Fossil fuels are a central part of the sustainable investing conversation. In Episode 6 of The ESG Update, Hunter Lovins, Chief Impact Officer at Change Finance, joins the conversation to share her insights into the fossil fuel industry and the merits of divestment.

Transcript

This transcript has been edited for clarity.

Dan Carreno, Change Finance:
Welcome to The ESG update presented by Change Finance. I'm your host, Dan Carreno. I’m the head of business development at Change Finance. We are an ETF provider dedicated to environmental, social, and governance investing. And our mission is to help investors align their portfolios with their values without sacrificing returns. And my guest this week is the one and only Hunter Lovins. Hunter is the Chief Impact Officer and a founding partner of Change Finance. She is also the president of Natural Capital Solutions. She is also an award-winning author, a founding professor for the Bard MBA in Sustainability. Hunter has consulted with many governments and corporations all around the world, and she was recognized as a Millennium Hero for the Planet by Time Magazine. Newsweek called her a Green Business Icon. Honestly, the resume keeps going and going, but this is a 20-minute podcast, so we're going to have to cut it off somewhere, Hunter, how are you doing? And if there's anything else that you would like people to know about you, feel free to share.

Hunter Lovins, Change Finance:
Thanks, Dan. I think that'll do for now.

Dan Carreno, Change Finance:
This week we're going to do something a little bit different. We're going to change up the format of the show. Usually, we discuss the latest developments in the world of sustainable investing, as well as new products and services that are available in the industry. But this week, we are going to focus exclusively on fossil fuels. The debate over fossil fuel investment versus divestment seems to go hand in hand with conversations about ESG investing. So, I've asked Hunter to join me this week to address some of the questions that I have received from a number of investors and advisors on this topic. I'm going to pose those questions to Hunter, and we have a lot to cover. I think one of the things that I've heard many, many times is, “I may not like it, but for better or worse, pretty much all of us still use fossil fuels either to heat our homes or fuel our cars. So, if I'm an investor, why would I divest from fossil fuels while they are still such a big part of the economy?” Hunter, what would you say to that?

Hunter Lovins, Change Finance:
Yes, we all use fossil fuels. Although increasingly, folks like British Petroleum are saying that we are probably at or very near to peak fossil use and that it's going to be declining ever after. In a sense, that doesn't matter because what matters is, are the companies profitable? Are they going to return on your investment? There are many things that we buy where the companies are not profitable and thus would not be a good investment. So the question is, will it cost more to extract oil out of the ground and sell it to all of us, then the companies will make in doing that. It's also in part why oil prices went negative. This last spring in April of 2020, oil companies were literally paying people to take oil away because it was accumulating in their storage tanks because none of us were buying it because of the COVID slowdown. COVID is still with us. The slowdown is continuing. Oil prices are fluctuating, but well below what it costs the companies to pay to get more of the stuff. Now, the companies are trying to keep up this, I hesitate to use the word Ponzi scheme, but it's beginning to feel a little like that so that investors keep pouring money into it.

Dan Carreno, Change Finance:
I’ll piggyback onto that. I typically answer that question by saying that we have to remember that the market is a discounting mechanism. If we're investing in a fossil fuel company, it's less about what that company is doing today, and it's more about where that company is going to be three, five, or even ten years down the road. And it's worth remembering that today in the United States, we are still burning something like 680 million tons of coal every year in this country to generate electricity, but that has not stopped coal stocks from absolutely cratering over the last three, five, and ten year periods. I think anybody would be hard-pressed to find somebody that thinks investing in coal is a good idea. That’s a really good lead in to our next question for you, Hunter, which refers specifically to the stance that BlackRock took at the beginning of this year. They came out and said they would essentially divest from coal, but they would continue to invest in oil and gas, saying that those are still part of the conversation. That those are bridge fuels that will get us to a renewable energy future. So, is that the best way to approach fossil fuel investments?

Hunter Lovins, Change Finance:
It's a bridge to nowhere. Larry Fink issued his statement on divesting from some forms of fossil, referencing millions of people are in the streets. He was referring to young Greta Thunberg, the 16-year-old woman who led 8 million people into the streets about a year ago, protesting inaction on climate change and against the companies that are causing climate change, which is probably the most serious crisis facing humankind today, caused in large part by the burning of fossil fuels. He was saying, “I am responding to pressure by the protesters and divesting from coal.” Well, he really ought to have been saying, as the Board of Regents of the University of California did say shortly thereafter, that they were divesting from all fossil not because of the protestors, but because it is a better financial decision. For beady-eyed investors who are recreationally challenged and not doing this as a moral statement, listen to the Board of Regents. It was simply a financial decision when the Kentucky Coal Museum put solar on its roof because it's cheaper than hooking up to the coal-fired grid at its doorstep. Come on; it's over. We are witnessing the triumph of the sun. The world around, renewables are now cheaper than fossil to deliver the services that we want. I am not talking about freezing in the dark. I am not talking about not having mobility or not having industrial power. We are talking about the energy sources that will deliver the services we need at the least cost. And it turns out everywhere you look, it's renewables or a combination of renewables and batteries. About a year ago, GE walked away from a functioning natural gas plant in California because they said it couldn't compete with solar. Shortly thereafter, the Los Angeles Department of Water and Power did a utility-scale deal for solar plus batteries at 2.90 cents a kilowatt-hour. The power that comes out of your wall, the national average is about 12 cents a kilowatt-hour. If you're in New York City, it's more like 18 cents. A month later, Portugal announced what I call the Walmart award for everyday low price: 1.60 cents a kilowatt-hour for utility-scale solar. Since then, Abu Dhabi beat them at 1.35 cents. Portugal said we can do better than that and came back at 1.30 cents per kilowatt-hour for utility-scale solar. Here in Colorado, our coal-loving utility said, “we need 1100 megawatts y'all bid.” The utility was sure that natural gas would be the cheapest, and gas came in at around 4 cents a kilowatt-hour. Wind came in a bit below 2 cents. Solar, a bit above 2 cents. Wind plus solar plus storage: 3 cents a kilowatt-hour.  The utility said no, the prices have gone up, bid it again. Everybody did it again. Same price. Meanwhile, the cost of solar and the cost of batteries continues to fall. They are continuing to fall, and they still have a long ways to go. It's simply the cheapest. So, you have India writing off 14 gigawatts of coal plants. You have China saying it's now cheaper to put solar on your roof than hook up to the Chinese coal-fired grid. You have companies the world around committing to go a hundred percent renewably powered. Some of them already are like Google. You have cities saying we are going to go a hundred percent renewable. Oslo just announced by 2030, they are going to be emissions-free.

Dan Carreno, Change Finance:
I would also piggyback onto your initial response to Larry Fink's comments about oil and gas being a bridge to nowhere. It just so happens that we have a piece on our website titled “A Bridge to Nowhere: The Case for Oil and Gas Divestment.”  One other resource that I wanted to reference is every year Lazard puts out an analysis on the levelized cost of producing electricity. It goes over coal oil, gas, into renewables. That's a really wonderful analysis. So far, we have talked about the financial case and the implications of investment or divestment. Let's shift gears a little bit, and let's talk about the moral aspect. I've heard this from a number of fund companies and asset managers. Individuals look under the hood of a fund that might have an ESG label on it, and folks see a major fossil fuel company in the top 10 holdings. The asset manager will come back and say, “well, you know, you may not like that, but the reality is some of these companies are the largest investors and funders of clean technologies and renewable energy.” What would you say to that Hunter?

Hunter Lovins, Change Finance:
If you want to hold oil majors, other fossil companies because they are belatedly getting around to doing the right thing, you are, in a way, investing in the worst kind of startup. These guys are not really good at this stuff.

Dan Carreno, Change Finance:
I think it's also worth mentioning how much of this is leaning into greenwashing. Some of these oil majors have been talking about this for decades. How long ago was it that BP rebranded themselves as Beyond Petroleum? If you look at the amount of their profits, their budget, that's being allocated to renewables, it's still a minute part of what they are doing overall. Some are certainly better than others, but it's not as if they have shifted 50% of their business clean technology and renewable energy. That just hasn't happened.

Hunter Lovins, Change Finance:
This is partly why Bevis Longstreth, who used to be the SEC Commissioner, said it is entirely plausible, even predictable, that continuing to hold equities in fossil companies will be rolled negligence.

Dan Carreno, Change Finance:
That's a whole other interesting line of argument. Someone could even accept that fossil fuels may be bad investments and that there's a moral case for divesting. But if I'm acting as a fiduciary, I feel as though I have an obligation to fully diversify portfolios and invest in all sectors and industries of the economy. So when somebody has those types of fiduciary concerns, what would you say to them?

Hunter Lovins, Change Finance:
Well, I would, again, reference Longstreth and that doing this will come to be ruled negligence. This is holding on to a long-discredited investment philosophy that you have to be in everything.

Dan Carreno, Change Finance:
I would also reference an article written by Kathy Hipple at the Institute for Energy Economics and Financial Analysis. The subtitle of that article is “Obligation of Impartiality Requires Investment Managers to Divest.” There are an increasing number of voices out there that are making the opposite argument. Also, the divestment from the University of California and the op-ed that was written in the Los Angeles Times. That's another great read. For individuals that are concerned about fiduciary responsibilities, reading some of these articles could be helpful and enlightening. The last question that we have time for is one that I hear on a pretty regular basis. For those individuals that do care deeply about climate change and would like to affect positive change relative to global warming as quickly as possible, isn't it better to then invest in these fossil fuel companies so that then you have a seat at the table as an investor, and then you can hopefully be a part of steering that company in a more sustainable direction? Isn't that better than divestment? What do you think, Hunter?

Hunter Lovins, Change Finance:
That used to be thought to be true. I was part of a team of people from a variety of investment companies that held that point of view. We were working with one of the big oil majors and proposed a shareholder resolution that received sufficient votes so that they would issue a carbon footprint report. We thought we were getting some traction. You can't put in a shareholder resolution unless you are a shareholder. The report that they issued was so derisory and so negligent. All of us who were part of this group said the strategy doesn't work. That this is not going to get them to pay any attention. Conversely, the Oxford Stranded Assets Program report concluded that divestment outflows, even when relatively meager in the first wave of a divestment, can significantly and permanently depressed the stock price of a target firm if they trigger a change in market norms. We now have something like $11 trillion and a growing number of dollars divesting. This has changed market norms, and as Longstreth suggested, it is coming to be seen to be negligent and immoral.

Dan Carreno, Change Finance:
One thing that I would add to that comment is the importance of recognizing a business's core competency. Once a company reaches a certain scale, and they have a particular core competency, and they are reliant on that core competency for their revenue and the funding of the business, it becomes very difficult for a company to completely switch gears, which is why we consistently see new emerging companies step in and knock off incumbents. We've seen this consistently throughout history. So, it does stretch the imagination to believe that the leaders of the clean energy future could be the large fossil fuel companies that exist today. I think we're running out of time. We'll wrap it up there. If anyone listening does want to find any of the articles or resources that we discussed during the podcast, you can always go to www.change-finance.com. We have a podcast library under the INSIGHTS tab, and all of the links are going to be provided within the podcast transcript. And if you do have any questions or feedback for us at Change Finance, you can always get in touch with us through the website. Hunter, I want to say thank you so much for coming on. Do you have any closing thoughts?

Hunter Lovins, Change Finance:
It's truly my pleasure to get to chat with you. The closing thought that I would leave with people is: what's the business case for ending life on earth? This was a question posed by the visionary CEO, Ray Anderson. When people said his commitment to sustainability wasn’t paying for itself, I was sitting with Ray, and he looked at me in puzzlement. He said, “everything I'm doing to behave more sustainably is enhancing shareholder value. That's not why I did it. I did it because it was the right thing to do. But now that I'm doing it, it's cutting my costs. It's attracting and retaining the best talent. It's reducing my risks. It's differentiating my product.” He had about 13 different reasons with what we now call the integrated bottom line. This is just better business. It's what the world is coming to, and I would suggest it's what you want to be a part of.

Dan Carreno, Change Finance:
Well, if that’s not a pitch for ESG and sustainable investment at large, I don't know what is. We'll close it out there. Thank you so much Hunter, and thank you to those that tuned in. We will be back soon with another episode of the ESG update.