A Practical Guide for Nonprofits Considering Divesting from Fossil Fuels, Part One
Purpose: The purpose of this article is to provide a framework for leaders of non-profit organizations that are considering divesting fossil fuels from the organization’s investments.
Part 1 - How Nonprofit Leaders Can Discuss Divestment
Intro: Divestment from fossil fuel investments is a growing approach for investors looking to address climate change, with the number of entities reporting full or partial divestment growing from 181 in 2014 to 1,951 in 2023 (representing over $40 trillion of assets) according to the Global Divestment Commitments Database. Despite growing support, divestment is often a contentious issue when presented to non-profit boards and investment committees. Trying to analyze the decision from multiple angles can create an end result that reflects the organization’s values and decreases the emotional toll of the process on board members and staff.
What is Divestment? Divestment means eliminating a particular type of investment from one’s investment portfolio. In this discussion, it is referring to eliminating investments in fossil fuel related companies - namely those involved in oil, natural gas or coal.
How to Discuss Divestment? Divestment, like climate change, is a complex issue, and should be evaluated from multiple perspectives. This is particularly important for non-profits when different leaders in the organization - executive directors, board chairs, investment committee members, may come at the issue of divestment from differing mindsets.
An effective approach to create an open, collaborative dialogue is to discuss the pros versus the cons of divestment. Below are examples of pros and cons that organizational leadership can discuss to understand how divestment lines up with the organization’s values and mission.
Example Discussion Topics
Arguments for Divestment:
Divestment as a moral imperative. If fossil fuels are harming the earth and imperiling humanity, then profiting directly off the sale of fossil fuels is not appropriate, especially for an organization that is devoted to bettering humanity. While one cannot necessarily filter out all investments in a portfolio that create moral objections, one can draw the line in certain cases, and much like many portfolios exclude tobacco manufacturers, excluding fossil fuels is a reasonable exclusion as well.
Divestment is an investment decision. If one has a strong belief that fossil fuel companies will underperform the broader markets over the long term, then selling fossil fuel investments today may be a wise long-term decision. Proponents of this argument point out that it is likely that not all and perhaps only a fraction of the current reserves of fossil fuels will ultimately be able to be used or sold before society phases out fossil fuel use. This argument implies that fossil fuel companies are holding large amounts of assets that will drop in value over time and accordingly, from just an investment perspective, it makes sense to decrease holdings in fossil fuels over the long term (even if over the short term, fossil fuel investments may produce returns that exceed the general market).
Divestment may impact performance less than many people expect. Organizations may find it helpful to review data that compares the returns of commonly reviewed stock indexes such as the S&P 500 to fossil-free versions of the index. S&P has maintained the S&P 500 Fossil Fuel Free Index since 2015 and provides comparisons to the general S&P 500 index. Performance of the two indexes, particularly over multi-year periods, are very similar. International indexes also exhibit similar performance between the general index and the fossil fuel free version.
Divestment has social benefits that are independent from economic impacts. Many look to the campaign to sanction and divest from South Africa as a model for the importance of fossil fuel divestment today. For example, growing support in the 1980s for divestment (and sanctions) was essential for uniting Democrats and Republicans to pass the Comprehensive Anti-Apartheid Act of 1986, which was the most significant country-wide anti-apartheid legislation of its time. Today, the expanding list of major institutions that are divesting from fossil fuels provides greater pressure on those that have not yet divested.
Arguments Against Divestment:
Our society remains reliant on fossil fuels for the foreseeable future and many people continue to use fossil fuels to power their everyday lives. It may be contentious within an organization to divest from fossil fuels at an investment level, but continue to benefit from them in day to day use. An alternative approach is to emphasize investing in renewable energy to the extent possible, rather than focusing on complete divestment of fossil fuels (see part 2 more on this idea).
The majority of fossil fuel reserves are owned by government or state energy firms (with estimates of close to 75% of reserves). The focus should be on putting pressure on governments to divest fossil fuels rather than on selling investments in publicly traded companies, which are the minority owner of fossil fuels.
The actual impact of divestment is unclear historically. While campaigns for institutions and governments to divest from apartheid South Africa began in the 1960s, it is difficult to quantify what direct impact these actions had on the end of apartheid, in particular because many of the divestments were put in place close to the end of apartheid. More clear is the impact of banks refusing to issue new loans to South Africa, with Chase Manhattan Bank declaring in 1985 that it would not renew loans in South Africa. A Chase executive later explained that the economic and political instability in South Africa made the business risk too high for the company. Accordingly, the takeaway may be that efforts to make it more difficult and less compelling for loans to be made to fossil fuel companies may be an even more important issue than divestment. One course of action could be to inquire about your bank’s climate record and fossil fuel investment policies. If the bank is actively financing fossil fuels, changing banks and explaining the reason for the change could be an impactful move.
Engagement by shareholders of fossil fuel companies has been successful. In 2021, a small investor group in Exxon successfully campaigned to appoint three representatives to Exxon’s board that had diverse experience in the energy sector including in renewable energy. Exxon subsequently announced a $15 billion commitment to advance low carbon solutions. Ownership in fossil fuel companies provides the opportunity to vote on shareholder proxies and engage with company management as a stakeholder, potentially creating change that divestment cannot. As Mark van Baal, founder of Follow This, an organization devoted to organizing shareholders to combat climate change noted "if the responsible investors divest and less responsible investors step in, I think the boards of these companies will be popping corks…After seven years of campaigning, we can conclude that [oil and gas companies] won't change on their own accord."
By discussing the pros and cons, organizations can come to a consensus on a divestment stance and make a decision about fossil fuel investments.
Part 2 covers the practical implications of deciding to divest from fossil fuels.
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Jonathan Bernstein is the lead advisor at Bernstein Planning and Investment Management. Jonathan graduated from Yale College and has worked in financial advising for 17 years. He previously served as Director of Research for Hefren-Tillotson, Pittsburgh’s largest independent wealth manager, managing over $18 billion of client investments and created the firm’s Impact Portfolios. Jonathan is both a CERTIFIED FINANCIAL PLANNER™ certificant and a CFA® charterholder. He has been advising individuals and institutions on sustainable investing since 2017.