A Practical Guide for Nonprofits Considering Divesting from Fossil Fuels, Part Two

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. (See Part 1 here)

Part 2 - Practical Implementation Considerations When Divesting From Fossil Fuels

If your organization decides to divest from fossil fuels, additional discussion is needed to decide how to implement divestment. Divestment is handled differently from organization to organization, often due to the nuances of the holdings in an organization’s investment portfolios. Implementing divestment can be divided into decisions about two main areas

• Committing to selling existing holdings in fossil fuel companies.

• Committing to not add future holdings in fossil fuel companies.

Considerations Regarding Existing Holdings: For investors that are holding individual stocks or bonds in fossil fuel companies, the implementation can be relatively straightforward - instruct the investment manager to sell those holdings, assuming that there is a liquid market for those securities and the holdings can be sold at, or close to, their market value. 

For portfolios that are invested in diversified funds such as mutual funds or private investment funds, the question is more nuanced. Fossil fuels may only represent a small part of the fund - is your organization willing to liquidate the entire holding in order to eliminate the fossil fuel portion? Sometimes, investment managers offer similar versions of funds that are run with fossil-fuel free mandates and so a switch can be implemented relatively easily. Other times, a currently used fund has no fossil-fuel free equivalent and the fund must be replaced entirely. An important question to ask is will the change meaningfully impact the ability of the portfolio to reach the organization’s investment goals and if so, is the difference acceptable to the organization?

Considerations Regarding Future Holdings: Making a commitment about future holdings is considerably easier. Organizations commit to not adding any new holdings in fossil fuel securities and structure their new investments so that each investment is mandated to exclude fossil fuels. The organization should be comfortable with any impact on the portfolio that this decision may create, such as realizing that comparing the portfolio’s returns to indexes that include fossil fuel investments (like the S&P 500) may be less of an appropriate comparison going forward.

Discussing the Decision with Investment Advisors: The decision on existing versus future holdings should be followed up with discussions with one’s investment advisors and managers to understand how they would implement the climate related changes to portfolios and if those changes are satisfactory to the organization. Input from the investment advisors may cause the organization to rethink or clarify its divestment approach.

Putting it All Together

Most organizations end up selecting one of these three main categories of divestment.

The three major categories of fossil fuel divestment:

1. Fossil-fuel free - organizations eliminate all current investments in fossil fuels and commit to not adding any in the future.

1. Full commitment - the organization makes a commitment to become fossil-fuel free over a set time period, but continues to hold some fossil fuel investments.

1. Partial commitment - the organization makes a commitment to eliminate some but not all types of fossil fuel companies (i.e. coal, but not natural gas), or to divest from all fossil fuel companies,  but only in specific parts of a portfolio or in specific asset classes (i.e. in public investments but not private investments, or in equity investments but not bond investments).

Before the implementation of investment changes, it is worthwhile to create a statement where the organization articulates its approach to divestment, its timeline, and identifies what will be divested, and, or, no longer purchased. Additionally, many organizations choose to communicate this statement to stakeholders, often highlighting how the decision was reached and how it reflects the non-profit’s mission. This may lead to additional impacts on your organization - such as strengthening the connection to younger constituents who rank climate as one of their top concerns.

Steps To Take Regardless of the Divestment Decision: Regardless of whether an organization adopts divestment, there are other important climate-related issues to consider:

• Consider investing in renewable energy companies. While the argument for eliminating fossil fuel holdings is nuanced, the argument for investing in renewable energy is more straightforward. Greater demand for renewable energy investments drives up their value, leading to greater rewards for the renewable energy industry and more supply of new renewable energy offerings. Though how to incorporate renewable energy into a portfolio is a separate discussion, one reasonable choice could be to shift one’s investments from fossil fuels to renewable energy, as both are tied to the demand for energy (this is sometimes called the Divest/Invest approach). This changes the discussion from whether fossil fuels must be eliminated from portfolios, to how to incorporate support for renewable energy investments, potentially avoiding clashes within an organization, but still ultimately enabling action regarding climate change. 

• Contemplate other ways to address climate change such as increasing the organization's energy efficiency or creating programming that highlights climate issues.

• Consider publicizing the organization’s approach and commitment to addressing climate change, as spreading the word is a valuable benefit of having a public presence and constituency. 

The bottom line: your organization may decide to divest its portfolio of fossil fuel holdings, but if so, it should understand what it is seeking to accomplish. Non-profit leaders should take the time necessary to decide if divestment is the best course of action for the organization’s goals and values. Expand the conversation to include not just divestment of fossil fuels, but also how the organization can include renewable energy investments and climate-related programming in its activities, which may create organizational buy-in and galvanize concrete action. 

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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.