The recent divestment out of coal by Stanford reflects a changing fossil fuels investment climate

A fundamental shift in financial investments away from fossil fuels is continuing to develop. An early mover is Stanford University, which in May decided to no longer use any of its $18.7bn endowment to invest in coal mining companies.

It’s a move aimed at combating climate change, which could influence college administrations elsewhere. Most significant is Stanford’s prestige as a thought leader in matters of clean energy research. Its endowment is the fourth biggest in the US, behind those of Harvard ($32.3bn), Yale ($20.8bn), and the University of Texas system ($20.4bn).

Stanford is the first major US university to support a nationwide student divestment campaign targeting fossil fuels.

“The university’s review has concluded that coal is one of the most carbon-intensive methods of energy generation and that other sources can be readily substituted for it,” says Stanford president John Hennessy.

Originating at Swarthmore College in early 2013, the fossil fuel divestment campaign has spread to more than 400 campuses across the US. Aided in part by environmental activist Bill McKibben of 350.org, student organisers have also benefited from the “stranded asset” argument pushed by three influential mainstream investors: Jeremy Grantham, co-founder of $117bn GMO, one of the largest asset managing firms in the world; Tom Steyer, a Forbes 400 billionaire who quit his job running a giant hedge fund, sold his fossil fuel stocks, and is a Stanford graduate and contributor to its endowment; and Robert Litterman, a former Goldman Sachs head and one of the most senior risk officers on Wall Street.

Stranded ‘assets’

Growing concern about the issue of stranded assets can be traced back to 2011, when the Carbon Tracker Initiative discovered in US Securities & Exchange Commission filings that the world’s top 200 fossil fuel companies have 2,795 gigatonnes of CO2 trapped in their fossil fuel reserves. These assets are at risk of becoming obsolete or non-performing – ie stranded – if carbon pricing increases.

“If this happens, stranded assets will underperform the market and those taking advantage of a [total return] swap will profit,” wrote Litterman in an environmental media platform run by the University of Minnesota.

Litterman has applied this to WWF’s investment portfolio, where he “swapped” its stocks linked to coal and tar sands for returns from the S&P 500 index – a financial manoeuvre that creates cash flows to the investor equal to the total return that would be generated by owning a basket of specified equity exposures.
The WWF hedge has reportedly worked, producing a net annualised gain of 21.7% over the past three years.

According to Steven Heim, a managing director at Boston Common Asset Management, investors are now looking at oil companies and calculating the riskiness of their assets by oil source and, second, the extent to which alternative investments are available.

One big hurdle is the lack of clean energy companies with $10-20bn market capitalisation, presenting few options for the large pension fund investors looking for companies of this size to invest in.

For oil projects, “there needs to be a lot more information from companies so investors can understand … the mix of assets and costs, and how that gets you to the breakeven point”, says Heim.

Most agree the tipping point that leads to lower valuations for coal companies has yet to arrive. Yet in the Stanford announcement there's a palpable sense that momentum is on the side of student campaigners.

It is a “leaderless movement” said McKibben, recently, in an attempt to deflect attention away from himself. “It can only happen with a spread-out and yet thoroughly interconnected movement, a new kind of engaged citizenry.” 

clean energy  climate change  financial investments  fossil fuels  Stanford University 

comments powered by Disqus