Why 2018 is the year that divestment is finally going mainstream
What started as a grassroots campaign is now branching out to academia, politicians, and business leaders.
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In early January, New York City mayor Bill de Blasio announced that the city would divest its fossil fuel holdings. At the same time, New York State governor Andrew Cuomo has urged the state’s retirement fund to do the same and cease fossil investments. Together, the two funds manage just under 400 billion dollars.
Likewise, Norway’s massive sovereign wealth fund is preparing to sell off its oil and gas holdings, valued at 35 billion dollars. In the UK, Huddersfield recently became the 60th British university to divest, while the public service union Unison has initiated a campaign to encourage local government pension funds to follow suit. Meanwhile, companies like AXA and ING strengthened their commitments to eliminate their exposure to coal and other climate killers such as tar sands.
According to figures collated by the campaigning group 350.org, the total value of institutions that have announced full or partial divestment has now surpassed six trillion dollars. But the vast majority of divestment commitments are concentrated among philanthropic organizations, institutional investors, and public bodies. For-profit corporations account for a mere three percent of divesting entities. As far as the private sector is concerned, divestment still remains very much a fringe phenomenon.
But that could change rapidly. Recent findings bolster the case that, counterintuitively, divestment need not harm portfolio performance. One study found that portfolios which divest from fossil fuels and utilities and invest in clean energy perform better than those with fossil fuels and utilities. Another examined the financial performance of portfolios over multiple decades going back to the 1920s. The study concludes that, contrary to conventional opinion, fossil free portfolios would not have underperformed.
Arjan Trinks, a researcher who co-wrote this study, nevertheless advises caution. He told me that quick divestment action could impose some financial costs on asset managers. If investors had to quickly sell off a big portion of their assets, this would leave them with significant transaction costs. Trinks also says that, so far, the net environmental benefits of divestment are poorly understood. As a result, asset managers might be more comfortable with strategies based on shareholder engagement over divestment. But some of these open questions are starting to be addressed.
Olaf Weber, a political scientist at the University of Waterloo, led a study that examined whether divestment can influence the share price of fossil fuel companies. His team looked at the impact of more than 20 announcements across 200 publicly traded fossil fuel companies. The result: share prices fell on those days on which institutional investors announced they were divesting of fossil fuels.
But can divestment actually drive emissions reductions? A new paper published in the journal Nature suggests it can. The study’s authors compared the effects of divestment (1) to those of the green paradox — the problem that any curbs on fossil fuel production in the future could incentivize producers to try to move up sales. What they found was that a shift away from fossil infrastructure can overcome the green paradox, but only if supported by strong climate policies like a price on carbon. The authors suggest that, in tandem with good policies, utilities will walk away from their fossil fuel assets. To the extent that divestment focusses on similar pathways towards emissions reductions, these findings appear promising.
It will not be easy, however, to scale up divestment. After all, there is an entire political, legal, and cultural architecture around the practice of investing. But heightened attention to the nexus between finance and climate change is driving change. Urgewald, a German NGO, has put together a database to guide coal divestment decisions. In the UK, new rules allow pension funds to take climate change into account when making investment decisions. Such changes to the meaning of fiduciary duties may compel companies to re-evaluate whether fossil fuel holdings are actually legal risks.
Alternative investment options are also booming. Clara Vondrich, the global director of the DivestInvest network, says that there has been an explosion of fossil free investment vehicles over the past five years. Asset managers can now choose from a multitude of fossil free investment indices. Fossil Free Funds, a project initiated by the NGO As You Sow, allows anyone to check whether their portfolios and pension plans contain fossil fuels. Moreover, organisations like Fossil Free Indexes are providing the kind of information that bridges the gap between divestment and responsible investment. Vondrich also highlights that any actively managed portfolio can be divested, and that a growing number of passive fund options are coming on line as well.
The fossil industry itself is responding to the growing divestment threat. BP executive Bernard Looney recently stated there was “more oil than the world needs”. As a result, the company is refocusing on gas, which it expects to be able to sell for many years. Meanwhile, the Independent Petroleum Association of America, a fossil fuel lobby group, has set up a Twitter account (ironically named Divestment Facts) to counter the ascendant divestment narrative. Its primary tactic is to contend that divestment will hit pension funds and university endowments financially. But as more research becomes available, this strategy may soon become unpalatable.
Amid the discussion over the prospects for divestment action, it’s important to recall that it is one among a number of tactics to hit fossil fuel producers directly. As such, divestment is one example of the recent shift towards supply side measures towards climate change. Other supply side examples include pipeline protests, tackling fossil fuel subsidies, climate change lawsuits, and initiatives such as the Lofoten Declaration, which calls for the managed decline of fossil fuel production. The most extreme iteration of supply side policies is to just buy fossil fuel deposits and conserve them.
Divestment is more than an attempt to defund fossil fuel companies. Because it brings clarity to what can often be a confusing and challenging problem, it allows activists to organize more effectively. It also highlights the extent to which the financial system as a whole acts as a driver of climate change. This is important for how we think about everything from our individual pension plans to how multilateral development banks continue to fund fossil fuel projects.
The result is that the range of policy options is widening. At Emmanuel Macron’s One Planet Summit last December, the World Bank announced it would cease its support for upstream oil and gas projects. Initiatives like the Task Force on Climate-related Financial Disclosures and Climate Action 100+ are pushing companies to take the issue of climate risk seriously. Even ExxonMobil has been forced by its shareholders to disclose its exposure to climate risks. In addition, more and more countries are also announcing plans to exit from coal altogether, including France, Italy, the UK, and Chile.
As one study recently argued, such secondary effects could be a more significant outcome of the divestment campaign than one might think. In their analysis, the authors found that previously marginalized ideas gained increased attention and legitimacy as a result of the work of divestment campaigners. It also allows for more diverse and often unexpected coalitions to join forces. Indigenous-led organizations like Mazaska Talks are now at the forefront of the fight against new fossil infrastructure. At the global level, divestment is therefore one major factor in the growing spread of anti-fossil fuel norms.
The available evidence suggests the impact is there. The next step is to leverage it.
By Tim Pfefferle
(1): By divestment, the authors here refer to decisions made by utilities to step away from fossil fuel infrastructure like coal fired power plants.