Wells Gibson Friday Blog – 26th March 2021
The dilemma of trying to do the right thing
Students have always been at the centre of activism around the important issues of the time, from the ‘Mai 68’ student riots in Paris, via the pressure put on Barclays and others to divest from apartheid-riven South Africa in the 1980s, to today’s Black Lives Matter movement and the existential threat of climate change. Their enthusiasm and conviction can often act as a powerful catalyst for change. Sometimes, however, a certain naivety accompanies their solutions. Complex problems rarely have simple, binary choices.
You can take down the statue of the ‘imperialist’ Cecil Rhodes, at Oriel College, Oxford, but what do you do about his financial legacy that funds the Rhodes Scholarship enabling outstandingly talented young people from around the world to undertake two years of postgraduate study at Oxford University? That is a dilemma.
Likewise, you can divest your portfolio from owning polluting fossil fuel companies, but who are you selling to, what impact will your decision have and is this the best way to make a positive impact? In 2020, Oxford University, under pressure from its student body, voted to divest its endowment entirely of exposure to fossil fuel producers.
Around the same time, students at St John’s College demanded that the bursar make a similar move with the College’s endowment with immediate effect, by selling its shares in BP and Shell. His response was perhaps not the one they were expecting, as reported in The Times:
‘I am not able to arrange any divestment at short notice…but I can arrange for the gas central heating in college to be switched off with immediate effect. Please let me know if you support this proposal.’
The students objected, claiming that he was being flippant and provocative and even dangerous, given that it was January in a 15th century college! His response was:
‘You are right that I am being provocative, but I am provoking some clear thinking, I hope. It is all too easy to request others to do things that have no personal cost to yourself. The question is whether you and others are prepared to make personal sacrifices to achieve the goals of environmental improvement (which I support as a goal).’
The point was well made. Should fossil fuel producers really carry all the burden of carbon emissions guilt? After all, it is our own, consumer-driven demands for petrol and diesel cars, international air travel, cheap goods produced in high-pollution economies and shipped by sea, a love of palm-oil filled Nutella, and a western, meat-eating diet encouraging ‘advanced’ agriculture with high mileage produce, that are really to blame.
Yet making seemingly positive personal lifestyle changes, such as buying a Tesla or drinking almond milk, can have hidden environmental impacts. The environmental and social costs of nickel and cobalt mining (often mined in less-developed countries) for electric vehicle batteries and increased demand for electricity generated, in the main by fossil fuels globally, make the argument less clear cut.
Each litre of almond milk requires 1,600 liters of water. Much of the world’s almond crop (80%) is grown in California, on vast monoculture farms, reducing biodiversity and drawing from and depleting deep wells. California has suffered severe droughts over the past decade, and one wonders whether this scarce resource is being sustainably managed. Tricky decisions.
So where does this all leave investors who want to try to make some form of sustainability impact through investments that they hold or avoid? Should they divest from companies like BP and Shell?
Let us look at the divestment case first. Most investors own shares that were originally bought in the secondary market i.e. from someone else who owned them before, rather than shares issued when a company needs to raise additional capital for its further development.
Likewise, when an investor sells their stake – in this case as a positive act of divestment from fossil fuel producers – they will sell these shares to someone else. Almost by definition, that person or institution will care less than the seller about the environmental impact of these companies. If a large number of investors divest, it may well be that the buyers end up with higher expected returns on account of the lower prices that they pay. What impact will this divestment have? Perhaps it sends a message to these firms that they need to change. Yet, it is a one-off protest that can seem a little like washing one’s hands of the problem.
Perhaps a better course of action is to stay invested and become a thorough nuisance, as a shareholder, at the company’s AGM! The reality is that a single individual has little power. However, the major fund management houses are powerful owners of most major companies and are ‘forever’ investors, particularly in passively managed, index tracking products. For example, Vanguard, SSga and BlackRock own almost 20% of Exxon, the largest oil company in the US. That is a very powerful voting bloc that can engage actively with, and apply pressure to, the firm’s management. Each of these fund management firms are signatories to the Principles for Responsible Investment, which is a United Nations-supported network that encourages engagement with corporations on environmental, social and governance (ESG) issues.
Is it better to engage with firms like Exxon, BP and Shell and encourage and cajole them into transitioning to a better place than to simply sell and walk away? BP, as a result of pressure from many quarters has recently set out its ambition to become a net zero company by 2050 or sooner. That would be real change and progress and should be encouraged.
The reality is that most of us want to take steps in the right direction, particularly with regards to the climate, in all aspects of our lives and struggle with the trade-offs we face.
It is better to try rather than to take no action at all. Well, most of the time. The one action not to take is to buy a Tesla with Bitcoin, something that the company now offers its customers. Bitcoin ‘mining’ uses up as much electricity as the whole of Sweden does in a year. Buying a Tesla with one Bitcoin has the equivalent carbon footprint of sixty petrol or diesel cars. That is one dilemma you need not face!