Since U.S. climate legislation failed in 2010, environmentalists and like-minded investors have begun campaigning to get investors to avoid fossil-fuel stocks. It’s worth putting the scale of that challenge in perspective.
The Natural Resources Defense Council this week announced a partnership with the FTSE Group, a leading creator of stock indexes, and BlackRock, the world’s largest asset manager. They will develop a global stock index for climate-minded investors that excludes coal, oil and natural gas companies, and any others that profit from extraction, a first, according to NRDC.
Investors will be able to use the index to build their own fossil-free funds, and thus avoid risks they see from "unburnable carbon." The phrase, which was popularized by the U.K.-based Carbon Tracker Initiative, refers to fossil fuel reserves that can't be burned if the atmosphere is to stay within a low level of warming.
Holding fossil-fuel stocks could put investors at risk, as society starts to leave carbon in the ground, the thinking goes. Some environmentalists have taken the Carbon Tracker research as a cue to dump fossil fuel investments altogether, rather than as a tool to consider portfolio risk. Its next research report comes out May 8.
There are a zillion indexes for whatever ails you. What makes this one interesting is that it rejects one of the very forces reconfiguring the energy/climate debate -- natural gas.
Gas has a uniquely ambiguous place in energy-climate discussions. Environmentalists aren't all sure what to make of it. It's cleaner than coal, dirtier than renewables, and its production has raised novel environmental and social questions in communities across the country. Many support its safe development. Will lumping gas in with coal limit the attractiveness of the FTSE Global ex Fossil Fuels Index Series even among eco-minded investors?
Mainstream investors certainly don't show any sign of jettisoning gas from their portfolios. Bloomberg News reported Tuesday that Charif Souki, CEO of the leading liquefied natural gas (LNG) exporter, Cheniere Energy Inc., was the highest-paid U.S. executive in 2013, making $142 million. Cheniere shares have increased 30-fold since November 2009 and has performed more than five times better than the S&P 500 in the last 12 months.
"I suspect shareholders aren't complaining, given what's happened with the stock," said Gary Hewitt, head of research at GMI Ratings, which tracks environmental and other non-traditional risks facing companies.
Some 445 institutions hold Cheniere Energy, according to data compiled by Bloomberg. The four largest are Pointstate Capital, Vanguard Group, Greenwich Asset Holdings and BlackRock itself.
“Put simply, natural gas is a fossil fuel,” said Jenny Powers, national media director for NRDC, by email. The group advocates for a fossil-free future, “and by partnering with BlackRock and FTSE, we’re sending a signal to Wall Street that its own major financial players are getting engaged on this issue, too.”
A spokeswoman for FTSE, which is owned by the London Stock Exchange Group, said she wasn't privy to conversations about excluding natural gas, and explained by email that the index “was purposefully designed to be transparent, easy to understand, quantifiable and repeatable.” BlackRock referred questions to the other two organizations, which are developing the methodology.
Investors have experimented with similar investment benchmarks in the past, according to Cary Krosinsky, an adjunct professor at Columbia University’s Earth Institute and a sustainability investment advisor for professional investors. This particular example comes at a time when there’s a clear distinction between fossil fuels themselves. The fossil-free approach excludes coal, oil and gas equally, although they don’t contribute equally to carbon pollution.
“It’s great that it’s happening but we’ve had these things before,” he said. “The question is, when will the assets move in this direction?”
More by Eric Roston (@eroston on Twitter):
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