Mother Nature is Not Calling for Divestment


Alicia Seiger

The divestment movement has been helpful in drawing attention to the impact of climate change on investment portfolios and increasing the stigma around fossil fuel companies. It was also well-timed. Less than two years after Bill McKibben first ignited calls for endowments to go ‘fossil-free’, oil and gas returns began a disastrous five-year run. The US shale boom had much more to do with driving asset values down than carbon math, but lower prices forced portfolio managers to reconsider what had long been their highest performing asset class. The moral appeal of divestment lent a feel-good sheen to the inevitable end of a fossil love affair. And as a result, investors have doled out enough headlines to give divestment activists hope.


New York State Common Retirement Fund, the nation’s third largest pension, fielded calls for divestment by establishing an advisory panel to make recommendations on how the $207 billion fund should respond. I served on that six-member panel, along with other experts in the fields of sustainability, finance, climate change and fiduciary duty. After a year of reviewing materials and interviewing practitioners, we recently delivered our recommendations, which can be summarized in three primary calls to action.



It can be hard to imagine what it means to align a portfolio with a specific warming scenario. Consider the analogy of a thermostat. A room cannot be set to two temperatures at the same time. Portfolios today have this inconsistency. Investors are buying and holding assets as if the planet is heading to 4-degrees (business-as-usual) while at the same time pricing risk as if the planet were not warming at all. Tying all investment decisions to a specific warming scenario gives the portfolio integrity through alignment with scientific principles. It also fortifies a portfolio against the physical impacts of climate change (such as floods, drought, wildfires, and extreme heat) and the transition risks on the path to decarbonization (such as the pace and scale of technology innovation and shocks from dramatic and abrupt shifts in policy.)

Finally, and this cannot be said enough, mother nature has canceled business-as-usual. Investors must recognize that they are taking a bet on climate whether they act or not. Those who proactively pursue new ways of investing will be better positioned for the road ahead. Investors must integrate sustainability metrics into compensation structures and rethink benchmarking and backtesting, which are akin to navigating a car down the road using only the rear-view mirror. Climate change promises sharp and abrupt turns in the road ahead.

“Fossil free” signs often generate a visceral reaction from those on the receiving end. The most disappointing responses are ones that misunderstand the message as demanding “social change” or as “a means to achieve policy ends.” The endowments on which our university students and pensioners depend are recklessly ill-prepared for climate change. It is the responsibility of every fiduciary to take appropriate action to protect their assets from the physical and transition risks of a changing climate.

Our panel’s recommendations enable fiduciaries to respond to calls for divestment with bolder action that will better position their portfolios to weather the future. To protect nest eggs from climate change, advocates and investors must look beyond their signposts and read the signs mother nature is painting the world over.