Fossil Fuels: Should ESG Investors Seek Divestment or Engagement?
Engage vs. divest? The question of whether fossil fuel divestment or engagement encourages energy companies (e.g. Chevron and Exxon Mobil) to move their business models away from fossil fuels and toward cleaner energy is one that is top of mind to many responsible investors.
At Riverwater Partners, we believe it is not yet possible to fuel the world’s energy needs with 100% renewable sources in the very near future. Rather, it is our position that a measured move toward clean energy will cut greenhouse gas output and ensure the world’s economy can continue to thrive. This approach requires engagement to educate energy executives about the benefits of and best practices of a move toward renewable energy and cleaner drilling techniques. In fact, such public pressure has been effective in causing change at a number of public companies.
DIVESTMENT A RISKY OPTION
What does divest mean? Divestment and/or coercing energy companies to move away from their current business model too quickly may pose several risks to the global economy and the well-being of Earth’s inhabitants.
Over the last few years, hundreds of institutions throughout the world have committed to divesting from fossil fuel holdings, including five of New York City’s public pension plans last year. While divestment can send a strong message, it has not had a material impact on drilling by the US as US oil production is at an all-time high.
Additional arguments against divestment:
- The United States has, for the first time in decades, is close to becoming energy independent and a net exporter of energy.Absent this independence, greater power is concentrated in OPEC countries and Russia, both of whom have caused much of the world’s geopolitical instability.
- Without meaningful ownership, shareholders cannot force oil companies into being better corporate citizens, and with no seat at the table – having sold all their shares – they will lose their voice.
ENGAGEMENT A MORE EFFECTIVE OPTION
We believe that engagement with energy companies, or encouraging them to reduce their reliance on fossil fuels and employ best practices for safe extraction of fossil fuels, will facilitate bridging the gap between today and an eventual 100% renewable energy world.
Evidence engagement is working:
- According to Ceres, a nonprofit dedicated to helping investors and corporations integrate ESG into their core business practices, “all 23 of the assessed Oil and Gas sector companies now disclose sustainability information in their annual financial filings. And more than half now proactively and directly engage investors on sustainability.”
- In what New York State Comptroller called “an unprecedented victory at Exxon for investors in a fight to ensure a smooth transition to a low-carbon economy,” shareholder engagement and pressure succeeded in passing board resolutions requiring Exxon to analyze and publish its plans to address climate risks. As a result, Exxon issued its first climate report in 2018 “that provides its most detailed disclosure to date on how a low-carbon transition would impact the company’s business, including the potential for high-cost resources to be stranded.”
Riverwater Partners is currently engaging with a small oil and gas company operating in the Permian and Bakken basins. After we invested and engaged the management team and board, they began to actively measure and report on their environmental impact. They are also now actively searching for more diversity at the board level, which should bring fresh perspectives to the company. We believe our engagement has had a positive impact as opposed to a strategy of divestment where the company would have likely not made any positive changes heretofore.
A green economy cannot be accomplished with divestment. Expecting all shareholders to sell oil stocks is not realistic and would not foster substantial change. We believe the key is not ignoring fossil fuel companies, but rather pushing them to move to cleaner drilling and faster uptake of renewable energy. Renewable energy has made great strides in competing with conventional energy and should continue to improve. Dialogue with companies about how to safely make this transition will ensure long-term success.