"Stop Investing in Fossil Fuels" – Bill McKibben’s 350.org
I wrote a piece the other day on Bill McKibben’s 350.org, which has launched a national campaign to persuade colleges, universities, churches, foundations, etc. to stop investing in the fossil fuel industry. I went on to say that lower demand for shares of stock will reduce total market capitalization, and therefore diminish horsepower in terms of all the factors that make the industry what it is: legal strength, political muscle, and good will in terms of public relations.
Frequent commenter Glenn Doty challenges me on this, writing:
That’s not going to work. The problem is that, once the business sells stock to the open market, there is no direct benefit to the business if the stock price increases or decreases. It’s like selling a piece of jewelry: if you sell it, and the next week the value of gold spikes… you get nothing, you don’t own the piece of jewelry anymore.
Most fossil fuel companies are quite profitable, and are paying dividends to shareholders. Not purchasing that stock is not going to change the dividend structure, nor would it in any way change the fact the company is profitable.
I’m not an expert on corporate finance, but I don’t think you’re correct there, Glenn. Since lowering the demand will lower the price, two things are true:
1) To whatever degree the company owns its own stock, whether in its treasury, its pension plan, or whatever, it doesn’t want to see a decline in the asset base it holds. There are many reasons for this, one of which is that a weak balance sheet increases the company’s cost of capital.
2) A falling price per share eventually means a falling dividend per share, and shareholders don’t want that. Angry shareholders make a trigger-happy board of directors and therefore a nervous executive suite that may be interested in a new course of action.
“Angry shareholders make a trigger-happy board of directors and therefore a nervous executive suite that may be interested in a new course of action.”
Quite true, but there may be no new course of action available that would boost stock prices.
Tilting at windmills are we? With a finite amount of mental energy, for most of us anyway, it is usually best to prioritize one’s actions based on a return on investment philosophy. I realize this isn’t about money, but the finite amount of effort I can devote to fighting the good fight prompts me to embrace that which I will get some bang from.
I agree with Glenn btw. Unless a company is ripe for a hostile acquisition, banging the stock price down has little effect. Might affect their bonds slightly. Actually, I love it when there is a bear attack that misses. That’s when I’m a buyer.
I also agree with Glenn.
You may drive the stock down but that increases the dividend yield. The actual dividend payout does not rise or fall instantly when the price changes but savvy investors (like myself) looks for these price drops and buy in to capture a higher rate of return on the investment. This of course is a feed back loop mechanism and the stock rises again restore equilibrium until some other market rumor or boycott causes yet another bubble or bust.
I disagree with Glenn. The current stock price affects a company’s cost of capital- if they need to raise more money, a high stock price means they can get more money without giving up as much control of the company an future profits.
But divestment from fossil fuels is something we should be doing even if it were not very effective. Changing a light bulb is not going to stop climate change, but that does not mean it’s not worth doing. And we should not invest against our principles even if we believe the harm we’re doing with our investments is minor.
Do you think the Catholic Church should be investing in abortion clinics? Then you should not think that people and groups worried about climate change should be investing in fossil fuel extraction.
Tom,
If the company is profitable then it doesn’t have to leverage its market cap for better cost of capital.
They merely need to show their track record and their past projects’ ROI’s. Then they can present their case for their current projects’ ROI, and they’ll get a fine deal on capital even if their stock value is in the gutter.
It just doesn’t impact them, at all, to have a coordinated attack on their stock price unless you are organizing something like a hostile takeover.
McKibben is organizing a lot of people to coordinate and accomplish nothing. It will be embarrassing, and it will only serve to make it harder to organize those same people to action in the future.
Glenn,
I don’t know what your area of expertise is, but I happen to be a stock analyst and portfolio manager.
Profitable growth companies often issue stock to fund expansion and compensate employees. It’s only profitable slow (or no) growth companies that can finance their business from internal resources. Even banks often look at a company’s share price and market capitalization as an indication of financial health.
Given that most cleantech companies are high growth and/or unprofitable, the share price makes a big difference, even by your account.
Furthermore, endowments own both debt and stock. Even if you were right and the stock price were irrelevant, we want such institutions providing the debt financing needed to build wind and solar farms.
You also failed to consider the IPO market. IPOs are often priced relative to other companies which are already public. If a thin film CdTe solar manufacturer wants to go public, you can bet they care about the price of First Solar. Venture Capital investors look to the IPO market for an exit, so they are more willing to supply seed capital to companies in industries sporting healthy market valuations.
Hence, the stock market not only has an impact on the financing of listed companies, it also has an impact on the ability of start-ups and private companies to obtain financing.
Tom,
I have a great deal of respect for your commentary in investing. I’ve lurked your articles for some time, but I don’t feel I have much to contribute there.
However, in this case you are simply not considering the fossil fuel industry as it is, and are therefore wrong. Exxonmobile doesn’t have to worry about the price of its stock when it seeks financing for a new field. If you knocked a few bucks off the stock it wouldn’t matter a bit.
As for the IPO, I didn’t fail to consider that, Craig just didn’t re-post my entire comment. From the excerpted comment that Craig was responding to… the next two paragraphs were this:
“The only way you can impact the company is if you refuse to buy FROM them. This is true for products, and it’s true for stocks – If you refuse to participate in IPO’s or early investment rounds, or if you just cut back on purchasing their product… then you can make an impact. Otherwise… no.
The best way that you can hurt them as an investor is to invest money into viable competition… You can hurt coal by investing in a wind farm, or donating to a charity that improves insulation in low-wage houses… but if you say “I won’t buy coal, I’ll buy Apple instead, you won’t change their profit margin by a single penny.”
Glenn,
We’re going to have to agree to disagree on this one. I agree with your basic point that it won’t make a lot of difference, but I think it’s still worth doing.
If you and I invest in fossil fuels, we’re being hypocritical. We’re also being hypocritical if we use them. So it’s best to do as little as possible of both. Our investments, CFLs, bike commutes, and blow-in cellulose insulation won’t make a big difference in the grand scheme of things, but they’re still worth doing. Why doesn’t the same principal apply to endowments?
I also agree with Glen; you have somehow confused stock value with the commodity value which is driven by consumer demand among other things such as natural events.
Craig,
If McKibben wanted to actually do something, he would start a fund which was dedicated to building the most cost-effective alternative energy available, and try to get people to invest in that fund.
The fund could then start putting up wind farms across the Midwest without regard for profit and just begin dumping the electron impulses into the grid. That would basically force many coal baseload plants to close, as the fossil industry would have to switch to gas plants in order to have sufficient balance power for the wind energy. The ROI of such an investment might be low, but the investors could see their investment as a charitable donation for an effective environmental action. I think people could more easily be convinced to make a low-ROI investment than they could be motivated to not invest in profitable companies.
In one case, they would be sacrificing profit so that other investors would get the profit – accomplishing nothing other than shifting more money towards people who care less about the environment. In the other case they would be sacrificing money to make an active attack against many operational coal plants, which would dramatically lower the profit of operating said coal plant, and forcing many coal power plants to be decommissioned.
Asking people to sacrifice in order to accomplish something is easier than asking them to sacrifice in order to accomplish nothing.
I trade energy stocks on a daily basis and all I can say is be careful what you wish for. While some people like to demonize fossil fuel companies let’s not forget that when it comes to some of the more exciting innovations, at least as far as solar is concerned, it is fossil fuel companies like Chevron and Shell that are helping to lead the way. Case in point, the use of Concentrated Solar Power in lieu of natural gas for EOR (Enhanced Oil Recovery) over in the Middle East, specifically at the Wafra oil field. And albeit on a significantly smaller scale Halliburton, yeah I said Halliburton, is using solar power to help power the tanks they use to dump in all that sand so they frack for natural gas.