Charitable trusts can give good short-term reasons not to disinvest from fossil fuels. But that is not the point, says Felix Salmon

If the purpose of your existence is to make the world a better place, why would you invest billions of dollars in companies that make the greatest contribution to global climate change? That’s the simple question behind the Guardian’s Keep it in the Ground campaign. But is there a simple answer?

Sadly, perhaps there isn’t. We could ascribe all of these investments to some kind of misplaced avarice. But that doesn’t make sense: it is not as if buying shares in these companies is some kind of “get rich quick” scheme. Indeed, oil and gas companies have significantly underperformed on the market as a whole over one year, three years, five, even 10 years. The real answer is more a complicated case of priorities, politics, pragmatism and portfolios.

Trusts such as Wellcome and the Gates Foundation tend to have a very wide gap between the people investing their assets and those spending them. In the case of the Gates Foundation all the assets are managed by a separate entity, the Bill & Melinda Gates Foundation Trust. Those managing the money are not guided solely by profit maximisation: there’s an investment philosophy saying no money will be put into tobacco or Sudan.



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But the reason for the separation of responsibilities is clear. The job of the investment managers is not to directly make the world a better place; that’s the job of the foundation. The money managers need to be good stewards of the foundation’s assets. The greater the amount of money the foundation has, this theory says, the more good it can do in spending that money.

It is therefore seen as counterproductive for the investment arm of any foundation to care, at an ethical or idealistic level, about what exactly it invests in. By cutting off potential investment, the amount of cash available for programmes could be hit.



Foundation portfolio managers can make these arguments easily. Those who manage foundations’ billions are highly paid professional money managers, generally very good at what they do. They scour the world for investments and try to invest on the “efficient frontier”, where you can get the perfect ­balance of high returns and low risk.

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But to do that they need to be able to move their money around more or less at will. The more no-go areas there are, the further away from the efficient ­frontier they will find themselves.

An earlier version of the Gates investment philosophy explained why the foundation was wary of divestment campaigns. Much of it was a “slippery slope” argument: if the Gates Foundation divested from every firm which failed social responsibility tests, soon there’d be almost nothing left to invest in.

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Things are changing. The ­latest Gates investment philosophy gives more shrift to those who say the foundation’s investments should, in general, reflect its mission, including its “values”.

The Gates Foundation is meant to live in perpetuity. The trust gives away 5% of its assets annually, the minimum to qualify for charitable ­status. So 95% of the money being put to work in any year is being invested in financial assets, rather than spent on charitable activity. If a substantial part of that 95% is being invested in pumping carbon into the atmosphere, helping to ruin the planet, it’s easy to see how the negative effects of the investments could surpass the charitable efforts.

Another obstacle is that charitable foundations love to make a difference. If they sold their shares in fossil-fuel firms, carbon emissions would not fall and neither would the carbon reserves of those companies, or firms’ profits. Even the share price would barely budge.



The Guardian is making a really big ask with this campaign: oil, gas, and coal constitute an enormous proportion of the global economy; avoiding them entirely is very difficult if you’re trying to maximise risk-adjusted returns.

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You could just move your investments further away from the efficient frontier. But the people who manage the multi-billion-dollar portfolios find such thinking borderline incomprehensible. It’s not so much that fossil fuel companies are great investments in themselves. Rather, they are investments which can reliably generate income – the all-important cash spent on charitable activities. So this isn’t a question of whether shares in fossil-fuel firms are “a good investment”.

And, while it’s possible to replace coal with renewable energy in the real world, you can’t really do that in a portfolio. Renewable technology pays no dividends, has no obvious path to long-term profitability, can easily get disrupted and controls no resources. In any case, a huge amount of renewables R&D is done by the same firms the fund managers should divest from, according to the Guardian.

Still, couldn’t the Gates Foundation and the Wellcome Trust be more like Generation Investment Management, the multibillion-dollar socially-responsible investment fund run by David Blood and Al Gore? It is entirely possible that Generation already invests Gates or Wellcome money. But the tenets of investing say it’s irresponsible for an endowment to put all of its money into such a strategy. It’s socially responsible to give Generation some of your money to invest – financially irresponsible to give Generation all of your money.

The people running the world’s big endowments don’t like to make big macro bets about things such as the likelihood of a global cap-and-trade system being introduced, with the possibility of fossil fuel firms falling in value. For one thing, in the markets, being early is the same as being wrong. The knowledge that something is going to happen is very low-value information unless you know when it will happen.



One reason why it’s hard for big money managers to divest from fossil fuels is exactly the same as the reason why it’s hard for you or me to divest from fossil fuels: it’s silly for us to think we can outperform the market by ­anticipating events. ­



So, it’s easy for fund managers to see quantifiable costs in divesting from ­fossil fuels. Yet with the benefits they’re going to see very little that’s quantifiable at all.



For example, if you’re going to do something costing X millions, wouldn’t you rather go to Africa and use the money to save tens of thousands of lives? Instead of just transferring ownership of stocks to someone who will probably put less pressure on firms to improve their environmental bona fides?

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As Jeremy Farrar, of the Wellcome Trust, says, if you want to make a measurable difference you’ll probably have more of an effect through engagement than through divestment.

If a firm owns a lot of coal or oil which is in the ground, it might be more effective to use your clout as a shareholder to try to persuade it to keep it there, rather than wash your hands of the company, leaving it to extract and burn as much as possible.



Engagement is pretty weak tea: but divestment is weaker still in terms of practical effects: it just transfers shares to investors who don’t care at all.

The big point the endowment managers are missing, however, is about the limit to pragmatism, especially when it runs up against basic ethical idealism. The main reason to divest from the fossil fuels is – it’s simply the right thing to do. By owning shares in these firms, the Gates and Wellcome foundations are profiting from activity that’s destroying the planet. They don’t need to do that, so they shouldn’t.



Doing the right thing is often a powerful force for good in the world. If the Gates Foundation and Wellcome Trust divest from all of the biggest fossil fuel firms, that sends a very clear message. Fossil fuel divestment is a political gesture. It’s idealistic, it’s the right thing to do even if it turns out to be utterly futile.



The Gates Foundation and Wellcome Trust employ skilled professionals who may be motivated by idealism, but their day-to-day work is resolutely pragmatic. A campaign like this speaks to their hearts.

The Guardian’s campaign is not a waste of time and effort. In a sense it’s already worked. About 170,000 people have signed the petition, with more names being added by the minute. The idea is out there, going viral. We’re changing the way the world thinks about fossil fuels, we’re altering the way the world thinks about the companies that profit from them.

Which means that we have changed the world for the better. Let’s keep it up.