Fossil Fuel Divestment - an effective way to curb Climate Change?

Feb 04, 2019
Divest demonstration in Oxford (photo goodinvesting)


When you hear the word divestment, you may initially think of the anti-apartheid activism that took place in 1970/80s South Africa, or divestment from tobacco companies spearheaded by NGOs, which resulted in stringent restrictions and taxes. However, it is fossil fuel divestment, a movement which emerged on American university campuses in 2012, that is the hot, yet controversial topic on everyone's lips today. 

Early last year, New York City mayor Bill De Blasio announced that the city would divest its fossil fuel holdings, a grand total of $189 billion (de Blasio and Khan 2018). Soon after, the mayor of London followed suit, adding to the vast number of institutions committed to divestment, including the Norwegian sovereign wealth fund, over half of the UK’s universities, and European insurance giants such as Axa and Allianz. 

This unprecedented growth in commitment reflects a wider effort to transition to a clean energy future since the 2015 Paris Climate Agreement, following which plans for action and investment towards a low carbon, resilient and sustainable future have entered mainstream discourse worldwide. The agreement’s main goal is to prevent global temperature rise to more than 2°C above pre-industrial levels and is part of a wider, universal effort to strengthen the global response to the threat of climate change. One such response has been divestment from fossil fuels, a rapidly spreading global movement involving the removal of investment assets from companies involved in fossil fuel extraction.

Divestment campaigners argue that fossil fuel companies are bad investments not only on moral, but also financial grounds. One of the major risks associated with investment in fossil fuel companies is the case of stranded assets, ‘economic resources held by a company that cannot  earn an economic return’ (Fossil Fuel Free UK). With regard to fossil fuels, changes in the regulatory and market environment resulting from the transition to a low-carbon economy would likely cause fossil fuel reserves to become economically unviable and thus generate no return on investment. More specifically, according to the IPCC, over 80% of fossil fuels are ‘unburnable’ under the goal to limit global warming to no more than 2°C (Briggs 2015). Concerns of a resulting ‘carbon bubble’ have been raised, which if uncontained is likely to burst, causing a ripple effect that would hit all markets. The risk of such stranded assets, which some have warned could cause another global financial crash, is being taken increasingly seriously by leading institutions such as the Bank of England, the World Bank and the G20’s financial stability board.

Oil fields in the Potiguar Basin (photo Agência Petrobras)


Besides the economic effects of divestment, some campaigners claim that its real aim is to deny energy companies the political, social and cultural backing to influence decisions on climate change. Stigmatisation is likely to produce undesirable consequences for a company, such as alienating customers, suppliers, subcontractors and potential employees, which in turn reflects negatively on financial performance. It may also result in the termination of multi-billion pound contracts or mergers and acquisitions, as well as the possibility of being banned from acquiring property rights or licences for business expansion (Busch et al. 2016).


However, despite the recent surge in divestment commitments, the movement has come under much criticism, particularly regarding its practicality. Divestment has been widely denounced as a symbolic gesture, which has no measurable impact on greenhouse gas emissions and thus does little to address the real issue of climate change. Others have criticised the movement as being unethical on poverty grounds. Fossil fuels are crucial for building the economies of developing countries, and therefore by divesting, we are denying them the chance to ascend the development ladder (Howard 2015). Divestment campaigners, however, have countered such claims by contending that climate change will have a particularly severe impact on the poorest and most vulnerable in society, therefore it is our moral duty to act (The Economist 2015).


Additionally, while already 1000 investors with $6.24 trillion in assets have divested from fossil fuels (350.org 2018), the vast majority of divestment commitments are concentrated among philanthropic organizations, institutional investors, and public bodies. As far as the private sector is concerned, there is still a long way to go, as for-profit corporations, where the greatest impact would be had, account for a mere 3% of divesting entities. 


Regardless of which side of the debate you are on, it cannot be denied that divestment alone will not solve global warming. Investment in clean energy is crucial if we are to stay within the 2°C limit in global temperature rise (Carrington 2016). Not only is it beneficial from an environmental perspective, but numerous reports have shown that investing in clean energy, energy efficiency and other sustainable technologies can be even more profitable than fossil fuels (Lubber 2012). As well as being a safer place to invest, compared to the volatile nature of the fossil fuel industry, clean technology is an expanding market, with investments last year exceeding $200 billion globally. 

Additionally, new technology and innovation that emerges as a response to climate change could inflict vast operational changes onto industries with a heavy carbon footprint more so than divestment movements. For example, recent advancements and lower prices in lithium batteries are likely to negatively impact the gas, oil and automobile industries, as electric vehicles and thermal storage for solar or wind energy are consequently becoming increasingly affordable and practical. Undoubtedly, there is huge potential for a global transition to a clean energy future, and as the desire to move from rhetoric to tough action on climate change management grows, a technological revolution is well and truly underway. 

Evidently, divestment from fossil fuels is not just an environmental movement, but one that has social, political and economic ramifications on a systemic level across the whole of society, and while it has sparked some controversy, it seems that the benefits outweigh the costs. Not only does divestment have the potential, if more widely adopted, to cripple fossil fuel companies, thus decreasing the likelihood of catastrophic environmental change, it is also a smart move from an economic perspective, as replacing investment in a volatile industry with clean-energy alternatives hugely minimises risk. In the present day, rapidly decreasing costs of renewable energy and innovative clean technology, coupled with the rising costs of fossil fuel exploration and extraction against a backdrop of sociopolitical uncertainty has changed the energy market. Investments in fossil fuel companies are no longer the reliable source of dividend they once were. 


References 

Busch, T., Bauer, R. Orlitzky, M., (2016), ‘Sustainable Development and Financial Markets Old Paths and New Avenues’, Business & Society, 55 (3), pp.303-329.

Carrington, D. (2016), ‘Fossil fuel divestment funds double to $5tn in a year’, The Guardian. Retrieved 16/12/16 from: https://www.theguardian.com/environment/2016/dec/12/fossil-fuel-divestment-funds-double-5tn-in-a-year 

De Blasio, B., Khan, S., (2018), ‘As New York and London mayors, we call on all cities to divest from fossil fuels’, The Guardian, Retrieved from: 
https://www.theguardian.com/commentisfree/2018/sep/10/london-new-york-cities-divest-fossil-fuels-bill-de-blasio-sadiq-khan

(2015), ‘Fight the Power’, The Economist. Retrieved from: http://www.economist.com/news/finance-and-economics/21656204-investors-are-being-pressed-sell-their-holdings-coal-oil-and-gas-fight

Howard, E., (2015), ‘A beginner's guide to fossil fuel divestment’, The Guardian. Retrieved 15/12/16 from: https://www.theguardian.com/environment/2015/jun/23/a-beginners-guide-to-fossil-fuel-divestment 

Lubber, M. (2012), ‘Investors are Making Money on Renewable Energy’, Forbes. Retrieved 13/12/16 from: http://www.forbes.com/sites/mindylubber/2012/03/20/investors-are-making-money-on-renewable-energy/#39b241d329f7 

https://350.org/press-release/global-fossil-fuel-divestment-movement-reaches-6-24-trillion-in-assets-under-management/ 

 


 

By Kalina Dmitriew


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