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World Environment Day 2016

To divest or not to divest - What is the question?

6 June Jun 2016 1154 06 June 2016
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The discussion in the session ‘To divest or not to divest – What is the question?’, which took place at the European Foundation Centre Annual General Assembly on 26 May 2016 has centered on the fossil fuel divestment and explored whether foundations should divest their endowments as part of their response to climate change.

Divestment is the opposite of investment. Whilst investment means buying assets in order to generate financial returns, ‘divestment’ means removing particular equities, bonds or funds that are morally ambiguous.

The fossil fuel divestment movement, aimed primarily at encouraging investors to remove investments in fossil fuels from their portfolios, has undergone explosive growth over the last few years. This movement is saying that it is unethical to be associated with an industry whose business model is based on knowingly destabilising the planet’s life support systems.

By the time world leaders called for action at Paris climate talks, hundreds of universities had pulled out of fossil fuels. Also a number of charities and philanthropists – including the Rockefeller Foundation, the Children’s Investment Fund Foundation, the KR Foundation, and the Leonardo DiCaprio Foundation – have embraced fossil fuel divestment. The campaign group, Go fossil free, an international divestment advocacy organization, claims that more than 500 institutions with assets totalling $3.4tn have made some form of divestment commitment.

Last April, the Nelson Mandela- Graca Machel Innovation Award for Brave Philanthropy was awarded to 135 trusts and charities that have pledged to divest from fossil fuels and invest in climate solutions through the global Divest Invest Philanthropy movement. It is about an alliance of foundations that are, in their words, "divesting their assets in fossil fuels and investing in climate solutions and the new energy economy”.

The law requires that foundations in all circumstances manage their assets with the sole purpose of furthering their charitable aims. But things are changing. The walls between investing and grant-making are starting to break down, with an increasing number of charities who have become hyper-sensitive about how they invest their money. Seventy-six per cent of British foundations screened out companies whose activity directly conflicts with a charity’s mission or values, or whose activities would alienate supporters or beneficiaries, informs Kate Rogers from Cazenove Charities, and co-author of Intentional Investing. “Most frequently these are investments relating to the manufacture of tobacco, or the publication of pornography. Indeed, a more contemporary example is the campaign calling on trustees to ‘divest’ from carbon-based energy industries”, she added.

Citing research, Rogers said that 34% of charities surveyed selected investments that specifically align with their aims or rate well in terms of environmental, social and governance (ESG) factors; By contrast, 22% of respondents were seeking to influence companies’ behaviour by engaging with them or using their share-voting rights to affect company policy. Finally, 17% of the total survey population had decided to use their assets to deliver tangible outcomes that directly related to their mission through social investment.

“But transparency is also essential in order to move towards investments that are not solely based on financial considerations, pointed out Matthieu Calame, Director of the French-Swiss Fondation Charles Léopold Mayer pour le Progrès de l’Homme. “This required a profound screening of all holdings in order to incorporate our charitable mission or values into our investment policy”.

76% of British foundations screened out companies whose activity directly conflicts with a charity’s mission or values

For Boudewijn de Blij from Fonds 1818, in times when many charities are struggling to survive, most of them are concerned that their investments provide good financial returns. “The beneficiaries don’t matter where a charity's money comes from”.

Simply put, if charities want to be more ethical, do they have to reduce their income expectations? Not necessarily. Rogers also presented evidence to show that while ‘sin stocks’ in such industries as tobacco, alcohol, arms, and pornography have historically delivered premium returns, their overall contribution to portfolios means that the effect of their exclusion in financial terms can be minimal. There is no doubt that the fossil fuel companies will need to be part of the solution for a more sustainable climate future: they are already some of the largest investors in renewable energy. In this regards, many analysis suggested that investing in companies with positive ESG records can make good financial sense.

More than 500 institutions with assets totalling $3.4tn have made some form of divestment commitment

Go fossil free, international divestment advocacy organization

However, there are also financial reasons for organisations to divest from fossil fuels. According to several scientific studies, a large portion of the reserves of fossil fuels already discovered would have to stay in the ground if the world wants to meet its 2-degree target. A scenario which has led economists to fear a 'carbon bubble’, that coal, gas and oil assets will become worthless, which could plunge the world into another financial crisis.

Photo credits: Getty Images/David McNew