I have been reading “The Intelligent Investor” by the peerless Benjamin Graham. People were not so concerned about climate change when it was last revised by the author in 1973, but it contains plenty to think about for the modern investor. Or, indeed, divestor.
Since I kicked off with a provocative title, let’s clear a few things up. I am not a quack who thinks that climate change, second only to vaccines, is a form of governmental manipulation. It hasn’t been dreamt up by snowflakes, the vegan industry, or a Swedish opera singer with a sustainably travelling daughter to promote. It is a very real threat to our long term existence on this planet and we need green energy fixes as fast as possible. But to do this we don’t need witty protest placards or your latest Twitter thread, we need big investments in green tech. Which means we need a lot of money.
Universities and colleges, generally the centre of calls to divest from fossil fuels, tend to sit on a big pile of money, an endowment, and use the interest off this to help fund research and their continued existence. Except when your money pile is that big the “interest” comes in the form of bond payouts and share dividends, along with the occaisional sale or two. Universities are classic value investors- they are in it for the long run, likely hundreds of years, and so they don’t (or at least shouldn’t) enagage in speculation. They want shares in established companies that have a good price to earnings ratio.
With the ocean of cheap money (i.e. low interest rate loans) being churned out by central banks since the 2008 crash, shares have enjoyed the best returns for the value investor. Even looking back over many more years, as Graham did, it has always been advisable to have some amount of your money pile invested in common stocks. Fossil fuel companies, like BP, have traditionally been seen as a healthy part of an investment portfolio as they tend to maintain share price and reliably pay dividends. This is why universities have some part of their endowment invested in fossil fuel companies. BP’s share price has hovered generally just under £5 a share for the last 5 years, and has returned around 7.5 pence per share per quarter over that time, giving an annual rate of return of around 6%. This more than four times the interest rate you can get on a good consumer savings account!
It is already starting to look like divesting is a bad idea for the bank balance. But if we eschew money for a moment, something Graham would have been unlikely to recommend, is there a good moral reason to divest? The aim of the divest protest movement, taken from Wikipedia of course, is “to reduce carbon emissions by accelerating the adoption of renewable energy through the stigmatisation of fossil fuel companies”. It has certainly been successful, in a way, as $12 trillion has already been divested from these industries. “Great!”, you say, “this is amazing progress for our strategy!”. Except, of course, it is no progress at all.
Divesting from fossil fuels equals selling shares in the companies that own and/ or extract them. Divesting does not equal lower fossil fuel extraction. The market price of a company is the number of shares multiplied by the price of one share sold right now. The book price of a company is the sum of all of its assets minus the sum of its liabilities. The book price is not changed when the market price fluctuates. The market price should reflect the book price in some way, but when everyone hits sell at the same time, the market price plummets while the book price stays the same. So the divest movement is perfect for an opprtunistic bank or investment fund to come along and hoover up some cheap shares with a very respectable long-term return on investment.
The only logical conclusion to the divest movement is that universities and colleges are giving up income on the cheap to funds that are mostly unkown and immune to protests over the climate. Universities are the very institutions that need this revenue source to educate the next generation of scientists and engineers, and they are the places where much of the original research in to future technologies is done. Losing out on money to faceless funds is, in my view, much worse than having the so-called “dirty money” in the first place. Universities need the long term returns from these shares to drive innovation. Investment funds just want the money.
Is there a way to reduce the value of fossil fuel companies and save the planet? Of course! Consume less fuel, reduce the book price and enjoy the revenge as the market price falls. Doing this is not easy- you can forget about the car, those flights, foods that are not grown locally, buying lots of clothes, living in a warm house in winter, having lots of children and even having pets. Oh, and everyone has to do this. Unfortunately for the divest movement members, and the rest of us, this is a lot more difficult than attending a few protests at uni.
Our unwillingness, and possibly our inability, to return to our pre-industrial lifestyles necessitates the rapid invention of clean tech, and an important part of this is a well funded university sector. Distinguishing between “clean” and “dirty” money may well be thought provoking, but its all worth the same in the end, and our places of learning need that cash income.
A few things to round off. Before buying a digitial wheelbarrow full of BP shares from your local university it might be worth heeding the words of Mark Carney. He wisely points out that as we transition to low carbon energy sources, companies with large fossil fuel assets will see these nosedive in value as there will never be a need to extract them. BP have been at the front of the field on this, pledging to become carbon neutral by 2050. While admirable, there are no detailed plans on how this will happen yet, which could put off a cautious investor.
And finally, for presumed boring legal reasons, does this blog constitute sound financial advice? Graham advocated only sound investment principles, and would never have given a guarantee that even his own advice on what to buy would yield positive returns. So if you buy shares based on the thoughts of a blogger who writes Homeric sports reviews and end up losing a load of money, that one’s on you.
Southern Oatcake 