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Vatican's call for fossil fuel divestment could have long-term impacts

The Roman Catholic Church's call for 1.3 billion Catholics to unload their fossil fuel investments and put their money behind renewable energy resources will have little immediate effect on investment flows because most Catholic institutions have already sold their coal, oil and natural gas holdings, fund managers and analysts said.

On June 18, the fifth anniversary of Pope Francis' environmental encyclical, Laudato Si, the Vatican released a guide for putting the encyclical's call to combat climate change into action, "Journeying for the care of the common home." The guide calls for Catholics to steer their investment dollars away from industries that pollute and toward energy investments that are environmentally sustainable, according to Vatican officials. The document is still being translated from Latin, Vatican officials said.

"The majority of our Catholic clients are already doing this," Crossmark Global Investments Inc. Senior Responsible Investing Specialist Tiffany Nunn said. Nunn has been building custom portfolios for religious groups, Catholic and non-Catholic, for more than 10 years.

Most U.S. Catholic institutions — orders of priests and nuns, universities, and the dioceses that govern local parishes — have investment portfolios, as do individual Catholics. While there is no reliable estimate of Catholic investment power, investors have been moving more rapidly into funds that invest in the stock of companies that meet certain environmental, social and governance goals. The church's teaching guidance comes on the heels of the Presbyterian Church in the U.S. and a variety of Christian denominations in the United Kingdom moving to shed fossil fuel stocks in April.

Energy companies need to be concerned that investors are walking away, Raymond James & Associates analysts Pavel Molchanov and John Freemen said in an October 2019 research note. "It is a striking but not widely known fact that 26% of all U.S. professionally managed assets, or nearly $12 trillion, are already covered by some kind of ESG criteria," they said. "If 26% of the asset pool is off limits, that is a headwind. And if that number were to rise to 35%, 40%, perhaps even 50% — which is what the growth trajectory suggests will happen over the next decade — the headwind will become severe."

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Nunn said the pace of divestment among her Catholic clients varies with their risk appetite, but they are shifting away from oil and gas. "When it comes to things like the environment, fossil fuels, each one has sort of taken a different interpretation," Nunn said June 22. "Some are more comfortable getting completely away from fossil fuels. Some of them are sort of sipping the water, and we'll see what happens. It's going to be more of a slower process."

University of Pennsylvania professor Mark Hughes said June 23, "When students encourage universities to divest endowments or the Pope instructs Catholics to divest their savings from fossil fuels, it provides compensating value for lower financial returns on investments. Moral authority like that being expressed by the Pope can overcome well-known behavioral biases that favor inaction and short term thinking. We know that people forgo higher returns, especially in long-term investments like retirement accounts, all the time. So a prompt from a trusted leader can make a huge difference."

An urban scientist, Hughes is the founding faculty member at Penn's Kleinman Center for Energy Policy, a think tank focused on the transition in energy resources. Another scholar, University of California, Los Angeles finance professor emeritus Brad Cornell, said the church's message is a new roadblock to resolving climate and energy issues.

Fossil fuels permeate the world economy. Cornell, now the managing director at consulting firm Berkeley Research Group, said calls to quit fossil fuels on moral grounds do not move the world to a solution. Worse, divestment from fossil fuel producers removes any ability to influence the future direction of energy companies, Cornell said. Oil and gas producers are meeting a demand created by billions of consumer choices, and painting the fuel as "bad" will not move the ball on climate change, Cornell said.

"It's dangerous," Cornell said. "We need to work with oil companies to move forward into a sustainable energy environment ... oil and gas are going to be part of that. We need thoughtful, detailed analysis, not this: 'You're a bad guy. I'm not going to buy your stock. Therefore, I'm a good guy.' That's terrible. That's just not right."

"The church has been calling people good and bad for 2,000 years," said the Rev. Tom Reese, a Jesuit priest, journalist and Religious News Service senior analyst. "The message is that this is a problematic industry; that it has an impact on the growth of carbon in the air," Reese said. "What the church is saying is, 'We will take a hit financially and get out of this industry as a way of telling the world that this is how seriously we take this' ... the capitalist economy operates on where you make the most money. And basically, what the hierarchy is saying is, 'that is not the ultimate value for us.'"