Editor’s Note: This is the first of two articles about philanthropies divesting their assets from the fossil fuel industry. Here, we look at the financial concerns foundations have, and how difficult it actually is to divest these days. In the second installment, we’ll explore the strategic and moral arguments that compel foundations to walk away from fossil fuels.

When the Rockefeller Brothers Fund, a family foundation derived from one of history’s biggest oil fortunes, announced it would ditch its fossil fuel investments, it became a beacon for the growing divestment movement—a symbol of the way the economy is shifting. As dramatic as the decision was, it took a lot of time and convincing to get there. 

“The case I first went in with was essentially saying, it’s morally contradictory to be a leader in philanthropic efforts to combat climate change and to be continuing to invest in the fossil fuels that are causing it,” foundation President and CEO Stephen Heintz says. “The simple analogy is, you’re making grants to beat lung cancer on the one hand, and you’re still invested in tobacco stocks.”

Heintz says while that was compelling to the foundation’s board, “the moral argument alone was not sufficient to carry the decision.” It wasn’t until a grantee of RBF’s, Carbon Tracker, made a financial case—the “stranded assets” argument that the vast majority of known fossil fuel reserves cannot be burned—that they reached a consensus to walk away from the industry. Five years later, Heintz says the board and staff agree that in all of their work on climate change, which first started in the 1990s, “This was the most impactful and most important decision we made.”

In those five years, the larger divestment movement has also ballooned across universities, faith-based institutions, governments, and more—now totaling $12 trillion in committed assets. And yet, while nearly 200 foundations worldwide have committed to divest, many thousands have not, and the largest American foundations with explicit missions to combat climate change have opted not to divest. In fact, divestment leaders say since the push to get foundations to divest began around five years ago, they’ve backed away from philanthropies and focused on other, more promising targets such as insurance companies and pension funds.  

“Look, we’ve done a lot of work targeting some of the most iconic foundations and we have basically been beating our heads against a wall,” says Clara Vondrich, director of Divest Invest

Which raises the question—why are so many foundations, including prominent leaders in climate and energy issues, so unwilling to publicly walk away from the fossil fuel industry? 

To answer that question and gain a better understanding of this charged and complex issue, I spoke at length with foundation leaders, impact investment experts, and activists. Ultimately, I’ve found that whether foundations divest boils down to some legitimate challenges they face, but largely is about the level to which they are willing to break away from a certain entrenched status quo—and one that is built on increasingly shaky ground. On the flip side, leadership must be sufficiently moved by a bundle of strategic and moral arguments for divestment, such that breaking from that status quo is deemed worthwhile. 

Throw all these factors into a boardroom, and what comes out is a divestment announcement. Or, as is more often the case, not. 

The Divestment Divide

Since 2014, the number of foundations signed on to Divest Invest Philanthropy—meaning they commit over five years to divest from the biggest companies holding fossil fuel reserves, and invest 5 percent of their portfolios toward climate solutions—has grown from an initial cohort of 17 to almost 200, with assets totaling $24 billion.

With some exceptions like RBF and the UK-based Children’s Investment Fund Foundation, signatories are mostly small and medium-sized foundations, with large funders like Ford, Hewlett, Packard, and MacArthur foundations not divesting, although some have partial screens on coal, for example. 

I reached out to nine leading climate funders, requesting interviews about fossil fuel divestment. Of the seven in the non-divesting camp, two agreed to be interviewed—the Hewlett and Surdna foundations. Ford and Oak politely declined. Packard sent a brief email statement and referred us to its investment philosophy and policies. MacArthur referred us to a 2015 blog post

There seems to be a split between foundations that are enthusiastic supporters, and those that don’t really want to get into it, publicly, at least. Some in the pro camp are exasperated by these holdouts. “It’s actually unconscionable if you haven’t,” says Ellen Dorsey, executive director of philanthropic divestment champion Wallace Global Fund. For others, it’s an increasingly impractical stance. “I think people will definitely do it, if not through a conscious decision that they take,” says Glen Tyler, South Africa team leader of 350.org. “I mean, fossil fuel companies are on the way out.” 

Part of the reason for the divide is that, while it’s certainly become easier over the years, divestment is complicated. In RBF’s case, for example, Heintz started working on aligning the foundation’s investments with its mission starting around 2003. It took incremental steps to get them across the divestment finish line, including going through two different investment managers. 

Divestment can require a foundation to hire a new financial team, challenge conventional wisdom about investment, and maybe even rethink the concept of what a foundation is for. In 2016, early signatories were even awarded the Nelson Mandela-Graça Machel Innovation Award for Brave Philanthropy.

Meanwhile, those that have resisted consider divestment to be just one of many potential strategies they could employ to combat climate change, and one that is simply not a fit for them. 

“Divestment is a tactic, right? It’s a way, potentially, to solve the climate problem,” just like any number of other tactics that foundations prioritizing climate change may choose to support, says Larry Kramer, Hewlett Foundation president. “All of those are tactical choices and we’re all making them all the time, and we don’t expect everybody to agree on what the exact right tactics are.” 

The Bottom Line

The Hewlett Foundation is, without question, a philanthropic leader in the climate fight. The Bay Area funder began giving toward the issue in the 1990s. By 2006, its climate philanthropy had grown to $20 million per year, and in 2007, increased that to $100 million with the launch of joint philanthropic initiative ClimateWorks Foundation. Today, Hewlett gives between $120 million and $130 million toward climate solutions annually, and has given more than $2 billion cumulatively.

Hewlett also has a $10.4 billion endowment that it has decided against divesting from fossil fuel stocks, meaning some portion of this climate champion’s assets are invested in oil and gas companies. 

The foundation did, however, consider divestment. Back in 2014, the same year Divest Invest Philanthropy launched, Hewlett’s staff and board broached the issue. Kramer says there were a number of conversations, including on the strategic and moral implications (I explore these more in the next installment). 

But a key piece involved its financial team looking at data from the previous 10 years, comparing Hewlett’s actual portfolio to the investment funds at the time that would meet the standard of divestment. The team concluded that had Hewlett been invested in such funds instead during that 10-year window, the endowment would have seen lower returns and, as a result, a “very substantial decrease in our overall grantmaking power,” Kramer says.

This is probably a good point to take a little detour and unpack what exactly divestment entails. It is indeed more than just flipping a switch or selling off a few dirty stocks, but what exactly is it? This gets a little in the weeds, but stay with me. 

Most endowed institutions don’t actually pick and choose a bunch of stocks to put their assets in, at least not for the most part. They’re almost always selecting arrays of fund managers, investment pros who do the picking and choosing based on a variety of criteria, in different asset classes (public, private, hedge funds, etc), and on behalf of many clients. Often these are commingled funds or passive investments, in which lots of investors’ assets are pooled together and individual clients can’t really call the shots. 

When an institution commits to divest, it first must decide what exactly it wants to screen out. The baseline Divest Invest ask (aside from the invest component) is to eliminate holdings in the 200 companies with the highest oil and gas reserves, and only in public equities, but divesting institutions often take it much further

Then it’s a process of first, selling off any direct investments they do have, and then making a decision on what to do with the funds they’re invested in. They can either convince current fund managers to customize their investments to meet the new standards, switch to different fund managers who will do so, or move to existing funds that already meet the divestment criteria. Usually, it involves some combination of the above, sometimes managed in house, sometimes by a consultant or contract investment officer. 

So for institutions not divesting, it may not be that their investment teams are committed to specific oil and gas stocks (especially not lately) as much as they are to a particular approach to investment. 

In Hewlett’s case, Kramer says 94 percent of the endowment is invested in more than 100 commingled funds, with managers that would not be willing to custom screen such investments just for them, and they would have to switch to other funds that were available, which their analysis found would have lowered returns. 

Kramer emphasizes that their decision on the topic is guided through a utilitarian framing of what allows Hewlett to have the biggest impact on the problem of climate change. So the financial analysis was posed to the environment program team, which decided that using the potential grantmaking would be more impactful than if Hewlett divested. The foundation decided against divestment.

Part of why Kramer says divestment doesn’t make sense for them is the fact that they have large assets, but work with a relatively small staff (an investment team of nine people). One option Kramer posed would be Hewlett shifting its entire model to managing all of its own investments directly. “That would require an enormous team, fundamentally changing the nature of the Hewlett organization, not just the finance team.”

A couple of caveats: Hewlett doesn’t have any investments in coal. Also, at the same board meeting, leadership did decide to no longer make new investments of one type, private partnerships, if they were primarily involved in oil and gas extraction. He says oil and gas amount to a “very small portion” of the whole portfolio, as most fund managers have been making the choice to invest less. 

Some version of Hewlett’s argument forms the basis for why many institutions say they will not divest. They see a risk that returns will suffer if they change their investment strategy, and that would undermine what they consider to be their chief reason for existence—education and research in the case of a Harvard, or making an annual payout in grants in the case of a foundation. 

It’s also an argument that advocates for divestment and impact investment experts I spoke with are very skeptical about, even just from a financial standpoint. 

Asset Anxiety

There’s a growing body of evidence that fossil free and ESG investments (those that meet certain environmental, social, and governance criteria) perform just as well or better than those that are exposed to oil and gas. 

In a recent Divest Invest Philanthropy report, 94 percent of survey respondents who committed to divest in 2014 reported that their financial performance has been neutrally or positively affected as a result. Rockefeller Brothers points out that their returns have outperformed all benchmarks since divesting (as of 2018, they are 98.7 percent fossil fuel free, with 14 percent going toward impact investing).

In 2018, renowned investment strategist and environmental philanthropist Jeremy Grantham led an analysis he called, “The mythical peril of divesting from fossil fuels,” that found, to his surprise, that if you divested from any single major sector in the S&P 500, it would basically not impact returns. 

“It means that if investors take out fossil fuel companies from their portfolios, their starting assumption should not be that you have destroyed the value. Their starting assumption should be until proven otherwise. that it will have very little effect and is just as likely to be positive,” Grantham writes. 

While energy undergoes boom and bust cycles, in recent years it’s been a “chronic underperformer,” the lowest-performing sector in the S&P 500. And there have been a number of other reports critical of oil and gas stocks and large institutional investors’ commitment to them.

It is true, however, that the oil and gas sector remains a chunk of the global economy, and there’s a longstanding conventional wisdom in investing that says you don’t want to limit your options. That’s precisely the argument the CIO at California Public Employees’ Retirement System just made against divesting—that the $380 billion fund can’t “constrain itself to a limited set of investment opportunities.” Harvard has stated something similar. 

But experts I spoke with pointed out that investment committees tend to have a knee-jerk reaction to any such potential constraints. (Grantham writes, “There is a no more conservative group on the planet.”) 

“There is a whole thing around how entrenched modern portfolio theory is and how the investment professionals have a vested interest in retaining control,” says Ellen Dorsey of Wallace Global. “So they’re going to fight. They become part of the opposition to it.”

Beyond analysis of current performance, one of the major tenets of the divestment movement is that, because we can’t use the reserves these businesses are built on, staying invested in them is a big financial gamble. When the University of California system, for example, decided it would divest its $13.4 billion endowment and $70 billion pension fund, it was emphatic it was not for moral or ideological reasons, but to avoid fiduciary risk. 

“The reason we sold some $150 million in fossil fuel assets from our endowment was the reason we sell other assets: They posed a long-term risk to generating strong returns for UC’s diversified portfolios,” UC’s investment manager and its chairman co-wrote in an op-ed

Dorsey and Vondrich say, in fact, that they are aware of foundations that are actually now divesting for financial reasons, but doing so quietly, out of the public eye, after having turned down the Divest Invest pledge. 

Where There’s a Will, There’s a Way

So assuming you accept the data that says you don’t need fossil fuel stocks for competitive returns, and accept that they are risky investments, are there still logistical or institutional challenges of the sort Kramer cites that might prevent an investor from being able to make a prudent break from the industry? 

On one hand, it does require a certain amount of work and commitment. And, as with all investing, it can be tricky. The process of divestment is one that often involves not just numbers in a ledger, but also power dynamics, relationships, and shrewd negotiation. 

Generally speaking, however, impact investment experts did express similar sentiments that these days, any size institution can divest and remain competitive—if it’s something they really want to do. In short, I often heard some version of, where there’s a will there’s a way. 

Scale of endowment is a factor, for example, but not along clean lines. Small foundations may have a technically smaller task, but have less influence over fund managers. Really large endowments have more power to wield over fund managers, but they also have a lot more assets that have to go somewhere.

Still, even in the past five years, the options have increased in terms of existing funds to invest in, and what consultants and managers are willing to assist with. 

“While the universe of fossil-free investment opportunities remains finite, foundations that are concerned about fully addressing climate change are finding growing opportunities to not only divest from the risks associated with exposure to fossil fuels, but also to invest in solutions to climate change, across numerous asset classes,” says Joshua Humphreys, president of nonprofit research group the Croatan Institute, which released the latest report on Divest Invest Philanthropy. 

David Wood, director of the Initiative for Responsible Investment at the Harvard Kennedy School, similarly pointed out that there are a lot of options available for both existing products and screening services, for institutions of any scale. “I don’t think the technical challenge of being a responsible investor is all that high a burden these days,” he says.

One example of such an option is with wealth management firm RBC and its socially responsible investment group, which currently consults on more than $2.6 billion in assets, all of which is fossil fuel free and integrates ESG criteria based on clients’ missions and return goals. RBC’s approach is to work on behalf of its clients, hiring third-party money managers but providing their own in-house ESG analysis. That way, RBC can overlay its criteria on a money manager’s portfolio, so clients can invest with any fund manager, whether they use ESG criteria or not. 

Thomas Van Dyck, the team’s managing director, who has been in socially responsible investing since 1983, says he finds 85 percent of the fund managers they approach are willing to work with them on meeting clients’ criteria. 

Granted, it’s Van Dyck’s business to tout ESG investments, but he points out RBC’s competitors like Mercer and Cambridge Associates who offer their own services. Not to mention, with the growth in funds committed to divest going from $50 billion to $11 trillion in just five years, there’s a level of demand that investment professionals are having to respond to.

When it comes to the larger foundations that have not divested, given their assets and their brands, Van Dyck finds it highly unlikely that fund managers wouldn’t work with them if they came to them with a strong desire to screen out fossil fuels or other ESG goals. They could even work together with other like-minded foundations to leverage their combined assets.  

“I think it’s up to what the trustees want to do. I mean, do they want their foundation to represent their mission?” he says. “There’s no limitations. I think it can be any size.”

Next: The strategic and moral arguments around fossil fuel divestment, and the foundation response.

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