The Bishop and the Butterfly: Murder, Politics, and the End of the Jazz Age

    Don't sell. Buy!

    On Sunday September 21, over 300,000 people rallied in Manhattan at the People's Climate March. Basically a feel-good event designed to spotlight popular concerns about anthropogenic global warming, the Marchers failed in at least one respect, they were pointedly ignored by the pundit-driven morning political talk shows that aired as the event was getting underway.

    Possibly anticipating that the media elites would snub them, some participants went beyond peaceful marching the following day at Flood Wall Street. The Flooders clashed with police who arrested some - apparently according to plan. Unlike the Marchers who did not espouse any particular solution or set of solutions, a central tactic of the Flooders is to cajole wealthy liberals to stop investing in carbon-based energy companies.

    Perhaps the highest profile divestor is the Rockefeller family which is moving its nearly one billion dollar philanthropic organization slowly but purposefully out of companies that extract, produce, or distribute fossil fuels.  Some wealthy universities, including Stanford, are also taking fitful steps away from investing in fossil fuels.

    Interestingly, Donald P. Gould, a trustee and chair of Pitzer University's investment committee acknowledged that the effect of divestment on extractors would be minimal. But in the long term, he said, "divestment seeks to work indirectly on these companies by changing the conversation about the climate." Gould failed, however, to explain how divestment will change the conversation.

    The irony is that well-intentioned activists and investors are actually doing the worst possible thing. Rather than selling energy companies, activist green investors should be buying them with the intention of changing company practices. To the extent the divestiture movement is “successful”, the result will be that investors who might vote for environmentally concerned Board members will likely be replaced by those who are unconcerned about the planet's health.

    Some may argue that the largest energy companies are so big that no one investor can change a company's practices. But, the Rockefeller family controls billions of dollars as do trustees of large university and pension funds. With planning, by joining forces, and by buying rather than selling securities, these mega-investors could be well-positioned to impose better business practices on some energy companies.

    Ultimately, the solution to our planet's ecological crisis must be political. As long as the very high external costs of burning carbon (smog, global warming, increased military spending) are broadly distributed while the benefits are concentrated, extractors, refiners, and distributors will profit from fossil fuels. A carbon tax is the ideal solution. Nevertheless, if activist investors can document benefits from cleaner greener management, they would strengthen the case for a truly post-carbon future.

    Unfortunately, neither the Marchers who, understandably perhaps, did not want to alienate anybody especially those whose financial and political support they seek nor the Flooders who are calling on environmentalists to withdraw from owning and hence influencing fossil fuel companies are on the most direct path to a cleaner greener future.

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    Comments

    Interesting and well-thought argument. A little less than half-way through, I thought I'd figured out the meaning of your title, only to be surprised. The other way that "buy" is a good strategy for addressing climate concerns is to actively invest in green/alternative power companies.


    I'm sympathetic to your point of view, however, it won't work.

    Some may argue that the largest energy companies are so big that no one investor can change a company's practices. But, the Rockefeller family controls billions of dollars as do trustees of large university and pension funds. With planning, by joining forces, and by buying rather than selling securities, these mega-investors could be well-positioned to impose better business practices on some energy companies.
     

    Right off the bat, one problem is that ExxonMobil's market cap is nearly $400 billion.  The entire AUM of a pension fund like, say Calpers, is only $300 billion.  The largest institutional holders of Exxon Mobil are all index providers. Vanguard, State Street and BlackRock own a combined 12% of the company.  This is all passive.  They own it because they have to own the market. They'll vote their proxies, sure, but they aren't going to try to force the company to change business models.  Indeed, doing something that active would be contrary to their responsibilities as index investors.

    Also, collusion between major holders on that point might well be illegal. The SEC generally frowns upon it.

    Sadly, shareholder democracy isn't really much of a democracy.  The vast majority of resolutions put to proxy votes are non-binding.  This is because, with all the various state laws involved, it is extremely difficult to write a binding resolution that won't be struck down somewhere, likely in Delaware.

    Buying stock in an oil or gas E&P company with the intention of changing it into some other form of energy company will probably not sit well with other investors who are looking for exposure to oil and gas.  They will rightly tell others who do not want such exposure that they could always not buy the stock.

    While it's true that divestment robs you of a voice it can have an effect if enough people get behind it.  Divestment can create something of a ceiling for a stock price.  If major institutional buyers are not available, the stock price can only climb so high.  Remember, stock is money.  When its stock price is high, Exxon can use it to buy competitors or access other areas of the capital markets.  When its stock price is low, management has less flexibility.  They feel that.  And, of course, the executives are compensated in part based on stock price performance and they are compensated with shares of stock.  If you can depress the stock price through a concerted divestment campaign they will eventually feel it.


    ExxonMobil is so rich in cash that when it wants to embark on expensive ventures, it never has to either 1) issue new stock, or 2) sell current holdings.  Based on today's closing stock price, XOM's annual dividend yield is over 3%.  A 10-year US treasury yields under 2%.  Any artificial (i.e., caused by shareholder activism rather than a reduction in expected profits) drop in XOM's stock price makes purchasing and owning the stock that much more attractive for executives, top managers, and institutions that don't care about the planet's health.  Nevertheless, I might reconsider in light of evidence that companies had modified bad behavior because of divestment.


    It may be that divestment doesn't work but that shareholder activism, in this regard, doesn't work very well, either.


    I'm doubling down with my strategy of investment - in the companies that you do support. This also suggests divestment for the companies you don't support, but only as a consequence, not the reason.


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