As Battlelines on Divestment Are Drawn, Investors’ Pathway Becomes Clear

Divestment from fossil fuels is attracting global attention not least because of the high profile divestment of the Rockefeller Foundation and Stanford University.

On 3 October the Australian National University issued a five paragraph statement advising that the University would “commence divestment of stocks in seven companies following an independent review of ANU domestic equities.”

The divestment of shares in Iluka Resources, Independence Group, Newcrest Mining, Sandfire Resources, Oil Search, Santos and Sirius Resources made up just 1% of the University’s total investment portfolio.

Whilst not a feature of its press announcement, ANU’s divestment was in response to a campaign by a student group, Students for a Fossil Free ANU Group, which itself was part of a broader campaign for Australian universities to divest from fossil fuels.

Australia is in many ways a small market. Whilst we don’t all walk up and down the street in Paul Hogan fashion saying g’day to each other, our markets, media and government are small enough that Australia has often been used as a testing ground for new products and innovations.

In that regard what happened after ANU’s October 3 announcement is a case study that should be of interest to all investors.

Since the announcement on a daily basis Australia’s premier business newspaper, the Australian Financial Review has rolled out articles and columns criticising ANU’s decision.

Former Labor cabinet members and current Coalition ministers have been brought into the discussion, including Australia’s Prime Minister Tony Abbott who described the decision as stupid.

Critics of ANU’s decision have questioned whether there is a need for activist groups to be brought under secondary boycott laws, which would in effect mean that environmental activists could be sued for damaging a company. Questions have also been raised as to whether the ANU vice-chancellor has a conflict of interest and whether ESG research firm CAER is somehow tainted through links to the Australia Institute, which is campaigning for divestment.

Investors it must be said are not used to this kind of attention. The question is why has there been such an active, vitriolic response?

There is probably something to be said for mining being a part of Australia’s culture. Australia is a country where the resources sector has been a core part of economic development. The Gold Rushes of the 1850’s turned Melbourne into the one of the richest cities in the world, the legacy of which is to this day seen with great Victorian era buildings.

The Australian dollar is itself a proxy for global commodities. Australia’s capital market features some of the largest mining companies in the world but has also become the source of capital raising for small cap miners who operate in all parts of the globe.

But there is something more. The attack on ANU’s divestment is also a direct message for asset owners that may be considering going down this path.

Australia is a place where the ‘rubber hits the road’ in terms of fossil free divestment. Earlier this year Deutsche Bank announced that it would not consider investing in Abbot Point, a coal terminal in north Queensland which is seeking to expand to become the world’s largest coal port.

Australia has deep coal reserves which strong commercial interests are seeking to develop. The Galilee Basin, an area that covers around 250,000 square kilometres located inland in Queensland, contains vast quantities of thermal coal. The investment required to unlock these reserves is significant with the potential to create new billionaires. But to do so there is a need for huge institutional investor support, including from global banks to provide debt finance.

Whilst responsible investment, however you define it, was a small part of the market it has largely been ignored by wider interests. What we are seeing now is that the debate about the way asset owners invest is one that is no longer conducted within the investment industry. It is now a stakeholder debate.

The implications of this are significant. There are two core groups whose interests do not coincide. On the one hand we have citizens who have largely been excluded from discussions around investment. In truth, up until the last couple of years there would be very few university endowments that would have considered that students had anything to do with how university funds are invested.

The second group represents larger commercial interests.

In the middle sits roughly $1.8 trillion of superannuation investment.

The lesson from the attack on ANU’s divestment is that superannuation funds could expect that this would be repeated ten-fold if a major Australian superannuation fund was to divest from fossil fuels.

To understand the playbook that would be used, and is being used in respect to ANU, Erik Conway’s book Merchants of Doubt provides great background on the way corporations have in the past worked to defend their interests. The so called ‘tobacco strategy’ involves clouding debate by attacking scientists and other stakeholders. As Conway states in his book “Whatever the explanation, it is clear that the media did present the scientific debate over tobacco as unsettled long after scientists had concluded otherwise.”

For investors there is in any case a better pathway than divestment, and that is actually to get serious about the way mega trends such as climate change will impact investment returns. In some ways divestment is a lazy option which conveys the impression to stakeholders that the job of investing sustainably is done. Nothing can be further from the truth. Building portfolios that focus on identifying the companies that are demonstrating that they understand the raft of megatrends that will impact over coming decades, and have active strategies to innovate and respond to the new environment, represents the future.

Links:

Merchants of Doubt, Conway, Erik M
http://www.amazon.com/Merchants-Doubt-Handful-Scientists-Obscured/dp/1608193942/ref=sr_1_1?ie=UTF8&qid=1413412555&sr=8-1&keywords=merchants+of+doubt

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