Etopia News asked Carsten Henningsen, founder and chairman of Portfolio 21, to answer two questions relevant to the divestment of fossil-fuel holdings and their re-investment in more sustainable companies. Here are the questions and what he had to say to Etopia News:
1. Why should institutions divest from fossil fuels?
Any company, regardless of the sector in which it operates, faces normal business risks, including management effectiveness, competitive threats, or economic cycles. Many companies may pose some risk to the environment and society based on their business activities. Fossil fuel companies, however, face and pose unique risks that we believe are not manageable to the extent required to make them attractive investments. Through our research, we have found unacceptable risks in the fossil fuel exploration and production industry. Some of the risks include: climate change and uncertain energy policy; competition from new technologies; health, safety, and environmental risks; political instability; and access to reserves. On this latter point, the types of projects fossil fuel companies are involved with today indicate the increased risks they have to take in order to keep oil and gas flowing. Deep water drilling in Arctic waters, shale oil production, and fracking close to populated areas are just a few examples.
Investing in fossil fuel today seems like investing in the whaling industry in the mid-1800s—old technology, still dominant, but clearly not the future. Our ability to power the global economy beyond the current age of fossil fuels will be the most important and difficult transformation ever made by our industrial society.
Furthermore, we believe that the fossil fuel sector is unnecessary to prudent portfolio structure and that it is possible to produce risk-adjusted returns that are competitive with appropriate broad-market benchmarks through a portfolio that does not invest in fossil fuel companies. Some investors may own fossil fuel stocks because they are afraid that they will underperform the herd if fossil fuel stocks rise sharply in value. Fossil fuel stocks make up the bulk of the energy sector, which accounts for about 10% of the global equity market. Whatever you are doing as an investor, you can do it without exposure to any given 10% of the equity market, unless you are an index fund trying to exactly replicate the market benchmark. There are many companies in other sectors ─ big, well-established, stable, high-quality, global companies ─ engaged in forward-thinking business practices that are helping to move our economy toward using less resources and a lower carbon future. There are many companies to choose from in lieu of fossil fuel stocks.
Portfolio 21 recently released a new paper titled, “Managing Investment Portfolios without Fossil Fuel Stocks.” The paper details the unique investment risks of the coal, oil, and gas sector, as well as how Portfolio 21 manages portfolio diversification without fossil fuel exploration and production stocks. We invite readers to share the paper with others interested in fossil fuel divestment issues.
2. Why should they do so using the Portfolio 21 Global Equity Mutual Fund?
The Portfolio 21 Global Equity Fund is one of very few mutual funds that do not invest in coal, oil, and gas exploration or production. Our passion is finding exceptional companies that provide competitive returns, mitigate the environmental impact of their business activity, find opportunities within emerging environmental limits, and operate in a manner respectful of society. We search globally for these companies, using proprietary environmental research and comprehensive business analysis. Portfolio 21’s selection criteria integrate our financial and environmental research process to seek high quality growth companies that we believe to be some of the most exciting in the world in terms of growth potential and risk/return profile.
Portfolio 21 is a leader in environmental investing. We are committed to maintaining the high bar for the quality of the companies in which we invest. Our concerns about the ecological crisis began nearly three decades ago, and we continue to critically examine our assumptions and approach every day. We hope to further environmental and social justice through the investment process. Today, companies have enormous power to create social and environmental ─ as well as financial ─ outcomes. Corporate power rivals government power in many respects, it controls it in other respects, and the two powers often work together. An investor with large sums of money under management is like a voter with a million votes to cast. Many investors fail to realize these facts, others ignore their responsibility, and of course some abuse it. We seek to do the best with it that is possible.
The Portfolio 21 Global Equity Fund has outperformed its benchmark, the MSCI World Equity Index, since the Fund’s inception in 1999 to date. Of course, any investor considering an investment in a mutual fund should read the prospectus carefully before investing. The prospectus and other details can be found at www.portfolio21.com.