There are essentially three approaches one can take to investing in fossil fuels, two of which incorporate climate and sustainability considerations into the investment process and one that doesn’t:
A: Invest in fossil fuel companies without regard to climate and sustainability considerations.
B: Full divestment from, or complete avoidance of, fossil fuel companies.
C: A best-of-class approach that avoids investing in fossil fuel companies that contribute the most to environmental problems and climate change while favoring investment in those (as well as companies in other sectors with significant environmental impacts) with stronger commitments to renewable energy, energy efficiency and the transition to a sustainable economy.
Approach A is unsustainable in that it simply continues the status quo and fails to recognize the need for investors and capital markets to play a role in reducing carbon emissions and ameliorating climate change. Most mutual funds, pension funds, foundations, endowments and other institutional investors, as well as individual investors, follow approach A, meaning that they – or at least their investments – are part of the problem rather than part of the solution.
Approach B has been embraced by a small number of investors and is being urged as an alternative by groups such as 350.org and a growing student divestment movement around the country.
Approach C is the approach taken to date by the majority of investors in the sustainable investment industry, wherein complete avoidance of fossil fuels has been rejected as impractical, but a best-of-class approach is embraced as a bridge strategy that encourages investment in renewable energy and the transition from an industrial-age economy fueled by coal and oil to a sustainable economy fueled by clean, renewable energy.
Under Approaches B and C – what we might broadly call “sustainability approaches” – investors also normally encourage companies to reduce other forms of pollution, optimize use of natural resources, including food and water, actively disclose their carbon and environmental footprints, and so forth. In fact, one could argue that Approaches B and C are both insufficient without such additional measures that together constitute a more holistic sustainable investing paradigm.
At Pax World, we have long embraced this more holistic sustainability paradigm for all of our Funds, and we have historically taken a partial avoidance/best-of-class approach (Approach C) for most of our Funds. We also offer two Funds – the Pax World Global Environmental Markets Fund (PGRNX) and the Pax World Growth Fund (PXWGX) – that currently do not invest in fossil fuel companies (Approach B).
Why have we taken this hybrid approach to investing in energy companies and divesting from fossil fuels?
To begin with, we have several concerns about pursuing Approach B (complete avoidance) as an exclusive strategy. First, we are not convinced that these large multi-national companies miss, or perhaps even notice, the small sliver of capital that is withdrawn. Indeed, when divestment occurs the shares are simply sold on the open market and someone else purchases them. While it’s possible that the price could be affected if large numbers of shareholders sell their shares, these companies are so large, and the number of shares that would need to be sold is so great, that is very unlikely that stock prices will be affected at all. If we really want to affect stock price and reduce the demand for fossil fuel company shares, a much better option would be a carbon tax.
Second, when you sell your shares you lose your seat at the table, your voice, your entitlement to vote your proxies at the company’s annual meeting, your ability to file or support shareholder resolutions, including resolutions asking companies to disclose or reduce their carbon emissions, and so forth. The transition from the energy economy we have to the one we want—one relying on clean and renewable fuels—will take decades. In the meantime, the amount of environmental pollution and greenhouse gas emissions can be strongly affected by which companies and business models prosper, and which lose favor. In short, if we use our power as investors to urge fossil fuel companies to reduce emissions, invest in renewables and be more mindful of environmental consequences, we have an opportunity to make the remaining years of our dependence on fossil fuels much less damaging than they could be.
Third, investors seeking market returns generally want exposure to the energy sector beyond simply investing in renewables, which thus far have been far more volatile investments than more traditional energy companies. Total avoidance could have the unintended consequence of driving these investors away from sustainable investment funds and back to traditional mainstream funds that take the “head-in-the-sand” Approach A to climate change.
Pax World has and will continue to avoid investment in any company whose primary business is coal mining and production, or in any electric utility whose reliance on coal is above the average of its home country, unless that utility has demonstrated a significant commitment to renewables and is reducing its dependence on coal. Coal combustion emits more carbon dioxide than any other fossil fuel, nearly twice as much as natural gas.
Pax World will also seek to avoid any new investments in companies whose sole or majority operations are in oil sands, and we have begun the process of reviewing any holdings we now have in such companies with the intent of divesting them within a reasonable amount of time. Pax will also continue to support public policies that hasten our transition to renewable energy, and to urge companies to both understand risks related to climate change and mitigate their own impacts on it by reducing emissions. Examples of actions we have taken in recent years include:
- Pax is a signatory to the Carbon Disclosure Project (CDP), which includes several projects aimed at getting companies to measure and report on greenhouse gas emissions, understand and manage the risks presented by climate change, and reduce greenhouse gas emissions. Pax endorsed a letter to the U.S. Congress, organized by the Investor Network on Climate Risk (INCR), urging the extension of the production tax credit for wind energy. Early in 2013, the Congress did extend that tax credit.
- Pax signed on to a letter, sponsored by the American Sustainable Business Council, to EPA Administrator Lisa Jackson in support of the adoption of the Greenhouse Gas New Source Performance Standard or the Carbon Pollution Standard for New Power Plants, which would establish a national carbon pollution standard for new power plants for the first time.
- Pax signed on to a letter addressed to the CEOs of companies with major shale oil holdings. The production of shale oil carries with it all of the environmental risks that accompany shale gas production. In addition, companies producing shale oil frequently burn off large amounts of associated natural gas, claiming that high oil prices and low natural gas prices make it uneconomic to capture and get to market. The letter seeks information about the amount of flaring, as well as details about plans to reduce flaring at existing wells and prevent it at future wells at the companies.
Effectively addressing climate change requires immediate, meaningful action, and we at Pax World are committed to playing a positive role in that effort.
Portfolio Holdings are subject to change.
Equity investments are subject to market fluctuations, the fund's share price can fall because of weakness in the broad market, a particular industry, or specific holdings. Emerging market and international investments involve risk of capital loss from unfavorable fluctuations in currency values, differences in generally accepted accounting principles, economic or political instability in other nations or increased volatility and lower trading volume.
ALPS Distributors, Inc. is not affiliated with any of the companies mentioned in this piece.