Bellwether for Change: Investors Divest

A ripple went through markets when the Rockefeller Brothers Fund chose to gradually divest from fossil fuels. 

That ripple was profound among investors focused on energy efficiency and renewable energy, signaling a major change in the game for a sector that has grown from a sparkle in the eye of a few to a billion dollar industry. For the larger markets, the decision by the Rockefeller Brothers Fund (RBF) is still causing ripples, as industry giants BlackRock and State Street Global Advisors (SSgA) launched low carbon indexes or products in response to interest. Newer funds, such as Green Century Balanced Fund are developing environmentally responsible metrics on which to base investment decisions.

Institutional investors, like the RBF, have a profound influence on capital markets.

In 2013, Luis Aguilar, Commissioner of the US Securities and Exchange Commission, noted in a talk at Georgetown University that the proportion of U.S. public equities managed by institutions has risen 8% of market capitalization in 1950, to about 67% in 2010. Given that the combined market value of all stocks on the NYSE was $95 billion in 1950 but more than $14 trillion by 2010, “institutional investors own a larger share of a larger market”. What this means is that those looking for investors to support their businesses must meet the criteria set by institutional investors. As those criteria change, the opportunities shift. Businesses unaware of such changes risk being left out by investors with new priorities.

Aligning Investment with Mission

For the RBF, the journey into new asset classes has resulted in many new lessons and some organizational changes that are welcome, if unexpected. The Fund, initially based on a fossil fuel fortune, is not turning its back on energy; rather it is focusing on impact investments and clean energy solutions — such as investments in renewable energy infrastructure and technologies — that support the foundation’s mission.

However, changing course for a fund with assets over $800 million, according to the RBF’s 2013 financial report, doesn’t happen in a day. While working to align its endowment investments with its mission, the RBF continues to adhere to the long standing mandate that its assets be invested with the goals of achieving financial returns that will enable the foundation to meet its annual philanthropic obligations and maintaining the purchasing power of the endowment, so that future generations will also benefit from the foundation’s charitable giving. In uncertain and volatile markets, these financial goals are not easy to achieve. Therefore, the Fund is making progress while carefully pursuing its impact investing and divestment efforts, balancing the objectives of mission aligned investing and endowment preservation. 

Important to the management of its endowment was the Fund’s decision to turn to the outsourced chief investment office model in late 2007, according to Geraldine Watson, the RBF’s vice president for finance and operations. This approach, combined with active involvement of its Investment Committee and internal staff, elevated the level of expertise dedicated to the day-to-day management of the endowment as demanded by growing investment strategies, complexities and challenges. 

New Asset Classes

An evolving set of asset classes, investments in energy and energy efficiency, as well as water and transportation, require expertise unavailable to institutions of similar size to the RBF focused on their own mission and programs. The RBF is currently working with Perella Weinberg Partners Agility (PWP), an outsourced chief investment officer solution, which is led by Chris Bittman. PWP’s growing expertise in impact investing, its long-term track record for success, and client-centric approach, supports the Fund’s objective to align its mission and endowment using institutional investment quality processes and strategies and serve as an example to its peers. 

Christie Zarkovich, a member of the PWP team, echoed Ms. Watson’s comments that divestment is not easy, nor is identifying future investable deals that will maintain the Fund’s risk and return objectives. 

”As the demand for sustainable solutions continues to grow, so too should the market for these investments. In the meantime, the investment team uses a multi-pronged approach, pursuing deals through a number of channels.” 

In contrast, investments in established markets — such as venture capital — are generally accessed through well-developed relationships with General Partners, who are able to identify and fully assess direct investments. Within impact investments, which includes sustainable infrastructure, the team employs a rigorous and disciplined process to identify innovative and economically viable technologies and investments. As a part of the diligence process, the team attends events, researches innovative technologies and companies, meets with funds specializing in new projects, and goes to conferences on impact investing. They also find deals by looking at what the Department of Defense’s ARPAe, and the Department of Energy are doing. By researching where innovations are going for capital and capital formation, new deals and potential partners can be found. This process can lead to unexpected collaborations.

”It’s not just one source. It’s a universe of sources because the field is still nascent.”

One of the potential hurdles is that any investment/portfolio strategy is impacted when the universe of potential investments is limited by a mission-aligned mandate. In order to ensure transparency, advisors discuss a fund’s divestment goals, which include the potential impacts of such decisions. The next step is to find investments with market rate risks and returns that meet those goals, integrating approaches that can diversify the portfolio into new areas.

For nonprofits, a potential barrier is that tax subsidies, such as the 1603 Investor Tax Credits (ITC) do not apply to organizations without large tax liabilities. These credits provided more than 9,000 grants totaling $18.5 billion, creating as many as 75,000 jobs by the end of 2013. Nor are all organizations able to invest in long term project financing, which is a positive for funds that rely on cash flow to support their pension obligations, but not as much for those without such obligations. Institutional investors may be unwilling to lock up assets that then can’t be deployed for growth.

As the RBF team looks to identify new investment opportunities, PWP is focused on a broad spectrum of competing strategies, such as renewable energy infrastructure, energy efficiency finance, and resource optimization. Currently, not all new investments are in sustainable energy. The hope, however, is that over the next five years, sustainable impactful energy efficiency will grow to be a considerably larger percentage of the RBF’s portfolio. 

On the plus side for those divesting from fossil fuels is the reduction in long term risk from ‘stranded assets’ owned by oil companies. If current reserves cannot be used, then investments in fossil fuels are a higher risk than previously reported. Such risks first gained public attention when the term ‘Stranded Asset’ was coined by Carbon Tracker Initiative. Since then, has been pushing for divestment in fossil fuels, along with organizations such as 2 Degrees and Ceres

Stranded Assets

At the turn of this century, it was believed that oil reserves were running out. These arguments were used to support renewable approaches to energy and transportation. Today, reserves are over three times what can be burned if the planet has any hope of staying below critical temperature levels.

’Stranded Asset’ is the term for explored, identified and owned fossil fuel reserves that are on the balance sheet of large companies as assets. These reserves cannot be burned if the planet is to stay below the global 2 degrees above pre-industrial levels. But if those assets cannot be burned they are in fact liabilities, and could have a material impact on the future earnings that investors need to know about. Ironically, the fossil fuel industry continues to successfully lobby for government supports for more exploration, which exacerbates the problem.

CRI, the Carbon Asset Risk Initiative, coordinated by Ceres and the Carbon Tracker Initiative, brought together 75 institutional investors, representing more than $3 trillion in assets, to develop programs to prevent shareholder capital from being wasted on developing high-carbon, high-cost fossil fuel reserves, and to drive fossil fuel companies to acknowledge and plan for the escalating physical impacts of climate change.
The Guardian is backing a Keep it in the Ground campaign which is having success in persuading investors to divest from coal. They proudly published the news when the world’s largest sovereign wealth fund, held by Norway, decided to sell of more than $8bn in coal assets. Even the investment bank Goldman Sachs, declared in January that the fuel had reached retirement age.

Some funds have chosen to stay invested in fossil fuels working as ‘activist investors’, especially faith based organizations that became involved early. However, Inside Climate News investigated 25 years of shareholder proposals. They found that ExxonMobile, Chevron and ConocoPhillips had 113 resolutions put on ballots: 30 were blocked or withdrawn, never getting to a vote, and the remainder did not pass. Such statistics do not warrant high expectations for shareholder activism in the future.

Divesting Strategically

The Fund’s decision to divest emerged from a desire to align investment policy and mission, from the point of view of Michael Northrop, program director, Sustainable Development at the RBF. That alignment is happening at an organizational level, and spreading to encompass a variety of public policies as the RBF incorporates its mission throughout its corporate communications. While the RBF has supported clean energy economy policy making with its grantmaking for a long time, that concern was not necessarily reflected in its endowments. That is changing as its endowment sheds fossil fuel investments and begins searching out clean energy investments.

The unexpected benefits also include organizational changes that accompany any major shift in strategies. One result for the RBF is a more integrated institution. As an example, The RBF’s Mr. Northrop and others on the program side, and Ms. Watson on the finance side, have been working together across the historically distinct functions of grantmaking and endowment management. Both agree that these conversations have led to new working relationships that have produced key insights on both sides. 

The RBF may be in the vanguard, but there is a changing, under-reported movement in the US toward new energy, according to Mr. Northrop.

“The supertanker is moving. This is a great place for people to be. These are giant markets. With a whole lot of ways to push into those markets.” 

Some of the factors driving this confidence include:

  • New rules that support financing vehicles for new energy and energy efficiency
  • Awareness on the part of Republicans and Democrats about wealth creation from energy generation and efficiency
  • A cleaner and more efficient building sector over the last 7 years from innovations in lighting, insulation, windows and doors, and new technologies in chillers, rooftop solar and wind, and even elevators
  • Worker productivity gains due to regulations on low VOC (volatile organic compounds) paints, improved ventilation, reduced toxins and increases in sunlight.

For PWP, the landscape includes not only scouring global markets for solar, biofuels, and wind, but also efficiency in buildings, transportation and storage, along with financing platforms that encourage energy efficiency. Ms. Zarkovich expects that investments in utility scale projects will wane in the coming years, as the market for more local solutions, such as micro-grids, expands. 

“We fully buy-in that infrastructure platform and systems that we live in today are going to change dramatically over the next 10-20 years.” 

Her remarks are supported by the dramatic growth in YeildCos, which invest in renewable energy and energy efficiency. As Sovereign Wealth and conventional strategic investors, especially in the European Union, move into clean energy, advisers have another window into potential investments.

Ms. Watson believes that client demand is going to drive broad, growing markets. 

“As more institutions seek to integrate mission objectives with investment strategies, we are seeing an increase in the number of asset managers developing funds that appeal to new audiences. It makes good business sense for them and will assist us in achieving our goals.” 

John D. Rockefeller, were he alive today, might have found himself building a highly profitable future in a new — and more sustainable — energy environment.