“The BP incident highlights big differences in how socially responsible funds prioritize various causes. Some of these managers considered BP’s stance on climate change a strong positive. ‘BP was the first to break the logjam on climate change policy’ and had been a leader on alternative energy, says Mark Regier, director of stewardship investing for MMA Praxis.”
– Quoted in Eleanor Laise, “Oops: ‘Socially Responsible’ Funds Hold Big Stakes of BP,” Wall Street Journal, July 17–18, 2010.
The greenwashing strategy of BP and Enron has been the subject of three recent posts at MasterResource:
Don’t believe that “Beyond Petroleum” BP fooled the politically correct after Enron and even all the way up to the Deepwater Horizon explosion/Gulf spill of April 2010? Then consider the Wall Street Journal’s “Oops: ‘Socially Responsible’ Funds Hold Big Stakes of BP” (reprinted below as Appendix A).
Enron Fooled the “Socially Conscious” Too
Enron also fooled the same “socially responsible” crowd. As I recounted in Capitalism at Work: Business, Government, and Energy (p. 8):
Enron had been a favorite of the intelligentsia. The New York Times and just about every other media outlet sang its praises. Ken Lay’s company was a champion of all things politically correct. Enron was progressive, practicing “social corporate responsibility” and “stakeholder theory” ….
On the environmental front, Enron practiced “sustainable development” by aggressively investing in politically favored renewable energy and sounding the alarm over man-made greenhouse-gas emissions.
Whether supporting Clinton/Gore’s proposal for a Btu tax; or lobbying the Bush/Cheney administration to regulate CO2 emissions, receiving a “climate protection award” from the EPA, or a “corporate conscience award” from the Council on Economic Priorities; advancing the interventionist agenda of the President’s Council on Sustainable Development, Business Council for Sustainable Energy, Pew Center on Global Climate Change, and Heinz Center for Science, Economics, and the Environment; or sponsoring Earth Day events in Texas, California, and Oregon, Ken Lay’s Enron was pointing the way to a sustainable energy future—or so it was thought.
Energy “Social Responsibility”: Two Major Fallacies
Two stubborn premises of ‘socially responsible’ energy investing should be revisited at this late date.
The first concerns the green greenhouse gas, carbon dioxide (CO2), and the second the non-green intermittent resources: wind and solar power.
Carbon Dioxide. The first fallacy is that CO2 is a known, major, reversible negative externality. On the contrary, a balance-of-evidence case can be made that CO2 is the green greenhouse gas as explained by Chip Knappenberger at MasterResource.
To this point, consider the happy intersection between mainstream climate scientist Gerald North of Texas A&M and mainstream economist Robert Mendelsohn of Yale. Realistic anthropogenic warming estimates such as held by Dr. North have strong positives–and even a net benefit after considering costs–for the environment and for the economy as explained by Mendelsohn. This is a strong argument for rejecting a case for ‘market failure’ and government correction, as if there were not government failure and analytic failure also.
There are real pollutants and there are speculative ones. CO2 is a speculative, politicized one. It is time for ‘socially conscious’ investors to focus on real environmental issues.
“Green” Renewables. Wind power is the green energy that is not green. Wind environmentalism is an oxymoron; the triumph of image and inertia over reality.
The fatal attraction of environmentalists toward industrial wind turbines (industrial wind parks) has peculiar roots. Left environmentalists like wind not because it is back to nature and benign–it is neither of these things. They like wind because it is about the only thing they can offer after (rejected) nuclear or hydro as a ‘supply side’ energy source. And the very problems of wind energy–high costs and unreliability–morphs into their demand-side strategy of conservationism. So the Left environmentalists supply-side strategy is really their demand-side strategy–but at the expense of the environment!
Socially conscious investors should turn against wind power and on-grid solar power in particular for the simple fact that the wrong environmental standard has been used. Kent Hawkins has explained the dirty secret of intermittent generation as a backdoor pollution source (see Appendix B). And in a more general sense, Peter Huber explains why renewables have severe environmental tradeoffs:
“The greenest fuels are the ones that contain the most energy per pound of material than must be mined, trucked, pumped, piped, and burnt. [In contrast], extracting comparable amounts of energy from the surface would entail truly monstrous environmental disruption…. The greenest possible strategy is to mine and to bury, to fly and to tunnel, to search high and low, where the life mostly isn’t, and so to leave the edge, the space in the middle, living and green.”
– Peter Huber, Hard Green: Saving the Environment from the Environmentalists (New York: Basic Books, 1999), pp. 105, 108.
The case studies of BP today and Enron yesterday demonstrate the fallacy of using climate alarmism and renewables-based energy transformation as litmus tests for socially responsible energy investing. But will substance overtake form in this area? It is high time for an open, honest debate where the best arguments from both sides are aired for both fund managers and investors to decide.
Appendix A: Eleanor Laise, “Oops: ‘Socially Responsible’ Funds Hold Big Stakes of BP,” Wall Street Journal, July 17–18, 2010.
The oil that spewed into the Gulf of Mexico has stained some “socially responsible” mutual funds.
These portfolios aim to invest based on environmental, human rights, corporate governance and other criteria. Yet a number of major socially responsible funds and indexes
Workers in Waveland, Miss., clean up oil that washed ashore from the Deepwater Horizon spill in the Gulf of Mexico.
The BP case shows just how different socially responsible portfolios can be. While BP had clear safety issues that alienated some of these funds even before the Gulf spill, others favored the company because of its stance on climate change and alternative energy.
The upshot on socially responsible investing: “Investors need to do more legwork than they might have originally thought when choosing an SRI fund,” says Kathryn Young, mutual fund analyst at investment-research firm Morningstar Inc.
Though still a small corner of the mutual-fund industry, socially responsible funds have attracted steady investor interest in recent years. Shareholders added about $1.4 billion to these funds in the first six months of this year, bringing total assets to more than $50 billion, according to Morningstar.
While the term socially responsible implies major investing restrictions, funds employ a wide range of strategies both to pick stocks and to decide when to sell. Domini Social Investments, which runs Domini Social Equity and other funds, has avoided BP completely. Pax World Funds had flagged BP over safety concerns last year but still held the stock on April 20; it sold a few days later. MMA Praxis Mutual Funds held BP in its International Fund as of June 30, and in a review last month decided not to exclude the stock from its investment universe. (It isn’t clear how many socially responsible funds held BP as of April 20, since mutual funds are required to disclose holdings only on a quarterly basis.)
In the past, many funds followed a fairly simple methodology, screening out companies focused on areas like alcohol, tobacco or weapons. But in recent years, partly to achieve better diversification, some have taken a more nuanced approach. Instead of ruling out entire industries, they may select companies in each sector that have demonstrated some commitment to social principles. Many are even trying to distance themselves from the “SRI” moniker, which some associate with the negative screening approach, in favor of terms like “sustainable” and “environmental, social and governance,” or ESG, investing.
Pax World, for example, a few years ago dropped strict screens that had ruled out gambling and alcohol-related stocks. Now, “we take a best-in-class approach,” rather than focusing on what not to invest in, says Joe Keefe, Pax World president and chief executive. One of the benefits of that approach, he says, is that “you can get broad diversification and exposure to all industries.”
Similarly, Calvert Asset Management Co. in late 2008 launched a new category of funds that use limited screening but focus more on engaging with company management to push for changes. And that is how it wound up holding BP. While the oil giant didn’t pass the screens employed by Calvert’s traditional socially responsible funds, it was held in the engagement-focused Calvert Large Cap Value Fund. That fund liquidated its BP holdings in late June, says Bennett Freeman, senior vice president for sustainability research and policy. “Engagement often takes a long time to demonstrate tangible results,” Mr. Freeman says.
Why soften the investing parameters? To track the broader market more closely. In the 10 years ending June 30, the average socially responsible fund gained an average of 0.1% annually, versus a 1.59% annualized loss for the Standard & Poor’s 500-stock index. In the first six months of this year, socially responsible funds fell 6.2%, versus a 6.7% decline for the S&P 500.
But the BP incident highlights big differences in how socially responsible funds prioritize various causes. Some of these managers considered BP’s stance on climate change a strong positive. “BP was the first to break the logjam on climate change policy” and had been a leader on alternative energy, says Mark Regier, director of stewardship investing for MMA Praxis.
Other managers focused on safety and already were backing away from the stock before the spill. Pax World, which put BP on a watch list in October 2009 due to safety concerns, launched a full review of the company earlier this year. BP failed, though Pax World still held the stock at the time of the spill. Even so, “our process was working,” Pax World’s Mr. Keefe says.
Even broad socially responsible indexes disagree on how to handle BP. The stock was removed from two KLD Research & Analytics indexes, now owned by MSCI, in 2007 and 2008. The Dow Jones Sustainability Indexes dropped BP after the spill, on May 31. Yet another index lineup, FTSE4Good, still includes BP. Index components are reviewed on a semiannual basis, and the next review will be in September, says Jill Mathers, a spokeswoman for FTSE Group.
Investors with deeply held convictions about a particular social or environmental issue would be wise to delve deeply into a fund’s holdings before taking the plunge. Says Adam Kanzer, managing director and general counsel at Domini: “No two are exactly alike.”
Appendix B: Kent Hawkins on Incremental Emissions from Fossil-Fuel-Firmed Windpower