Does it really make sense to divest from Fossil Fuel companies?

The NY Times recently ran an article about the growing role of mothers in the climate movement, “A growing force in the climate movement: Moms”. It’s great that mothers are standing up to advocate for the planet and their children’s futures. However, one of the protests described in the article struck me as an example of how a “common sense” approach to climate activism can do more harm than good.

Sunrise Kids NYC, have singled out fossil fuel financiers, once staging what they called a protest play date at the Westchester County farmhouse of Larry Fink, the BlackRock chairman. As Bocci and I spoke on a video call, her son Zasper climbed onto her lap to complain that he didn’t get a chance to press Fink’s doorbell repeatedly, as the other kids had.

The purpose of the protest was to urge Fink to divest trillions of dollars of holdings in fossil fuel companies. I found this story jarring, because to me Larry Fink is one of the unsung heroes of the climate movement. It makes me sad that fellow climate activists would want to harass him at home rather than thank him for the ways he has pushed our capitalist system to take climate change seriously.

The call to divest from companies that profit from the sale of fossil fuels is a common one in the climate movement. It seems like common sense: if fossil fuel use is destroying the environment, it is morally wrong to profit from it. People who care about the environment and also own shares in fossil fuel companies need to sell their shares, or they are hypocrites.

But think about it another way: owning shares in a company gives you an ownership stake in the company, and the right to vote for board members who control the company’s corporate strategy and priorities. If everyone who cares about climate change sells their ownership stake in fossil fuel companies, then the people they sell to will NOT care about climate change, and will manage the company accordingly.

It’s objectively true that fossil fuel companies engaged in a disinformation campaign to delegitimize climate science and delay taking action to decarbonize the world economy; this doesn’t change the fact that if fossil fuel companies stopped operating tomorrow, millions of people would freeze or starve to death. Our society is physically addicted to fossil fuels, and must be weaned from them. If our goal is to achieve sustainable human flourishing for the entire human race, then it is just as fatal to move too quickly in reducing fossil fuel use as it is to move too slowly.

We have a challenging tightrope walk ahead of us. We need fossil fuel operations to extract the minimum amount necessary to sustain humanity while it transitions to clean energy as fast as possible. It seems clear that there is no chance of this happening unless fossil fuel companies are led by people who take climate science seriously.

It seems to me that the moral imperative for the climate movement is not to divest from fossil fuel companies but rather to buy the largest ownership stake possible in order to install corporate leaders that will steer fossil fuel companies to a clean energy future. This is exactly the strategy taken by the activist hedge fund Engine No. 1 that in 2021 leveraged a $40 million dollar stake in Exxon Mobile (0.02% of the company) to wage an investor activism campaign to install three board members who acknowledge the need for Exxon to transform its business model away from fossil fuels. Given Engine No. 1’s small stake in the company, their strategy relied on convincing Exxon’s large shareholders, the largest three being BlackRock (yes, Larry Fink’s BlackRock), The Vanguard Group and State Street, to back its plans.

And this leads to why I see Larry Fink more as a climate hero than a climate villain. BlackRock is the world’s largest asset manager with US $10 trillion in assets under management as of January 2022. Asset managers manage other people’s money. When you buy a mutual fund or ETF for your 401k, or pay into your union’s pension fund, chances are that a company like BlackRock, Vanguard, or State Street holds the underlying shares and negotiates with the company’s leadership on your behalf. Such companies have a legal responsibility (a “fiduciary duty”) to use their influence in ways that are consistent with the interests of their clients. Historically, money managers have used this fact as an excuse to vote for corporate strategies that maximize short term profits at the expense of pretty much anything else, including the health of the planet.

Larry Fink rocked the investment world in his January 2020 letter to CEOs, when he declared, “Climate Risk is Investment Risk,” essentially arguing that an asset manager’s fiduciary responsibility required taking climate change into account. Since then, investment strategies with an explicit focus on environment and social concerns have grown dramatically. Over $$650 billion poured into Environmental and Social Governance (ESG) funds worldwide in 2021, up from the $542 billion in 2020 and $285 billion in 2019. ESG funds now account for 10% of worldwide fund assets and continue to grow. Of course, the increasingly obvious physical impacts of climate change, storms, flooding, wildfires, and the efforts of scientists and activists to inform the public, are the primary drivers of change. However, the endorsement of economic titans like Larry Fink opens a pathway for corporate leaders to address climate change without having to be revolutionaries, knowing it is not in conflict with their fiduciary responsibilities. You can draw a direct line from investor activism to the SEC’s recent proposal to regulate carbon emissions disclosures of publicly traded companies, on the argument that because company net-zero goals are a response to investor demands, progress against those goals are fair game for audit and oversight.

Personally, I think that if your goal is to fix climate change, calling on large investors like pension funds and endowments to divest from fossil fuel companies is misguided. (If you’re just looking to maximize long term returns, that’s another story!) Much better to pressure those investors to proactively advocate for fossil fuel companies to clean up their acts. I’m not aware of any retail investment funds based on this premise, just “Green” funds that exclude fossil fuel companies and other major GHG emitters. Perhaps buying into these funds is the best thing regular people can do to signal their support for climate action. But even if that’s the best option available to us small fries, we shouldn’t ask the Larry Finks of the world to follow the same strategy.