Since its launch three years ago, the divestment movement has surpassed the $50 billion mark, with over 800 global investors committing to divest their holdings in fossil fuels over the next five years. Signatories encompass a broad diversity of sectors and regions, from cities and universities to health care organisations and large institutional investors. Last Saturday, 350.org and the Guardian held a divestment workshop in London with a number of inspiring speakers from Carbon Tracker, ShareAction, Christian Aid and many others. They laid out the key divestment arguments, campaign successes and how to get involved.
As the movement grows, so do the number of opinions. Divestment is often misrepresented and portrayed as an empty strategy: when you sell your holdings, it is unlikely that the new buyers (who will replace you) would exert the same influence. However, three things are often missing in articles or investors’ letters against fossil fuel divestment: the message that it sends, the urgency to act on climate, and the strong financial arguments underpinning the campaign.
The fossil fuel divestment movement cannot be analysed only through the lens of share price, availability and cost of debt. These are likely to be small, at least until much higher volumes of capital are mobilised. The real strength of divestment comes from helping open up the political space for climate action by global policy makers. It highlights the concerns of younger generations and helps shift the balance of power in favour of renewable energy sources. It provides a platform to delegitimise the power of fossil fuel industries, which in the U.S. alone spent $1.61 billion on lobbying Congress and received $5.1 billion in subsidies to exploration in 2013 – almost double the 2009 level.
Data from the IEA confirms that financial support for global fossil fuel – of which exploration is just one portion – totalled $550 billion in 2013, which is more than four-times the subsidies given to renewables. With rising costs for hard-to-reach reserves, and falling coal and oil prices, these generous public subsidies are not just holding back investment in efficiency and renewables, but are also propping up fossil fuel exploration which would otherwise be deemed uneconomic.
Divestment can also be a useful strategy following a period of engagement, if the original outcome sought hasn’t been met. Engagement and divestment are not mutually exclusive: a large institutional investor could hold shares and engage with some companies (where they think they can genuinely affect change – in time) and divest from others who are not moving fast enough. Heirs to the Rockefeller family, which made its vast fortune from oil, recently talked about their decade-long efforts to persuade Exxon to shift towards clean energy and stop funding climate sceptics. Frustration led them to commit in September 2014 to a phased-approach to fossil fuel divestment.
The problem is that, by focusing solely on resolutions and engagement, shareholders risk being distracted by small compromises and incremental change when the speed and level of transformation required in the energy sector is far higher. Since 2009, total emissions of the ten biggest emitters in the sector – including Exxon, Shell and BP – have increased by over 50%. Exxon’s 2012 Energy Outlook, for instance, projects increases in global energy demand by 30% by 2040 compared to 2010, including continuing increases in CO2 emissions until 2030.
This year, a coalition of activist investor groups representing more than 150 major shareholders in Europe and the US have submitted a resolution asking Shell and BP to reduce emissions, invest in renewables, and test how their business models would hold up if governments were to take action to limit climate change to 2°C. These steps are good business, but will they guarantee a quick enough transition to a low-carbon economy and avoid cooking the planet? How does that compare with the $670billion a year that fossil fuel companies continue to spend on exploring for new oil and gas resources? What good is a proverbial shareholder ‘seat at the table’ if the table topples over anyway?
Different from previous divestment campaigns such as tobacco and corporates in apartheid South Africa, this one is also being underpinned by an increasingly strong financial argument. Concerted regulatory action to meet globally agreed limits of 2°C could render up to 80% of the world’s known reserves of fossil fuels unburnable, resulting in sharp falls to fossil fuel companies’ valuations. This refers to fossil fuel energy sources which cannot be burnt – some may be used for other purposes which do not involve combustion, e.g. as petrochemical feedstocks.
Equity portfolios are particularly exposed to the risk of stranded assets, as the FTSE 100, S&P 500 and other global indices have relatively high proportions of their market capitalisation in carbon intensive stocks. A market shock, as we have seen in the recent past with the US housing bubble, could trigger economic and social problems across the world. Despite mounting evidence, Exxon and Shell’s response to a group of institutional investors with $3 trillion of assets under management was borderline arrogant: we do not see governments taking the steps now that are consistent with the 2°C scenario and we do not believe that any of our proven reserves will become stranded.
Finally, Drew Faust’s statement on Harvard’s decision not to divest ignores broader moral dimensions of their investment decisions by stating that “the endowment is a resource, not an instrument to impel social or political change”. It reflects an outdated expectation that businesses can detach themselves from broader societal issues that affect the well-being of present and future generations. It is simply not viable to persist in the view that the role of business is to increase shareholder value rather than to play an active role in building societies – including getting directly involved in the complex moral issues that affect us all.
The clock is ticking and the need to act on climate change is urgent. Not only do we need to stop temperatures rising above safe levels, but it is also cheaper in the long-term to act now as for every dollar that is not spent in the energy sector before 2020, an additional $4.3 will need to be spent after 2020 to compensate for increased GHG by building zero-carbon plants and infrastructure by 2035.
Investors need to ask themselves: what exactly are we trying to achieve (or in this case, avoid) and how big are the steps that we need to take to get there in time? Will engagement be enough to get us there before temperatures rise by too much, or will divestment send a much stronger message that will, indirectly, ensure a quicker transition? When dealing with fossil fuel companies, it is necessary to differentiate between lip service and meaningful commitments in the face of credible science.