The Fiduciary U-Turn

Dec 11, 2020

While our clients often choose our environmental screens to better align their investments with their values, we think they deliver financial alignment as well. Over the next decade, we believe there is a high probability that fossil fuel and high carbon businesses will underperform and that many of them will disappear entirely. The idea that this is more than a “feel-good” approach to investing is gathering steam among investors of all types.

Historically, one of the largest impediments to the sale of these holdings from pension funds is that the board of directors is obligated to act in the best financial interests of the beneficiaries. If the desire to divest is driven purely by non-financial motives, it could be argued that directors are not acting in a fiduciary capacity.

However, it is becoming more and more difficult to support that view. In fact, the reverse argument, that owning these companies actually increases liability, may be the one that now is harder to refute. Traditional energy has been one of the worst performing sectors in the U.S. stock market for years. As we mentioned in last month’s post, 2021 may provide a respite for fossil fuel companies, but political, regulatory and societal trends do not point to a long-term performance recovery. With the gradual removal of the fiduciary roadblock, It is difficult to see how the momentum behind divestment will do anything but increase in coming years.

Compelling evidence of the shift in attitude comes from one of the largest state pension funds in the U.S. The New York State Common Retirement Fund, a $226 billion portfolio, recently announced its intention to become carbon-neutral by 2040 and to review its energy holdings for potential divestment. Notably, the Fund historically relied on fiduciary criteria to resist activists’ calls to divest(1). Now those same criteria are being used to justify the recent reversal of that stance. The press release characterizes divestment as a “tool we can apply to companies that consistently put our investment’s long-term value at risk.”(2)

But doesn’t divestment just allow opportunistic investors who don’t care about climate change to swoop in and buy the stocks at cheaper prices? Theoretically, yes. But that argument only works over time if the investment itself has long-term viability(3). Otherwise, it’s the equivalent of getting a good deal on a horse-drawn carriage in the early 20th century.

By the Numbers

0 - The number of new gas and diesel vehicles that will be allowed to be sold in Britain by 2030, according to a plan announced by Prime Minister Boris Johnson.(5)