
Big Money Starts to Dump Stocks That Pose Climate Risks - asaegyn
https://www.bloomberg.com/news/articles/2019-08-07/big-money-starts-to-dump-stocks-that-pose-climate-risks
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systemtest
Last year I switched from MSCI World Index to MSCI World Custom ESG* Index.
With passive investment you want as much companies as possible in your basket
so excluding companies is not something to take lightly. But both these
indices perform the same so for me it was an easy choice.

* Environment Sustainable Governance. 58 out of 1660 companies are excluded, mainly in tobacco, guns and UN global impact.

~~~
lukasLansky
Does this actually make a diffence, from game-theoretical perspective? It
seems to me that if substantial amount of investors start to bias in a certain
direction, it will only create an opportunity for active investors to earn
money by betting in the other direction, and these active investors will "fix"
the "bad" price. Maybe it's not a coincidence those indices perform as well as
the rest of the market, as you observed?

These active investors don't even have to realize their strategy is based on
going against nice guys -- they might be led purely by statistical
performance.

I'm not trying to be needlessly cynical. I like effective altruism for
example. I'm just not sure stock market is a good battleground for ethics.

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andy_ppp
It depends if the people are betting that climate change is real and these
companies will start to be treated differently are correct. Could be another 4
years before changes happen...

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lukasLansky
I agree. If a smart investor notices that a company business model stops
working the moment governments pass legislation introducing carbon markets,
it's a good investment strategy to short the stock. But notice that it's the
government that is doing the heavy lifting here, investors are just diligently
passing the shock from the future so resources are not wasted.

If there is a climate catastrophe going to happen, but no government is going
to punish companies responsible, it won't make sense to try to do that for
yourself -- in the same way bad corporations are freeriding on climate, bad
investors are freeriding on your efforts to punish such corporations.

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tehjoker
If you read this carefully it isn't that these financiers have grown a
conscience, it's that public protest and the possibility of government policy
changes have made it risky to hold these securities.

These analysts wouldn't have a rigorous analysis that made sense in financial
terms without the force of public pressure. These companies are just machines
that respond to stimuli and have no thought of consequences.

~~~
dougmany
There may also be risk in future liability. Tobacco took a hit because they
knew of risks but they continued to sell their products without warning
customers. I have heard there is similar evidence for oil companies that knew
of global warming long ago but have yet to warn their customers.

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electricviolet
Indeed -- Exxon has known about climate change since at least 1977.

[https://www.scientificamerican.com/article/exxon-knew-
about-...](https://www.scientificamerican.com/article/exxon-knew-about-
climate-change-almost-40-years-ago/)

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floki999
This is something which has been trending up for the past 5 to 10 years, and
gaining more momentum. Large European fund managers (e.g. pension plans) have
been at the forefront of responsible investing and it is developing quickly
amongst their peers in North America.

Simply put there are 3 dimensions which corporates have to consider:

1\. Their contribution to greenhouse gas emissions and other environmental
pollutants. 2\. Their own exposure to physical climate risk (can they quantify
it?) 3\. Their compliance to reporting standards and regulations regarding
climate change and other environmental issues.

Large investors increasingly want to know (a) how they contribute to climate
change via their investments and (b) their risk exposure to climate change
risk, via the businesses they are invested in.

Corporations have to realize that their large, institutional, investors are
way beyond debating climate change and are taking action. Like it or not.

~~~
navigatesol
> _Corporations have to realize that their large, institutional, investors are
> way beyond debating climate change and are taking action. Like it or not._

I'll preface this by stating that I'm no subscriber to "corporations only care
about profits" school, but:

Do you think this matters to the corporations all that much? You can't "dump"
stocks without someone else buying the shares from you. Are these
institutional investors going to take a huge hit in the name of climate
change? Are the shareholders willing to sacrifice a chunk of their retirement
for this cause? I'm skeptical. Where are the alternative investments? The
world is awash in capital, with a huge chunk of bonds now paying negative
interest rates.

The big risk is government regulation, but we haven't seen a whole lot yet.

~~~
loganfrederick
> "You can't dump stocks without someone else buying the shares from you."

At what price?

That's the impact of moves like this: 1) lowering stock prices for existing
companies and 2) allocating money/increasing prices for climate-friendlier
companies. It could mean the difference between, say, a large oil company
getting $1 billion from a European fund and a battery technology company
getting that billion.

~~~
navigatesol
> _At what price?_

My point exactly. I know that executive pay is most often tied to share price,
but who do you think really suffers more: the CEO who gets a slightly smaller
bonus, or the fund that has to dump shares for whatever it can get?

Look at the example in the article. The fund dumped $300MM of Exxon shares in
June, share price mostly unaffected.

> _It could mean the difference between, say, a large oil company getting $1
> billion from a European fund and a battery technology company getting that
> billion._

But unless the company is issuing new shares, it doesn't receive any of the
money. It's a transaction between old/new shareholders.

I can see the drive to be able to market your investment fund as climate
friendly to attract more AUM, but it's unclear to me it makes financial sense
as the investor (at least generally).

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loganfrederick
You're not wrong. I'm interpreting it more from the asset manager's
perspective than the company's. You're correct in that they are making a
conscious choice to maybe forgo a profit on oil in order to bet on something
more speculative. That's just the thesis they are going with and may adversely
effect performance.

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_bxg1
Unsustainability is unsustainability. At the scale of climate change it's no
longer "we'll prosper at the cost of others", it's "we'll prosper in the short
term at the cost of everyone - including ourselves - in the long-term".
Finance people are apparently better than executives at thinking long-term (or
maybe just have more incentives to care about the long-term, whereas CEOs can
generate some quick growth and then peace-out).

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balozi
This is great! I applaud this effort. Let everyone back their beliefs and
principles with their own money.

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dgudkov
I doubt it's about backing beliefs and principles with money. It's probably
more about admitting increased risks of losing money as a result of public
shaming campaigns (sometimes reasonable, sometimes not) by vocal minority.

And of course, the corporate PR disguises such dumping stocks as a virtue.

~~~
floki999
I dont quite agree. While this is certainly a secondary factor, which a
portfolio manager will worry about (i.e. a stock tanking due to bad press or
negative ESG ranking), investment committees which develop responsible
investing policies are guided by guenuine principles. It’s a multi-dimensional
problem and the challenge is of course that these dimensions sometimes counter
each-other and result in feedback loops. The is what makes a market, however,
the sheer size of large institutional (and sovereign) investment funds will,
in the long run, run over marginal players in terms of impact.

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mistrial9
in 2007 USA there were a half-dozen "major" frameworks for reporting risk and
establishing a profile of a company; many professional papers and
presentations. This sort of business-press cheer leading is necessary but
insufficient.

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floki999
Yes that’s true. And of course the banks have seen the ESG market as an
opportunity to make a quick buck, and continue to generate report upon report.
Also, many data vendors out there inventing all sorts of ESG metrics, many of
which are of dubious significance. It’s a net positive though.

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Lavery
Ethical considerations aside, one of the other drivers of this is the origin
of some of the money involved here. Most of the largest sovereign wealth funds
globally are the result of money generated by resource extraction: Norway, Abu
Dhabi, Kuwait, Saudi Arabia (directly and via Aramco), Qatar, etc. For these
names, holding stocks that pose a climate risk is buying oil with oil dollars.
Without intentional divestment of oil, coal, and other climate names, they are
essentially levered long. Excluding these from their holdings is just prudent
investment.

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sunstone
This has been going on for a few years. The Rockefellers sold theirs in 2014.
They tried to make it seem like it was environmentally motivated but really,
it was all about the money. [1]

[1][https://www.cbc.ca/news/business/rockefellers-to-sell-oil-
as...](https://www.cbc.ca/news/business/rockefellers-to-sell-oil-assets-as-
part-of-50b-global-warming-fight-1.2773771)

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algaeontoast
Ideally, in time without policy changes or major government intervention,
fossil fuels or business practices that willingly pollute and damage the
environment will become uncompetitive and too expensive to make money.

If only we can find a way to bankrupt the palm oil farmers and loggers who are
cutting down the Amazon Rain Forest...

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sremani
Bloomberg used to me a good publication now its tied to hip to its founder's
ideology. Him being a politician with Presidential aspirations, Bloomberg has
taken a turn for worse. Divestment is not going to "clean-up" the environment.
Its a tool of "do something" or virtue signaling crowd. Unfortunately, Mr.
Bloomberg has a fortune to make investments in hard-science and safer power
generation -- but it won't provide bang for the buck for his Political
ambitions.

All we are getting from this disinvestment crowd is corporate green-washing as
if we do not have enough of it.

~~~
_red
One of the hallmarks of a collapsing society is that "everything becomes a
political statement". The newspaper you read is a political choice, as does
the sneakers you wear, and where you eat for lunch.

~~~
JumpCrisscross
> _One of the hallmarks of a collapsing society is that "everything becomes a
> political statement"_

What is this based on?

Athenian democracy and Roman republicanism each thrived in hyper-political
cultures. The early America was heavily political.

Politicisation of culture doesn’t mean rise or decline. It means there big
decisions need to be made. Big decisions need big buy-in.

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cheeky78
It might be as an indirect result of climate risks, but the main reason is
because they fear government regulation.

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loxs
Sorry guys, for me this is a solid advice to increase my positions in oil,
coal and nuclear ETFs. Especially if their prices drop a little.

Not that I don't care about the environment, I just don't believe that economy
works "by design". We don't have better energy sources, and while this lasts,
these will be profitable and expensive.

~~~
floki999
That’s a totally legit position - the hope is that incumbents in these sectors
will adapt and work to clean-up their operations. I don’t think any investor,
no matter how large, is aiming to kill these types of companies - but
institute positive change. Having said all this, positive returns should come
first.

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ptah
about time

