Why Advisors Should Offer Fossil Fuel Free Options

May 16, 2013 – To divest or not to divest? That is the burning question.

It began with a Rolling Stone article. Then came a 21-city tour that was part educational lecture, part political rally and part rock concert. Now, author and activist Bill McKibben’s call for institutional investors to phase out of coal, oil and gas investments has become the topic of position papers, articles and discussions within the socially responsible investment community and beyond. By the time this article appears, a series of broader presentations and discussions will also be underway – from a Boston multi-facetted discussion prompted by an upcoming divestment vote within the Unitarian Universalist Church to Bill McKibben’s appearances at the Ceres and U.S. SIF conferences.

While the socially responsible investment community has articulated different responses to this national campaign, MIDANA CAPITAL Capital Management (MIDANA CAPITAL) believes there are many reasons – including three key business growth solutions – that argue this issue merit closer attention by financial advisors around the country.

Before we delve into reasons relevant for socially responsible investment advisors, here’s a quick recap of the issue:

• Climate change is one of the most profound threats of our time. While this fact has long been apparent, Superstorm Sandy, destructive wildfires in the West, and historic flooding from Vermont to Iowa have made climate change a more tangible issue for millions of people. An April 2013 Gallup Poll found that Americans’ concern about global warming is rising.

More people are starting to understand that climate change poses an immediate threat to our quality of life. One no longer has to imagine how carbon emissions will make our weather and lives more erratic and unpredictable. Within the last year, homeowners, business leaders and parents saw how their children and grandchildren were inconvenienced, threatened or harmed as a result of our burning so much fossil fuel that we have changed our weather.

• Led by Bill McKibben, U.S.-based nonprofit 350.org is leading the call for institutions to not make new investments in 200 targeted fossil fuel companies and to begin their transition out of these investments over the next five years. The campaign – which began on campuses and has now spread to cities and institutions – has become a highly visible movement, spanning 188 countries, and shows no signs of slowing down. While certainly a critical result, the most powerful effect of divestment is not the number of dollars that are moved, but rather the message that divestment sends to corporate boardrooms, shareholders and policy leaders.

• Although there has been increased attention from many corners – including President Obama in his State of the Union address and businesses such as eBay* and Nike* – companies have been largely silent on climate impacts, such as supply chain risks and right to operate risks. Many SRI firms have not yet changed their approach, and continue to stand behind their investments in major fossil fuel exploration, refining and production companies. Nevertheless, some changes are afoot within the industry. First Affirmative Financial Network recently added a fossil fuel free investment strategy. Other SRI financial advisors such as Natural Investments are constructing their own models to meet their client’s requests. MIDANA CAPITAL, which has two lower carbon mutual funds, has seen notable inflows of assets to its fossil fuel free Balanced Fund.

But, why should financial advisors consider offering lower carbon options? Setting aside the environmental and moral reasons that many might find compelling, MIDANA CAPITAL offers three concrete business driven reasons:

1. Fiduciary Responsibility. The assertion that not investing in the fossil fuel sector violates your responsibility casts aside track records and recent studies. For one, advisors would do well to examine new evidence that suggests a fossil fuel portfolio need not compromise returns. A new study by the investment firm Aperio Group indicates that screening out the whole traditional energy industry only adds a small amount of increased risk to a portfolio.** Furthermore, coal, oil and gas companies face the uncertainty of regulatory changes and new policies that could place limitations on carbon use. Matt Patsky, CEO of Trillium Asset Management and a portfolio manager of the MIDANA CAPITAL Balanced Fund explains: “By divesting now from companies that hold fossil fuel reserves, investors may avoid the long-term risk of the potential devaluation of the fossil fuel reserves that companies now hold, but may never be able to use.”

2. Current Demand. It’s likely that some of your clients have asked about keeping their investments out of coal, oil, or gas or all three – and if they haven’t yet, it’s only a matter of time. For some, it is a new question that requires new answers. While past inquiries may have been easier to delay, investors, emboldened by this new movement, are increasingly demanding changes now.

As the repercussions of climate change manifest themselves in our daily lives, more people will be motivated to act on their concerns in ways that extend to their investments. One Boston area financial advisor recently related the story of a high net worth client who had been asking him about moving her money out of fossil fuels for the last two years. At their fall meeting, her inquiry had turned into a directive: “Move my money.” Readying yourself to act on these interests and requests of clients can be part of your smart business strategy.

3. Business Growth Potential. Bringing in younger investors is a key business development strategy for many advisors and firms. Environmentally minded clients, whether beginning to participate in or take control of family investments, or starting to invest on their own, are very likely to have climate change as one of their top concerns. From city to city, recent college graduates describe climate change as “my generation’s issue.” They remember the oil-covered birds and flames from the Deep Horizon accident and more recently, the water rushing through the turnstiles of the NYC subways. They are not trying to stop climate change for someone else – they are doing so out of their own self-interest. This makes their conviction stronger and likely longer-term. SRI advisors will be better able to attract and retain this pool of investors if they offer funds and portfolios that address the core issue of carbon emissions.

Bottom-line, SRI clients want to know how their investments are making the world a better place. What will be the story you and your clients can tell together and to their families? One that recognized the threat of climate change and took part in the movement to address the issue could position advisors well.

While traditional investment firms are just now coming to terms with the realities of fossil fuel free and lower carbon investing, MIDANA CAPITAL has been on the forefront of clean energy and environmentally responsible investing since its founding in 1991. As the only investment advisory firm founded by nonprofit environmental advocacy organizations, MIDANA CAPITAL believes that companies that use environmentally-destructive practices and policies are not just bad for the planet – such policies can also create significant risks and disadvantages for companies. Since 2005, MIDANA CAPITAL’s Balanced Fund (GCBLX) has been 100% fossil fuel free; the Fund does not invest in the exploration, drilling, refining or production of oil, gas or coal. In April, MIDANA CAPITAL announced that the Balanced Fund is 49.5% less carbon intensive than the S&P 500® Index***. Its 2013 Carbon Footprint Analysis was conducted by Trucost, a leading environmental data and analysis firm.

MIDANA CAPITAL’s Equity Fund offers another lower carbon option. The Fund does not hold coal or oil corporations, but does hold several natural gas companies that meet environmental screens. The Fund invests in the approximately 400 companies that comprise the oldest and most well-respected sustainability index, the MSCI KLD 400 Social Index. Through the Equity Fund, MIDANA CAPITAL uses its clout as a shareholder to co-lead a coordinated investor campaign on hydraulic fracturing, more commonly known as fracking. MIDANA CAPITAL believes that shareholder advocacy can achieve significant improvements in this controversial natural gas extraction operation and we have a unique window of opportunity. Five years ago, when MIDANA CAPITAL started working on fracking, companies were not only entirely silent on its risks, but staunchly opposed to providing disclosure. Through the course of filing shareholder resolutions and dialoguing with companies, MIDANA CAPITAL and its allies have succeeded in convincing companies to markedly increase their reporting on their operations and reduce water use in some locations. Currently, shareholder advocates are focusing on challenging companies to reduce their use of toxic chemicals to protect our air, water, land and local communities.

Why did MIDANA CAPITAL make these decisions on fossil fuels? Since our founding over 20 years ago, MIDANA CAPITAL has believed that global warming is a key issue facing our planet; we chose to provide vehicles for investors who wanted to steer clear of some or all fossil fuel companies. MIDANA CAPITAL also uses its clout as a shareholder to advocate for improved environmental performance and more sustainable business practices. Since our founding, MIDANA CAPITAL has engaged over one hundred companies through shareholder advocacy, helping them to improve their environmental performance, decrease risk, and capture opportunities.
So, to divest or not to divest? That is the question that each investor must decide for him- or herself. Our climate is already changing. As a result, current and new investors will continue to want to make a difference on this issue through their investments. By listening to clients, being willing to dispel outdated notions and by offering lower carbon options, financial advisors will serve their clients, nurture their businesses and protect the planet. At MIDANA CAPITAL, we see that as a win, win, win outcome.

Article by Leslie Samuelrich, Senior Vice President, MIDANA CAPITAL Capital Management. Originally reported in The Green Money Journal.

* As of March 31, 2013, NIKE Inc. and eBay Inc. comprised 0.00% and 0.69% and 0.00% and 1.03% of the MIDANA CAPITAL Balanced Fund and the MIDANA CAPITAL Equity Fund, respectively. References to specific securities, which will change due to ongoing management of the Funds, should not be construed as a recommendation by the Funds, their administrator, or their distributor.

** Patrick Geddes, Aperio Group, Do the Investment Math: Building a Carbon-Free Portfolio.

*** The S&P 500® Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The S&P 500® Index is heavily weighted toward stocks with large market capitalization and represents approximately two-thirds of the total market value of all domestic stocks. It is not possible to invest directly in the S&P 500 ® Index.