"Divesting stranded assets makes financial sense, via total return swaps."

Robert Litterman in Ensia: “….while it makes perfect sense to argue that acting solely on ethical or moral grounds is difficult to reconcile with the fiduciary responsibility to prudently invest the endowment, that may not be the end of the story. There is an opportunity for the Harvard endowment, and other investors, to tilt their portfolios in order to generate an attractive return while reducing climate risk if they consider the economics, not necessarily the ethics, of the situation.”
“….It’s very possible that fear of catastrophic outcomes will lead to rational global pricing of emissions much sooner than the market has built into current prices of stranded assets.
Therefore an opportunity exists in going short certain equities, such as coal and tar sands, which under the slow policy ramp for emissions prices still have significant valuations, but which will actually lose value when it becomes recognized that carbon emissions will soon be priced rationally. Such equities are known as “stranded assets.” The other piece of the puzzle is going long the broad equity market. Such an exposure can be easily implemented by institutional investors through a total return swap — a derivative that creates cash flows to the investor, positive or negative, equal to the total return that would be generated by owning a basket of specified long and short underlying equity exposures. This swap creates the equivalent economic benefit of selling stranded assets at current valuations and investing those proceeds in the broad equity market. It is a bet that stranded assets will underperform the equity market.
….I think a savvy investor, particularly an educational endowment, recognizes that people do become more rational over time. Such an investor would see the risk embedded in the stranded assets in their portfolio.
….some investors think people are never rational. But it turns out that behavioral anomalies, once understood, often disappear. It’s very possible that fear of catastrophic outcomes will lead to rational global pricing of emissions much sooner than the market has built into current prices of stranded assets. If this happens, stranded assets will underperform the market and those taking advantage of the swap will profit.
I think a savvy investor, particularly an educational endowment, recognizes that people do become more rational over time. Such an investor would see the risk embedded in the stranded assets in their portfolio. At the World Wildlife Fund, where I chair the Investment Committee, we voted last May to use a simple total return swap as described above to hedge the stranded assets embedded in the funds in which we have investments, without otherwise disturbing the portfolio. Since then stranded assets have underperformed the market.”