In late 2012, billionaire investor Tom Steyer left the hedge fund he founded so that he could devote his time to environmental activism. (Jahi Chikwendiu/The Washington Post)

At the base of the mountain, Tom Steyer was a billionaire hedge-fund manager with oil and gas investments and a seemingly conflicted conscience. But by the time he and environmentalist Bill McKibben finished a hike up two tall Adirondacks peaks on that summer day in 2012, Steyer had revealed that he was ready to change his life — he would unload his investments in fossil fuels and become an activist in the fight against global warming.

Just two years later, Steyer, 56, has become the environmental hero he set out to be, giving the left its own billionaire donor to counter the powerful Koch brothers on the right. Steyer has vowed to spend up to $100 million in 2014 to help elect Democrats who are committed to fighting global warming. And with an eye on playing a similar role in the 2016 presidential race, he has positioned himself as a potent new force in the growing world of big-money donors.

Yet, though Steyer has described his newfound activism as “my personal version of a ‘Paul on the road to Damascus’ moment,” his conversion has been more of a slow evolution — and it is still ongoing.

While Steyer said in 2012 that he was halting his “ecologically unsound” investments, a review of his ties to the $20 billion hedge fund he led for two decades shows that he is only now becoming fully divested from energy firms linked to climate change. Responding to questions last week from The Washington Post, a Steyer spokeswoman said that his holdings will be free of all fossil-fuel firms by the end of this month.

When he gave up his ownership of Farallon Capital Management in late 2012, Steyer directed that his personal holdings be divested only from tar sands and coal, two of the dirtiest energy sources, said the spokeswoman, Heather Wong. In late 2013, he directed that the ban be extended to natural gas and oil investments beyond those in the tar sands, Wong said.

“Tom does not have an ownership stake in Farallon Capital Management, which reflects the fact that when Tom left Farallon he sold his management stake and directed that his investment holdings be divested from Farallon’s tar sands and coal related financial positions,” Wong said via ­e-mail. “Moreover, since directing Farallon to divest the coal and tar sands holdings, Tom expanded the divestment directive to include all of his fossil fuel energy holdings and as of this month he will be divested out of fossil fuels altogether.”

Wong did not provide details as to why Steyer decided against divesting from all fossil fuels at first. She said that he had identified coal and tar sands as “the fossil fuels that are having a specific impact on climate” and expanded his restrictions later “because he felt it was simply the right thing to do.”

A Farallon spokesman said the firm created a special investment “screen” in 2013, at Steyer’s request, to help steer his personal investments away from particular companies. The spokesman, who spoke on the condition of anonymity, citing the sensitive nature of the topic, declined to explain or describe the criteria for companies or investments that would qualify for being screened out of consideration.

Steyer declined requests for comment. His staff did not provide documents showing the new guidelines he has placed on his investments.

A slow untangling

The complications of Steyer’s untangling from fossil-fuel investments were clear even on the day of his hike with McKibben.

Steyer had sought out McKibben as a potential ally and adviser as he pondered a shift to activism, and he agreed over the course of their brisk morning walk to help McKibben campaign against the proposed Keystone XL pipeline, which would bring crude oil to U.S. refineries from the Canadian tar sands. The project has been a focus for environmentalists because the process of tapping the tar sands produces far more pollution than traditional drilling.

But Farallon, still led at the time by Steyer, had just invested in a company seeking to extract oil from the same area.

Even after his departure from the hedge fund, Steyer continued to lend his name to endorsements of Farallon’s traditional funds, which still include fossil-fuel firms. In his “goodbye” note to investors in late 2012, he encouraged them to keep their money with Farallon, stressing that his exit would not change the firm’s “mode of operation” and that his successor and longtime partner at the firm, Andrew Spokes, embodied “the values in which I believe and which distinguish our firm.”

McKibben said he was not bothered by Steyer’s slow unwinding of his fossil-fuel investments. The environmentalist said that Steyer deserves praise for his willingness to give up a lucrative career and that even many of the most ardent anti-fossil-fuels activists have benefited from the industry at some point.

Steyer “was one of the very first — maybe the very first — to say he’d get rid of his holdings,” McKibben said. “That seemed good to me.”

Relinquishing his Farallon management shares was a costly move for Steyer because he gave up enormous tax advantages and a share of additional profits. He “left millions on the table,” according to a person familiar with the decision.

Steyer apparently chose a different approach than Mitt Romney, whose decision to accept executive compensation after leaving Bain Capital proved damaging to his 2012 presidential campaign as he sought to distance himself from controversial decisions by the firm.

“I’m impressed,” Victor Fleischer, a law professor at the University of San Diego and an expert in hedge-fund and private-equity compensation, said when told what Farallon disclosed to The Post last week. “It’s unusual for somebody who has been involved in the founding of a company to completely separate from it.”

Steyer has described his exit as a matter of personal morality.

“I came to realize I could no longer in good conscience remain in a business that by definition was invested in every sector of the economy, including the energy sector,” he said in an April statement.

He told students at the University of California at Santa Barbara last month that he left his firm because he saw global warming as a defining challenge for his generation, just as World War II was for a previous one.

“If it doesn’t change, we are completely screwed,” Steyer said, exhorting the audience to action. “What we have to do is push to make the change. . . . And that’s actually why I quit my job — to try to be one of the pains in the ass.”

Profits vs. values

Steyer’s move into big-money politics would not be possible had he not reaped a fortune in part through fossil-fuel investments.

A native New Yorker who graduated from Yale and got an MBA from Stanford, he moved aggressively and quickly into the world of money management. He named his new hedge fund, Farallon, after a group of islands off the Northern California coast favored by sharks. Farallon would become one of the largest and most successful hedge funds in the world.

Public records filed with the Securities and Exchange Commission show that Steyer invested in fossil fuels at multiple points over the years, with Farallon buying shares of oil, coal and natural gas firms. Investments included BP and mining companies in the United States and around the world. Farallon’s second-largest holding in September 2012, a month before Steyer announced his departure, was a $220 million investment in the oil-and-gas giant Nexen.

An early point of tension between his drive for profits and his liberal ideology came a decade ago, when Steyer and his wife were caught off guard by Yale students’ push — which quickly spread to other college campuses — to protest their school’s investments in Farallon funds.

Calling their group “Un-Farallon,” the students pointed to allegations that companies in which Farallon invested had used unfair labor practices and fouled the environment. Public demonstrations included a giant papier-mache globe being smashed by a woman wearing a sign that said “My name is Farallon Capital Management.”

The protests embarrassed Steyer and his wife, Kat Taylor, who were major donors to Democratic causes. They began to wonder if, and when, they might bring their business interests in line with their values.

“It was a little flare going off in our minds,” Taylor told Men’s Journal for a profile of Steyer that was published in February. At the time, she said, they both thought: “One day we want to be totally aligned. We haven’t earned that moment just yet, but we’re going to get there.”

Steyer recently identified another moment of critical self-reflection — his 2007 appointment to the Stanford board of trustees.

“When I came on the board, I asked myself, what can a great university do to distinguish itself, to . . . make a difference in the world?” he said last month in a speech to the Vermont Law School. “So it really forced me to think, what are the things that are confronting us as a society, and how can we respond to them? . . . I decided it was climate.”

With President Obama’s 2009 inauguration, Steyer said, he began to believe that policies could be enacted to help avert a climate disaster.

Steyer entered the political fray in 2010, when he donated $5 million and raised more for a successful campaign in California to defeat a ballot initiative pushed by Koch Industries, owned by Charles and David Koch, and other fuel refiners that would have rolled back new limits on greenhouse-gas emissions.

Going for a hike

A final milestone came in the summer of 2012, when Steyer phoned McKibben after reading his call in Rolling Stone magazine for a movement to divest from fossil-fuel companies that he said were profiting from the demise of the planet.

It was McKibben’s idea to go on a hike in the Adirondack range, not far from his home in Middlebury, Vt. “Didn’t know a thing about him,” McKibben said in an e-mail to The Post. “That’s why I suggested a hike instead of a meeting — if nothing came of it then at least I’d get a good hike in.”

McKibben said he was impressed by Steyer’s views on opposing the Keystone pipeline, which was emerging as a difficult decision for the Obama administration.

“I think he understood the logic of the Keystone fight right away — that it was crucial in its own right and also a way to draw a line in the sand,” McKibben said.

Steyer was criticized last year by pro-Keystone Republicans, who accused him of not disclosing his financial interests in the Canadian tar sands even as he talked about his moral opposition to the pipeline.

Farallon had invested in a large energy company, Kinder Morgan, that owned a pipeline connecting the Canadian tar sands to a Pacific port. Industry analysts say the Houston-based company, which is seeking to expand its pipeline, would provide one transportation alternative for tar sands oil to get to market if the Keystone project failed to get approval.

Responding to the complaints, Steyer last year said his Kinder Morgan investments would be sold by the end of 2013 and the profits donated to charity.

Last Friday, at the same time The Post was asking Steyer and Farallon about his investments, Steyer publicly announced that he was creating the charity he had promised — devoting $2 million to help those hurt by wildfires and other extreme weather events.

Alice Crites contributed to this report.