DIVEST INVEST KEYNOTE ADDRESS
Tuesday, April 5 2016
Keynote address of Australia's first Divest Invest conference by Stephen Heintz, President, Rockefeller Brothers Fund
Good morning everybody.
Boy this is fantastic. I can’t tell you how excited I am to see a room full of people to have this conversation here in Australia. Thank you all for what you are doing, for what you are here to discuss today, the ideas and the concepts, and hopefully the commitments you will leave here having made. I want to thank The Climate Institute and the Australian Environmental Grantmakers Network and our colleagues in philanthropy here in Australia who have helped support this conference and who are part of this larger movement worldwide.
We are in a moment of enormous world historical challenge and enormous opportunity. We often say that in philanthropy – that the challenges are just another way of presenting opportunities. But this one is different. This one is qualitatively different this is quantitively different. This is an existential challenge. It is one of the three great anachronisms of our time -- carbon fuelled capitalism. It served us well for 250 years after the invention of the steam engine, but it’s now burned itself out because it’s burning up the planet.
It brought a lot of prosperity. It brought a lot of development around the world. It was a very good thing for a very long time. But we now know it has produced enormous cost and an existential threat to the very vitality of this planet and all forms of life. 7.4 billion human beings and some 2 million other known species who share one ecosystem, one climate and increasingly, and I think this is important, one policy.
Paris suggests that we are finally moving forward with a global framework that’s not just a multi-lateral agreement among governments, although it is, but more profoundly it’s a poli-lateral agreement, because it requires action and includes commitments from the private sector and civil society in the non-profit sector. All sectors representing all societies now have a moral obligation to move forward to solve this existential crisis.
So it’s a very, very exciting time and I think we can take some encouragement, as the wonderful speakers who have already started this conference this morning have said, we can take some encouragement from what has happened both in Paris and also I think we should take note of the SDGs and the 2030 agenda that was also adopted through the United Nations sustainable development summit.
These are encouraging moments that give us hope that in fact human civilisation can save itself and all other forms of life on this planet. So I’m very, very excited and when I come to a meeting like this I just get more excited. I would prefer to be sitting and listening rather than speaking, but I’m going to a little bit of the story of how our foundation navigated this interesting journey and then I really look forward to conversation, questions and discussion.
I want to tell you the story of our journey in a very honest way because I think that’s important. I think we need to learn from each other in a very open and transparent kind of fashion. It’s not easy in some cases to make the kinds of decisions that we know are the right decisions. But moving an institution, especially in our case, an institution that was founded with fossil fuel wealth has perhaps some lessons for others.
What we found along the way was to move into a place where we could announce in September 2014 that we were divesting from all fossil fuels, as rapidly as possible, we had to change our investment philosophy. We had to change our investment governance in terms of the members of our investment committee, we had to change our investment manager, and we had to do a lot of data work to find out exactly where the money was. Each one of those steps actually took some years.
We started this conversation in the early 2000s, not too long after I had arrived at the fund, because, quite frankly, I was frustrated. I had this wonderful foundation with this fantastic history and I was only using 5 per cent of the assets to support its very ambitious mission, which is to help build a most just sustainable and peaceful world. The other 95 per cent were locked off, managed by a wonderful group of very senior and very successful investors in a voluntary investment committee, and a set of fund managers who were producing good returns.
But it was very frustrating when I started having conversations with them about how we might begin the process of aligning our investments with our mission, in that the answer was a very traditional answer: “You’re a very nice guy, you do very nice work, you go over there and keep up the good work, leave us alone our job is to produce absolute returns and to give you more money to work with.” And this just wasn’t a satisfactory answer because it’s not true. You don’t have to separate the two and that’s essentially the concept that we are all proving.
So I know I had a lot of work to do to breakdown these institutional and philosophical barriers, so I began to think what’s the way to start this process.
We are a very deliberative organisation. We are 75 years old. We were founded by the third generation of the Rockefeller family in 1940. These were the famous sons of Jon D. Rockefeller Junior that included a governor and vice president Nelson Rockefeller and David Rockefeller who had been chairman and CEO of the Chase Manhattan Bank when it was really the global bank, and another brother who was Governor of the State of Arkansas. They were powerful young men in one of the most prominent and wealthy families in the world at the time, and they organised this foundation with the encouragement of their father who said, “OK boys, it’s time to get serious about the family business and that’s not oil, it’s philanthropy.” And so the Rockefeller Brothers Fund was organised and we just had the 75th anniversary, so we got to study our history and one of the things that was so wonderful to see in the shelves of documents that have been collected over the years was a commitment to the environment and globe from the very beginning.
Now, the environmental manifestation of that commitment in the early years was really about conservation and the family and the Rockefeller Brothers Fund did a lot to help conserve a lot of environmental ecosystems and natural beauty. But over the years it moved from conservation into ecosystem management, and early on in the 1990s the fund began to see climate change as a threat to all of the beautiful nature that it had conserved and other vulnerable ecosystems around the world, and so they began to want to know more about what was happening in the climate. They started funding climate research in the 1990s, which was very early of course in the process for foundations.
So there was this ethos that we could build on, and that was our great strength going into this process. So when I came to the fund and kind of found this division, this barrier between the investment and the philanthropic world, my strategy was to say to the investors, “Alright I understand your point of view, I have a different view but I understand where you are coming from. You’ve done a great job for the fund. But we ought to be thinking about our proxy votes because those are economic assets and we are not utilising.” They said “well that makes some sense” and so we, as I said, a very deliberative institution, spent about a year in a committee process with investment committee members and other members of our board (by the way half of our board and members of the Rockefeller family so this is very much a family institution still), plus some outside advisors, and we came up with I think a really - at the time this was 2005 and when published it – a pretty progressive document of proxy voting guidelines according to ESG principals.
Voting the proxies was good, and we instructed our managers to begin to follow the guidance. But what was more important was the education process because having the debate about ESG and what that actually means in practice was a wonderful opportunity to have a dialogue with all of our internal stakeholders about these very important concepts so that was kind of step one. And then in 2010 I went to the Board and said, “We have a governance problem.” Because remember I said earlier that one of the challenges we faced was we had a committee that kind of an acronistic view of how philanthropic investment might be managed, so I know I needed to kind of change personnel on the committee, but I didn’t want to have a complete coup d’etat. So I said, “We had a governance problem.”
I looked at the structures of the fund and I was very proud of the fact that the RBF has term limits for our board of trustees and they apply equally to family members and non-family members. But low and behold we didn’t have term limits for our committees, none of our committees, so I said to the board, “This is not considered best practice in the world of philanthropy. We ought to have term limits on all committees.” And they said, “Oh boy, you know, you’re absolutely right.” So we adopted a bylaws change, and we then had term limits, and that gave us the opportunity over a few years to thank some members of the investment committee for their dedicated service and bring some new ideas into the mix and that was transformative. So that was the next step.
Then in early 2010, now having a more immunable committee, a more interested committee, we went to the board with a proposal that we set aside 10 per cent of the total value of our assets at the time. The 10 per cent equated to about $86 million and we were looking for ways of proactively invest those assets in market rate investments that would support our mission primarily in the areas of clean energy new technology and other business strategies to help reduce carbon emissions and fight global warming.
So we got the board to adopt that. We had to hire a new investment office because the old investment office was structured in a way that couldn’t do it. Their business model, we are not big enough to have a CIO and full investment staff, so we engage was it known at least in America, I don’t know if you have them here in Australia, as OCIO’s which is Outsourced Chief Investment Officers. And there is kind of a boutique industry with some very, very good investors now, who serve university and college and foundation endowments of about our scale, somewhere less than a billion dollars, more than $500,000 less than a billion, and they have a full bench of real investment professionals, all the asset classes, and they have proven to be very good. But our original OCIO had a completely co-mingled fund structure and 14 clients, so now I was not only up against my own investment committee, I was up against 14 other institutions who were not eager to change because they were getting very good returns.
I then convinced the investment committee and the board that we had to get an OCI firm that was really committed to help us implement our goals of investing 10 per cent of our endowment. So we went through a new RFP and I mean this was a lot of work and I’m telling you this story, because I think it’s important for people to understand you have to be really intentional. You have to be very strategic. You have to look at all the elements and you have to tear them down. You have to tear down each one of these barriers and find a path forward.
So we hired a new OCIO a firm called Perella Weinberg Partners and we had 13 responses to requests for proposals. Perella Weinberg had a very interesting approach which was, “We are not experts in mission investing or impact investing and we are not experts in clean energy markets. But we see that that’s where the world is going to go, and we think it’s in our business advantage to get there early. We see working with you at the Rockefeller Brothers Fund as a way of doing that”. That was a very compelling pitch, especially when the other pitches weren’t any more compelling.
Actually in a lot of ways, we thought these people are really hungry to do this, which is what you really need. So we hired them at the beginning of 2014 and the first mandate we gave them was to really ramp up the investments from this 10 per cent set-aside. But then I decided because of Ban Ki-Moon, who had called the global summit for the UN in September of that year that we needed to do something more, and we really needed to get serious about divesting.
Now you can imagine again with 1o members of the Rockefeller family sitting around the boardroom, with 10 other very thoughtful leaders putting this concept on the table was an interesting experience, and I have to tell you they were fantastic. They are really smart people, half of the Rockefellers on our board have PhDs in various fields, and the DNA they inherited all of John D. Rockefeller’s business acumen, and also his enormous philanthropic ambition. It’s a wonderful combination, so they put us through a really serious conversation, and so did the other business leaders who serve on the investment committee, and on the board. But we said to them two things:
- This is a foundation that has been a leader on climate change since the 1990s.
- Now in 2014 almost half of our grantmaking worldwide is about climate and energy.
All of our work in China is climate and energy; most of our work in the USA is climate and energy. We are working on fighting coal power stations in the Western Balkans. We are working on with the United Nations and the UNFCCC process including helping to provide additional capacity to the secretariat for organising both Copenhagen and Paris conferences. This is a foundation that is recognised as a leader on climate change, continuing to be invested in fossil fuel companies, which was the same as if we were making grants for lung cancer research and being invested in tobacco. It’s a moral inconsistency and a hypocritical one at that, and the Rockefellers, among other things, are very ethical people. So the moral argument had significant sway with them, but it wasn’t quite enough to get us over the decision unfortunately, because we had been funding a lot of grantees in this space including some organisations represented here.
We had been funding research into carbon markets, carbon futures, renewable energy, and one of our grantees of course is the Carbon Tracker Initiative, who as you know these are pretty smart London investors who formed an NGO and a think tank. So we had been funding these issues and we were then able to bring to this conversation that started with moral ambiguity of the problem to an economic problem, and say, “Look, if we have any chance of what science tells us is now absolutely mandatory, as our wonderful presenters have said, staying at least below 2 degree Celsius, hopefully getting to 1.5 degree Celsius and net zero. If we have any chance doing that, 60 – 80 per cent of the known fossil fuel reserves simply have to stay in the ground. And that means the companies that own those reserves are going to be losing value over time, because those are going to be stranded assets that are on their books.” And the economic argument coupled with the moral argument really got us to where we needed to be.
Therefore we were thrilled that we were able to participate in September, as Sue said, the day after the climate march. The timing was not accidental, but it was wonderful because the march, which all of us participated in, was one of the most moving experiences of my life. I was there with my wife and 13 year old son at the time, and it was a huge expression – 400,000 people joyously peacefully marching through the streets of Manhattan, with the NYC police doing a wonderful job of helping everybody and guiding it, and it was a massive expression of love for our planet and a demand for collective action.
So the next day we had the press conference where we announced that we were going to divest completely from fossil fuels, but we were going to do it in a prudent fashion over a period of time because it’s not a simple matter. We had done the homework we’d looked at the data, we’d followed the dollars. You can’t divest – for those of you in the room that are currently doing it know – by just throwing a switch overnight unless you are prepared to leave a lot of money on the table, which we weren’t prepared to do. So we said that we were going to divest from coal and tar sands oil by the end that year, so between September and December we were going to be completely out of those two dirtiest sources of energy and we are now down to 1 tenth of 1 per cent of our holdings in coal and tar sands. And we said that we were going to get completely out of gas and oil over the next couple of years.
When we started the process at the beginning of 2014 our total endowment had an exposure of roughly 7 per cent in all fossil fuels and at the end of the first quarter of 2016 we are now down to 3.5 per cent exposure. We are on a good path. We have some investments that are locked up and we know of course the duration of those lock ups, so we can see there a trajectory, and, of course, depending on fluctuations and valuations and all of those things, there will be ups and downs along the way, but our goal is to get as close to zero by the end of 2017, or early in 2018.
The good news is that we have established both. We have of course a conventional benchmark to kind of compare our performance with, and we established a fossil fuel free benchmark, and thus far we have been beating both benchmarks.
Now, it is early days and there’s a lot that’s going to happen. But at least we haven’t had to reverse course, because we don’t want to loose a lot of money, because that would hurt our philanthropy.
Two other things and then I’ll look forward to your questions.
At the press conference I was asked whether our decision to divest wasn’t largely symbolic. After all we are a fund of $860 million, not really that significant financially. And I said, “Well yes of course it is symbolic, but symbols matter, symbols inspire people, symbols motivate behaviour, and in this case, symbols send signals, market signals.” And I believed it when I said it, and I was very happy in the next few months to actually begin to experience it.
Two examples. There was a Brazilian infrastructure fund that had approached us in early 2014 to say would you be willing to invest in us. So we and our investment advisors looked at it and thought this is a very very good investment, but it had exposure to fossil fuels, and so I said, “I’m sorry, I’m trying to get ready to announce that we are going to divest from fossil fuels. I’m certainly not going to increase our exposure before doing so.” So we said we are not going to invest.
About four weeks after the press conference where we made our announcement, the Brazilian fund manager called back and said, “Your announcement made the front pages of the Brazilian newspapers. It’s getting a lot of play here, so we are thinking about organising a fossil fuel free fund. Would you have a look?” And we said of course, and we gave it all the rigorous due diligence that we give to every investment opportunity and we’ve invested with them.
This has now happened a second time with another fund and of the 10 per cent we have now exceeded the 10 per cent and most of it has happened since 2014, because the market is changing as our previous presenters have indicated.
The opportunities are growing, the deal flow has been fantastic, so we have already exceeded the 10 per cent and we have just started the discussion with the board about raising and set aside to 20 per cent.
I think at our June board meeting they will agree to go ahead with that, so this is an important inflection point in civilizational history. It is a time when we have to jettison an acronistic idea and acronistic systems. An acronistic thinking builds the new institutions, the new policy frameworks, the new technologies, and the new global ethos that can help us save the planet from certain climate catastrophe.
We can do this, and we can do it in this poli-lateral framework where everybody is doing their part. Governments are setting policy, investors are divesting and reinvesting, individual citizens are doing their part, civil society continues to press and advocate and hold people to account, which is critically important.
Civil society’s role going forward is more important than it’s ever been, but we can do this, and I also said at the press conference because people recognised there was a lot of irony in the decision by the Rockefeller family through its principal philanthropic institution to divest from the source of the wealth, that if you study the geography of the biography of John D. Rockefeller himself, this was a young man who went to work at age 16 in the 1860s with essentially no money. We have his original ledger book. He made $45 in the first year he went to work and he gave away $5 to charity. He was beginning already you could see it.
By the turn of the century, he was the wealthiest man in the world. He became the wealthiest man in the world because he saw the future, he saw an economy at the time that was using whale oil for lighting primarily, and all of a sudden there was this new resource that he knew could transform life, transform the global economy and he quickly veraciously built a global business. And I am absolutely convinced knowing that story, and knowing the kind of entrepreneur and visionary he was , that if he were with us today, he would be doing the same thing in the clean energy economy because he knows that’s the future. And he knows that’s where prosperity lies and we now know that not only prosperity but greater equity poverty elevation and environmental wholesomeness are all wrapped together in the move, that we must take rapidly and urgently, and with all of our passion all of our skills all of our capacities and all of our resources.
Thank you very very much.