Blog : Guest Blog: Divest or Engage? SRI Mutual Funds Debate Best Way to Tackle Fossil Fuels

By Madelaine | May 7, 2014 | in

The Guest Blog below is from our friends at Progressive Asset Management, Inc. PAM is an independent full-service investment brokerage firm that specializes in socially responsible investing. This article from its spring newsletter discusses current debate on the best way to tackle Fossil Fuels.

The launch of the Fossil-Free campaign in 2008 by Bill McKibben and 350.org --calling for the divestment of the “Top 200” publicly-traded energy companies based on estimated carbon reserves in the ground -- has divided the socially responsible mutual fund industry into essentially two camps. Both sides have the same goal of weaning the world from CO2 producing fossil fuels in favor of cleaner alternative energies. But they differ on their approach to forcing big oil to change.

On the one side is the “Total Divestment” camp comprised of SRI mutual funds that embrace 350.org’s call for fossil-free investing -- and even take it one step further, eliminating all fossil fuel companies from their portfolios, including coal, oil, natural gas, pipelines and energy service companies. Leading proponents of this fossil-free group include the Green Century funds, Portfolio 21, and Shelton Green Alpha Fund.

The larger camp includes those fund companies who believe that rather than shun fossil fuel companies entirely, it is more productive to continue to invest in the most enlightened of the industry – those that are making the most positive steps toward environmental change – and then “engage” these companies as shareholders to promote even faster change through various forms of “shareholder activism”, such as:

• l Dialogue with company executives
• l File shareholder resolutions
• l Work in coalitions with other shareholders and stakeholders
• l Vote proxies

• l Conduct letter writing and email campaigns
• l Work with government regulatory agencies, such as the EPA and SEC
• l Attend and speak at annual share- holder meetings

The engagement group includes such industry leaders as The Calvert Funds, PAX World, and Domini Funds.

Engagement or Divorce?

The fossil-free funds admit that engagement has an impact, but they say that the process is taking too long given the increasing speed of climate change. Their stand is that the only way to stop or slow down climate change is to simply leave the carbon in the ground. Once it’s extracted it will be burned and then there will be no turning back. Therefore fossil fuel companies must be forced to stop extracting by what amounts to a boycott of all their securities, much like the anti-apartheid boycott on South African investments by the developed world in the mid-1980s.

The funds promoting engagement have always included divestment as part of their screening process, eliminating companies that are un- repentant offenders – such as Exxon and Monsanto – but have attempted to work with more open-minded companies that are attempting to change and are generally less carbon- intensive. They question whether essentially declaring investment war on a whole industry really forces it to change, or instead closes off any chance for effective dialog. They point to the major gains that have been made through their engagement efforts through the years.

Are Both Right?

At the moment, it’s hard to say which approach is more impactful. The Divest movement is relatively so young and the fossil-fuel stock boycott so small to date that there really isn’t any hard evidence yet that it is making any significant impact on the extraction rate of fossil-fuel companies. The engagement camp has the advantage of a far longer track record of policy results, but while it has slowed down the release of CO2, it has not prevented it from recently rising above 400 parts per million.

But is it wise to cut off all engagement with big oil in favor of an adversarial boycott strategy that is largely untested? Is it better to try to convert the devil you know than create a more hostile devil? The decision is up to every investor, and fortunately now there is a clear choice among mutual funds, according to the philosophy that appeals to you most.

Mike Smith can be reached at msmith@fwg.com, or 603-418-8662.

Mike is a registered representative offering securities through Financial West Group (FWG), member FINRA/SIPC. The PAM Group is the socially responsible investment division of FWG. Progressive Asset Management, Inc. and FWG are unaffiliated entities.

Green Alliance members can receive a FREE portfolio review as well as a $50 gift certificate to the GA Business of their choice from Progressive Asset Management Group! To join the GA, click here.