This article by Dr. Maik Günther was published in an older edition of The Beam (Jan. 2017 ). Subscribe now to read more on the subject.
Over 600 institutions across 76 countries representing $5 trillion in assets have committed to divest from fossil fuels. This includes, amongst others, the world’s largest sovereign wealth fund — Norway’s GPFG — , financial giants Allianz and AXA, the Rockefeller Brothers Fund, as well as the cities of San Francisco and Berlin, and Stanford University. For a social movement that since 2012 has been challenging the business model of the fossil fuel industry by calling to divest — removing capital from stocks, bonds or funds invested in fossil fuel companies — this is momentous.
The argument that investing in fossil fuels — oil, coal, and gas — is morally problematic started to take shape on US campuses in 2011. Motivated by previous divestment campaigns, for example those against South African Apartheid in the 1980s or the tobacco industry in the 1990s, students urged university boards to withdraw their school’s endowments from fossil fuel companies. Their argument? Investing in companies that contribute to the destruction of the earth contradicts the key mission of higher education in preparing younger generations to shape and protect that earth.
Inspired by these ideas, in 2012 Bill McKibben, founder of environmental NGO 350.org and one of the leading figures-to-be of the global divestment moment, published a landmark article in the Rolling Stone Magazine. Therein, McKibben addressed three numbers:
• 2 degrees Celsius: The maximum amount of temperature rise the planet can bear before dangerous climate change occurs
• 565 gigatons of carbon dioxide: The amount of emissions that can be released before that point is reached (the so-called global carbon budget)
• 2,795 gigatons of carbon dioxide: The amount of emissions that would be released from burning all reserves currently listed in fossil fuel companies.
These figures, according to McKibben, meant that the unexploited reserves of oil, coal, and gas identified by the global fossil fuel industry equated to five times more carbon than can be emitted before the planet’s temperature would rise by more than two degrees. In other words, if fossil fuel companies eventually extracted and sold every reserve listed in their balance sheets, catastrophic climate change is bound to occur.
To address this mismatch between burnable and to-be-burned carbon, 350.org launched its first divestment campaign in 2012. Building on the students’ ideas, the activists called upon any organization that serves the public good — mostly governments, educational and religious institutions — to cut their ties to the fossil fuel industry. They also urged society to view the fossil fuel industry in a new light and to distance itself from this “rogue industry, reckless like no other force on earth. It is ‘Public Enemy Number One’ to the survival of our planetary civilization”.
Since then, a number of universities, faith-based organizations, foundations, and cities have, to varying degrees, committed to divest from fossil fuels. The movement particularly picked up momentum through divestment announcements by a number of symbolic institutions and endorsements by opinion leaders. In 2014, the World Council of Churches, representing half a billion Christians, ruled out all fossil fuel investments. The Guardian Media Group divested its funds, following its subsidiary newspaper’s “Keep it in the Ground” campaign. In 2015, the UNFCCC — the UN Secretariat overseeing climate change — backed divestment as “it sends a signal to companies, […] that the age of ‘burn what you like, when you like’ cannot continue”. That same year, the G7 called for a complete decarbonisation of the world’s economy. And Leonardo DiCaprio, during an address at Davos’ World Economic Forum in 2016, urged to stop allowing “the corporate greed of the coal, oil and gas industries to determine the future of humanity”, and to “leave fossil fuels in the ground where they belong”.
While sparked by a moral imperative — “If it’s wrong to wreck the planet, then it’s also wrong to profit from that wreckage” — moral concerns, over time, became supplemented with concerns about economic risks from stranded assets, and legal attention about fiduciary duty.
Whilst climate-associated risks were certainly present before the campaign, as the movement progressed, the financial sector started to recognize the economic risks of remaining invested in fossil fuels. In particular, the notion of stranded assets, introduced by financial think-tank Carbon Tracker in 2012, signaled a turning point: if the world’s governments fulfill their pledges to tackle climate change by cutting carbon emissions (exacerbated by Paris’ push toward a 1.5 degree future), close to 80% of global fossil fuel reserves would have to be kept in the ground, creating the so called carbon bubble and making investments in them worthless, or stranded.
Today, financial institutions increasingly recognize this risk. In 2014, Bank of England Governor Mark Carney publicly stated that “the vast majority of reserves are unburnable”, while calling for investors to consider the long-term impacts of their decisions. In 2015, the International Monetary Fund and the World Bank called to cut “harmful” fossil fuel subsidies. And a recently launched report by the G20-Financial Stability Board — incorporating the world’s most powerful central bankers and finance ministers — urged companies to disclose climate-related risks of their operations.
In addition to regulative bodies, climate concerns also entered the for-profit financial mainstream — including large insurers, pension funds, and banks — with companies such as AXA and Allianz divesting, and Goldman Sachs, HSBC, and Blackrock, for instance, issuing climate change warnings and calling on investors to incorporate climate risk screenings for new investment decisions.
Besides asset risks, divestment also ignited a debate among legal scholars warning that trustees and investors who fail to consider climate risks may jeopardize their legal duty as fiduciaries. UNFCCC Executive Secretary Christiana Figueres, for instance, while linking the dangerous rise in greenhouse gases in large part to “past investments in […] fossil fuels”, warns that “institutional investors who ignore climate risk face being increasingly seen as blatantly in breach of their fiduciary duty.”
Taken together, fossil fuel divestment today has grown into a truly global movement, with institutions divesting on every continent and permeating every sector of society — from purpose-driven organizations, to cities and faith groups, even mainstreaming into the financial sector. The movement has become the fastest growing divestment campaign in history and, in fact, “one of the great movements of the 21st century”, as heralded by Hans Joachim Schellnhuber, one of the world’s most influential climate scientists.
Does it work?
Such a remarkable development, however, begs the question of whether divestment, in fact, actually works.
Most commentators agree that divestment itself will not have a significant financial impact on fossil fuel companies — others will simply buy up the divested assets. For the movement, however, this is somewhat irrelevant, since its objective is symbolic and educational rather than economic anyway. In making climate change a moral issue by directly targeting fossil fuel companies and those invested in them, the movement aims:
• To create public awareness about the fact that being invested in fossil fuel companies means being invested in a business model incompatible with international efforts to climate change
• To stigmatize the fossil fuel industry — to erode its “license to operate” — and to force fossil fuel companies to reconsider their business model
• To thereby mobilize the political will for tougher and more comprehensive climate change legislation.
In the words of the campaigners: “Severing our ties with the guys digging up the carbon won’t bankrupt them — but it will start to politically bankrupt them, and make their job of dominating the planet’s politics that much harder” (350.org).
Being stigmatized poses significant problems for organizations, as access to critical resources such as customers, investors, and potential employees becomes restricted. Research by the University of Oxford (2013) points out that the financial loss of the divestment campaign “will not be felt through the shares sold but through the reputation lost by these companies by being stigmatized”, and by the passing of more restrictive legislation, which typically follow successful divestment campaigns. Past divestment strategies, the study continues, “forced changes in corporate behavior, government regulation, and legal statutes that would otherwise not have been accomplished.”
In 2016, some of the world’s largest coal companies went bankrupt. While “rooted in economic and political forces quite outside fossil fuel divestment”, as the recent Arabella Advisors report suggests, these developments reflect an increasing vulnerability of fossil fuels as a business model — a model that is “no longer fit for purpose” (Chatham House Report, 2016). Divestment, in combination with other climate advocacy action, could potentially exacerbate this trend.
Implications for renewable energy
Although the campaigners do not tell investors where to move their funds to, many key actors are more upfront in calling to redirect investments into renewable and sustainable energy. With the three-fold debate that divestment highlights — catastrophic climate change, stranded assets, and fiduciary duty — the implications seem clear: transitioning to a clean energy future has become inevitable. And therein, investors have a key role to play: “Investments in clean energy are the right thing to do and the smart way to build prosperity for all, while protecting our planet” (UN Secretary General Ban Ki-Moon, 2016).
In fact, individuals and institutions “that have pledged to both divest and invest in clean energy” (Arabella Advisors) hold tremendous investment opportunities (US$1.3 trillion) into clean energy in their hands. And together with more divestment announcements, like the one by the Rockefeller Brothers Fund, (heirs to the Rockefeller oil fortune) this could make the prospects for renewables even brighter. “We are quite convinced that if he [John D Rockefeller] were alive today, as an astute businessman looking out to the future, he would be moving out of fossil fuels and investing in clean, renewable energy”
– Arabella Advisors (2016). “Measuring the Growth of the Global Fossil Fuel Divestment and Clean Energy Investment Movement.”
– Carbon Tracker Initiative (2012). “Unburnable Carbon — Are the world’s financial markets carrying a carbon bubble?”
– Chatham House (2016). “International Oil Companies: The Death of the Old Business Model.”
– G20 Task Force on Climate-Related Financial Disclosures (2016). “Recommendations of the Task Force on Climate-related Financial Disclosures.”
– Rolling Stone Magazine, McKibben (2012). “Global Warming’s Terrifying New Math.”
– University of Oxford, Smith School of Enterprise and the Environment (2013). “Stranded assets and the fossil fuel divestment campaign: what does divestment mean for the valuation of fossil fuel assets?”