accumulating carbon dioxide. In addition, IPCC’s special report tailors its reporting to hide the fact the Earth warmed substantially in the early part of the 20th century, before humans added significant amounts of carbon dioxide to the atmosphere, the planet cooled for more than 20 years after humans started adding carbon dioxide after 1950, and ocean temperatures were warmer in the early 20th century than they are now. Each of these lines of evidence indicates a strong natural component to climate change, Bates concludes.
In addition, Bates points out IPCC researchers continue to “tune” climate models to accurately portray the warming of the later third of the twentieth century, but when the models are so tuned, they then don’t accurately portray the warming in the first half of the twentieth century or the pause in warming in early part of the twenty-first century.
With such glaring weaknesses, governments should not rely on the special report’s projections of disaster to determine energy or climate policies, Bates concludes.
SOURCE: Global Warming Policy Foundation
China has backtracked on policies implemented to increase solar power, announcing it would not approve any wind and solar power projects unless they can compete with coal power plants strictly on the basis of price.
Under a plan announced in May 2018, the Chinese government had granted large solar power projects a per-kilowatt-hour (kWh) subsidy. The government is cancelling that subsidy for new projects immediately.
In addition to cost considerations, the government said the rapid expansion of wind and solar power had created logjams on the electric power grid, resulting in wasted electricity due to lack of capacity to transmit and distribute the rapidly fluctuating power. In 2017, capacity issues resulted in 12 percent of wind generation and 6 percent of solar electricity generated being wasted.
According to plans announced by China’s National Development and Reform Commission, no new solar and wind projects would be approved through the end of 2020. Any projects proposed beginning in 2021 will have to show they can beat the price of coal power and demonstrate the electric power grid can handle their output. The national government will allow local governments to continue to offer their own subsidies for wind and solar projects if they wish, as long as any projects they support meet the second condition. The national government also announced it would no longer provide support for local solar or wind manufacturing facilities.