Falling Dominoes: Why More Large Foundations Will Divest From Fossil Fuels

The Rockefeller Brothers Fund is the latest foundation to scrap its fossil fuel investments amid a broader shift by nonprofit institutions to align their endowments with their values. And while it will be hard to match the symbolic power of a Rockefeller entity giving its finger to the oil industry, we'll be seeing more foundations move their assets away from carbon, and for good reasons. 

Over the weekend, some 400,000 activists gathered in New York for the largest climate march in history, in anticipation of the Climate Summit this week. The fossil fuel industry and government action are the main targets of such outcry, but one of the most successful climate campaigns in recent history has placed attention on institutions you’d consider the good guys on the environment.

Last week, 160 environmentalists from 44 countries, organized by the coalition European Environment Foundation, called upon foundations to use not just grants, but endowments, to spur action on climate. The group took out a full-page ad in the New York Times calling for the groups to invest in clean energy and low-carbon companies, withdraw investments from fossil fuel companies, or campaign as shareholders against development. 

The announcement by the Rockefeller Brothers Fund—not to be confused with the much larger Rockefeller Foundation, although the wealth of both is famously rooted in Standard Oil—was nicely timed to coincide with the Climate Summit. 

These developments are the latest in a campaign driven in part by Bill McKibben’s 350.org to get institutions to pull their investments in carbon-intensive industries. (350.org has received $800,000 from RBF since 2009, and it's hard to imagine that the irony of this wellspring has been lost on McKibben.)

The case for divestment is that, similar to apartheid and tobacco divestment campaigns in the past, institutions in pursuit of social good should treat fossil fuel companies as toxic, using their financial weight to hit the companies’ bottom lines.

Universities, churches, and municipalities have been the primary targets. But earlier this year, we saw the launch of Divest-Invest Philanthropy, which started with 17 funders who pledged to move their more than $2 billion in collective endowments away from fossil fuel companies. Divest-Invest now cites $50 billion committed in overall divestment. 

Related: Here Are The 17 Foundations Yanking Their Assets From The Fossil Fuel Industry

While the Rockefeller Brothers Fund’s significant assets (of $860 million) and symbolic importance are absolutely important, it’s still a small amount of money in the grand scheme of things, even compared to other foundations' endowments. Consider that just the largest 10 foundations in the country hold assets of more than $100 billion. 

The Hewlett Foundation, for example, is one of the largest climate funders in the country, giving out $28 million in energy and transportation grants in 2013, and a founder of the philanthropic collective ClimateWorks. But it has not been in favor of screening its $8.6 billion in investments based on social impact, citing a few reasons on its website.

The funder has concerns that the many issues they could screen for are broad and subjective, that it could hurt investment performance and take time away from the investment team, and that conventional financial managers are increasingly considering ethical business practices.  

The one place where the Hewlett Foundation does make an exception is tobacco, where it notes: "This product, even if used as intended, has deleterious consequences for both individuals and society." Of course, that's pretty much the argument climate activists, including many funded by Hewlett, make about fossil fuels. 

Hewlett does care enough about aligning its operating practices with its mission that its Silicon Valley headquarters was the first LEED-certified Gold building in California. It devotes six pages of its website to touting the building, under the banner: "The Hewlett Foundation Building: Environmental Values at Work."

And herein lies a big reason the divestment dominoes will fall: Glaring contradictions tend to be hard for major institutions to sustain, especially when people start paying attention.  

Still, it would be wrong to dismiss the counterarguments against divestment too blithely. For one thing, there’s the idea that an endowment should be working solely to maximize funds and therefore grantmaking power in the long term. There’s also the argument that divestment simply doesn’t work—that the money in play isn’t enough to influence action. 

Of course, the Rockefeller family and others are well aware that pulling their investments isn’t going to quickly shut down pipelines and shutter coal plants. For many, it’s a moral argument.

But regardless of whether divestment will influence companies, or if it's effective as an act of protest, there are really good reasons why moving such investments simply help a foundation do its job.

There’s a growing trend of foundations pursuing tactics that are generally known as socially responsible investment. That can include carving out a percentage of funds to benefit companies with social justice missions, creating shareholder resolutions, or even yanking stocks in a certain type of company (screening/divestment). 

According to a 2014 report by US SIF, a membership association for institutions and investors participating in sustainable and responsible investing, there are at least 100 foundations today pursuing this approach on some level, a still small but growing number. 

Aside from the fact that these foundations may be troubled by holding investments that undermine their missions, they are also realizing that pursuing those missions with only the 5 percent or so of assets given in grants each year is leaving a huge opportunity on the table. As the SIF report states, “The IRS 5-percent rule may have had the side effect of gearing foundations towards meeting only a 5-percent target for social good.”

This strikes me as the most powerful argument for divestment or strategic investing. The very concept of a foundation is that money can and should create social good. To compartmentalize that concept only to grantmaking and not the hundreds of billions collectively held in investments just seems, I don’t know, weird

Related: Impact Investing Hits the Big Time

Then there's the economics of the decision. There’s a fear that abandoning stock in some of the country’s very profitable companies would be too risky for the long-term strength of endowments. Meg Voorhees, author of the SIF report says, “A lot of our members have been wrestling with this question — what does portfolio performance look like when you divest from fossil fuels?”

But a number of analyses (pdfpdfpdf) suggest that responsible investment practices are stable and perform comparably to conventional investments. 

Not only that, many investors predict that while the oil industry was a safe bet in the past, it’s a bad bet in the future. This has to do with the idea of “stranded assets” or perceived value in a business that it turns out can’t be realized in the future. RBF president Stephen Heintz made this argument in announcing divestment, saying that if John D. Rockefeller were alive today, "as an astute businessman looking out to the future, he would be moving out of fossil fuels and investing in clean, renewable energy." Investor and climate funder Tom Steyer has made a similar point. 

Related: The Divestment Showdown that Inspired Steyer’s Climate Disaster Fund

Granted, for massive foundations to make such a shift would be a difficult transition. Many of the reasons foundations will not come to this casually boil down to the fact that it’s hard. There are practical and cultural barriers, such as the divide between program and investment teams, and board members reluctant to change. Foundations suffer the same institutional inertia that they often rail against in their own social change funding. 

But Voorhees at US SIF points out that there’s a variety of ways to ease into such investing, and more staff are likely going do so. “I would speculate we’ll see more foundations and endowments announcing plans to reduce the carbon footprint of their portfolios in one way or the other.”

And there is one other indicator that fossil fuel divestment is something that will catch on—tobacco. As I noted, that is the sole exception that Hewlett makes in screening stocks, and so do many of the largest foundations in the world. Gates, the California Endowment, Robert Wood Johnson Foundation, and Rockefeller Foundation, for example, have all been screening out investments in tobacco companies for years. They decided the damage wasn’t worth it.

My prediction: It may take a while before the fossil fuel divestment dominoes are truly falling fast, but once they are, little will stop the trend. And with RBF's move, the pace just picked up in a big way. 

At some point, as the dynamic changes, the question for a place like Hewlett becomes this: Do you want to earn kudos for being on the vanguard? Or do you want to take fire for lagging behind, and just end up in the same place anyway?

As a sage once said: “Skate to where the puck is going to be.”