Morgan Stanley Capital International (MSCI) has named fossil fuel divestment campaigns as a trend to watch in 2014. "Not since the apartheid era in South Africa," writes the Global Head of ESG, "have college campuses in the US and elsewhere teemed with the call for divestment."
Divestment usually takes place when the beneficiaries of a fund, for example, beneficiaries of a university pension fund, demand that the trustees exit investments that they perceive to be particularly harmful to society or the environment. Many investors choose to ignore such concerns, but all investors should be aware of the impact divestment campaigns can have on a company's shareholders.
In Australia, a campaign called Fossil Free ANU had a degree of success when it forced the Australian National University to exit its investment in Metgasco Limited (ASX: MEL). This was on concerns that the company's coal seam gas projects present an unacceptable risk to underground aquifers on which farmers rely. The university fund manager subsequently demonstrated its indifference to the issue by increasing the fund's investment in Santos Limited (ASX: STO). Santos is a far bigger company than Metgasgo and has more diverse projects, but it is also a major player in coal seam gas.
When ANU announced it would sell its holding, Metgasco shares were trading well above 40 cents. A year later they were trading at around 20 cents, and today they trade at under 10 cents. Perhaps the major reason behind this decline is that politicians are beginning to take note of the growing voter concern over coal seam gas projects, which have managed to unite farmers and environmentalists in opposition. Shareholders may have been able to ignore the risk of environmental damage from coal seam gas, but few investors in Metgasco could ignore the detrimental impact the investment has had on their own wealth.
Bloomberg reports that 83% of Yale students voted to have the famous university divest from fossil fuel companies, as did a majority of students at Harvard. The Yale endowment fund has yet to agree to the proposal, and the Chair of the Advisory Committee on Investor Responsibility said: "[It] is our policy to recommend divestment only as a last resort, and then only if we thought that divesting has the prospect of producing something of benefit in the struggle against climate change." In other words, divestment is an option to be considered, but not a favoured one.
However, it isn't just fossil fuel companies that face divestment campaigns. The Norwegian government pension fund divested from 23 palm oil companies in 2012, citing their unsustainable practices. The fund is also banned from investing in forestry firm, Ta Ann Holdings Berhad, because of the risk of "severe environmental damage".
In 2013 the Australian Federal Government agreed to pay Ta Ann Tasmania $26 million as part of an agreement that would limit the company's access to Tasmanian timber. Australia's Future Fund has divested from tobacco companies after pressure from the Greens and public health activists.
Companies most vulnerable to such campaigns are those with a single business that could be considered harmful to society or the environment. For example, some people dislike the poker machines designed by the likes of Aristocrat Leisure Limited (ASX: ALL) and Ainsworth Game Technology Limited (ASX: AGI). While gamblers are undoubtedly a rich source of revenue for both investors and governments, many voices oppose poker machines, which have been linked by some to a rise in gambling addicts.
Shareholder activist Stephen Mayne has long voiced his opposition to the proliferation of poker machines. In the past he has argued that Woolworths Limited (ASX: WOW) should adopt practices that would stem losses made by addicted gamblers. Woolworths, Australia's largest pokies' operator with over 11,700 machines, would likely have suffered a drop in revenue from its gaming machines if proposed reforms had been successful.
For now, poker machine profits are safe, but this may not always be the case.
Foolish takeaway
Activists are increasingly intelligent about how they go about protecting the environment and less fortunate members of society. Shareholders should always consider the risk that new regulation or divestment campaigns will impact their portfolio. Many companies make the world we live in a better place: these companies engender loyalty in customers and are likely to profit for years to come. If the experts at Morgan Stanley Capital International are correct, the targeting of companies deemed to be socially harmful, may become a bigger risk than it has been in the past.
