DIVESTMENT IS NOT THE ANSWER

Originally published in Insurance Asset Risk

Few issues seem to raise more ire in the green movement than fossil fuel investment. Anthony Minopoli, CIO at Knights of Columbus, explains why divesting from fossil fuels is not the answer to the climate change issue right now. Part one of a two-part interview by Sarfraz Thind.

Climate change is pushing the world to the brink of destruction. Fossil fuel causes climate change. Investors should divest from fossil fuel assets.

It sounds an easy formula. But Anthony Minopoli, chief investment officer (CIO) for the Knights of Columbus (KoC), says things are not quite as simple as they sound.

"I think that this notion that we're going to wake up tomorrow and be in a completely green environment is not realistic," he says. "It's pretty hard to say you're going to wave a magic wand and get rid of fossil fuels right away. In the north-eastern part of the US, the vast majority of the homes are powered with fuel oil, the rest with natural gas—are you going to retrofit that many millions of homes?"

Minopoli's views on environmental, social and governance (ESG) investing are not necessarily in line with the green movement's wishes for divestment—but they reflect a consideration of investor issues that are not always forthcoming in an era of greenwashing.

It is not the only thing on the conscience of a man who manages the general account of what is not your typical investment company.

KOC BACKGROUND

The KoC was started as a Catholic benefit society to take care of the needy in its parish of New Haven in 1882 by a Father Michael McGivney (now under consideration for sainthood).

In the nearly two hundred years since it was founded the organization has grown to over two million members in countries including the US, Canada, the Philippines, Guam, Mexico, Puerto Rico, Poland. Catholic precepts still permeate the insurer’s investment philosophy.

“We do believe we are our brother’s keeper in the sense that we want to […] make our community better,” Minopoli says.

Insurance forms a part of the charitable institution. Indeed the insurance arm seeded KoC asset advisors—the investment arm—with $160m in 2015. The latter has grown rapidly and now manages almost $29bn of institutional assets, including $300m of the general account, all of it carried out under strict Catholic principles outlined by the US Conference of Catholic Bishops.

From an investment standpoint, the goal is to ensure that assets are allocated in accordance with precepts of the Catholic faith. The CIO works with proxy advisory firm Institutional Shareholder Services which distils principles pronounced by the US bishops into actionable investment rules that it can put into its trading system.

“Our investment people as you would imagine are MBA, CFA types, not moral theologians, so ISS helps us distil the rules by the bishops.”
It also keeps a moral theologian on retainer—in case of controversies.

ESG

Running screened portfolios is obviously not a new concept for Minopoli who was appointed CIO in 2005 but has been a member of the Knights since 1994. However, the company formalised its ESG process when it bought equity investment boutique Boston Advisors in 2019 which was ahead of KoC on the issue, he says.

It now has ESG research "built into every company review" –"you cannot truly evaluate the risk of a company if you don't understand its ESG factors," Minopoli opines. Even so, having a screen on is does not necessarily entail exclusion.

If a company screens low in ESG KoC may well still invest, he explains. "It means that if we are going to invest in such a company, we understand what their ESG scoring is, where the risks are, and we would expect either lower risk in some other area, or a higher rate of return for taking on those ESG risks."

Minopoli says he has "always been a market guy" and the environmental push to a fossil fuel free investment world does not sit easily with the reality of it.

As far as direct investment in green assets goes, things remain slim for KoC. Renewable energy investments are in the very low single percentage digits.

Bridging from fossil fuels to renewables is not something that will happen with a snap of the fingers, Minopoli says. Opportunities may crop up in the coming years in conjunction with reform being undertaken by the Biden administration which could see traditional fossil fuel prices rise and raise the attraction of green energy. At the same time, technological advances in green energy may also result in cheaper prices raising the attraction of such assets. But while there is progress in both strands it is slow. For the time being, the US is in a green transition and the company is still in a wait-and-see mode on the new administration.

US IDIOSYNCRASIES

It is a conundrum that the US has been more reticent to adapt to climate change investing than other jurisdictions like Europe. But there is some logic behind the slowness of transition, Minopoli argues, particularly considering differences in geographical landmass and the spread of habitations.

"We are a very spread-out nation. You might want to go green [but] you've got to retrofit every individual home. That's a pretty tall and expensive order. Now. I think there's an investment opportunity baked in that cake. But it's going to be a slow roll, because you simply have way too much ground to cover."

There are other sticking points. Do you divest from a fossil fuel company that is now transitioning to greener energy? Minopoli points to the example of Shell, which set out an ambition to move to net zero emissions for itself and products used by its customers by 2050.

Or there is the Keystone XL pipeline.

Last month, the Biden administration announced it was cancelling the Keystone XL pipeline that was being built to carry oil from Canada to Texas and has been the target of ire from environmental and indigenous groups for its potentially ruinous impact on the environment.

Minopoli is concerned about the government's decision.

"It's not like we're going to be going over to solar and wind energy completely this year," he says. "And those barrels of oil coming from Canada, rather than being carried through a pipeline they will be carried on trucks and rail cars. I'm not sure trucks and rail cars are more environmentally safer or friendlier than a pipeline."

He is not arguing that people shouldn't focus on renewables for environmental considerations. "But I think we have to take a more rational approach and understand that we're not quite there yet."

Meanwhile, many of the green energy investment cropping up in the country have essentially come about because of government subsidies or government protection and enjoy tax benefits that potentially makes them appear more financially lucrative than otherwise.

As a registered charity, and therefore a tax exempt investor, KoC does not get the same tax benefits that are available to others. Without the benefit of these subsidies, green energy really needs to stand on its own in terms of its compelling, cash generative ability for it to be attractive, Minopoli says. The asset manager is cautious of getting drawn into a false mirage of green opportunity.

He admits the move to green energy is going to be a critical component of the investment process in the next decades. But, as an investor, KoC is hardwired to look at the practicalities of it—the other side of the story—which environmentalists may not see, or see and not talk about.

In part two of this interview published next week, Minopoli will discuss investing under Catholic principles and why the insurance industry faces a reckoning from low rates.