The CIO of the University of California’s investment office, which manages $180 billion in assets, is standing by his decision a decade ago to sell assets in the fossil fuel and tobacco industries.
Speaking at the Delivering Alpha annual event in New York on Wednesday, Jagdeep Singh Bachher cited both political and economic reasons for what many deemed at the time to be a risky move.
Although such a bold call garnered push back at the time and later criticism, the fund continued to perform despite turning its back on oil and coal.
“As investors we make judgmental choices every day, would I rather invest in Apple or Saudi Aramco, would I rather invest in Apple or in an oil and gas exploration production company?” said Bachher. “When I have choices to make, I'm not investing in everything, I make choices that are probably more profitable over the long term. So, I looked at fossil fuels, especially the risk from exploration and production with a long-term horizon, as something that wouldn't be attractive to invest in.”
Bachher made that decision in 2018 fours years after he took on the portfolio, having already completely exiting existing investments from fossil fuels across the whole portfolio, except an incremental amount that could not be sold.
“We now measure every day from that point forward [on] how the S&P500 with tobacco and fossil fuels has done relative to the S&P500 without… so far, we're okay. We have been fine economically with our decision to sell fossil fuels and tobacco,” he added.
Bachher stressed that as a manager of a university endowment he is keen for the investments that he chooses to include in the portfolio to reflect the ideals of the beneficiaries themselves, namely the students. At the time there were a lot of calls for divestment from fossil fuels as consciousness of environmental issues and the role of the financial sector began to infiltrate society.
More recently, since the war between Israel and Gaza, students have been calling for the university to sell off assets that are directly or indirectly supporting Israel. This would, Bachher suggested, include U.S. Treasuries.
“I am educated in and by our constituents in an educational institution about issues that matter every day, and I make choices,” he said. “And I made a choice for the portfolio itself, fossil fuels, and it has turned out to be a good economical decision.”
Writing in September 2019 on the university website to justify the decision, Bachher gave his reason for the move: “We found them too risky… we continue to believe there are more attractive investment opportunities in new energy sources than in old fossil fuels.”
But following Donald Trump's win in the U.S. election, the oil and gas industry has been bullish on old fossil fuels. Upcoming policy changes and further Republican wins in Congress are likely to boost energy and crude oil, which could lead to a fear of missing out for those not holding a position in the sector.
Solita Marcelli, chief investment officer Americas, UBS Global Wealth Management, said at the same event that it is not clear what policy will actually take hold, and that the future remains uncertain despite optimism in the markets. But the energy sector is one of those deemed most likely to benefit from deregulation, a priority for the incoming Trump administration.
Whether Bachher’s early move to cut fossil fuels proves correct remains speculative, but he suggested that he is confident that the portfolio will continue to perform without big changes to his approach.
“The more you drill the more the prices of oil come down, it turns out it might actually be a good economic decision, even going forward,” he said. “It's not a zero-sum game. If you come out of fossil fuels you have alternatives about where you go, like into clean energy and other types of energy sources.”
Between 2014 and 2018, UC was in the early years of finding new and profitable opportunities in other areas away from oil and gas exploration and production.
“You could stick your hand in the sand like an ostrich, or you could stick it out and say ‘you know, maybe this will be okay’,” he said. “We just need to figure out how to get out to the other end. The growth mindset turned out to be a better approach to make then, and I look forward to what the growth opportunities might be.”
