Extract from The Guardian
A
comprehensive guide to the basics of divestment: what it means, why
the urgency and how it impacts climate change
A
coal-fired power plant in Germany. ‘Coal does the most to pollute
our climate, but it’s the oil industry that does the most to
corrupt our politics,’ said campaigner Jamie Henn. Photograph:
Oliver Berg/EPA
Tuesday
23 June 2015 16.00 AEST
What
is fossil fuel divestment?
Divestment
is the opposite of investment – it is the removal of your
investment capital from stocks, bonds or funds. The global movement
for fossil
fuel divestment (sometimes also called disinvestment) is
asking institutions to move their money out of oil, coal and gas
companies for both moral and financial reasons. These institutions
include universities,
religious institutions, pension funds, local authorities and
charitable foundations.
It
is the fastest-growing divestment campaign in history and could cause
significant damage to coal, gas and oil companies, according to
a study
by Oxford University. Previous divestment campaigns have targeted
the tobacco and gambling industries and companies funding the
violence in Darfur. Divestment is perhaps most well known for its
role in the fight against apartheid in South Africa.
What is the case for divestment?
Almost
all of the arguments in favour of fossil fuel divestment fit into two
categories: moral and financial.
First,
the moral argument, which is rooted in basic maths. Scientific
research shows that in order to keep to international
targets to limit global warming to a 2C rise and thus prevent
catastrophic levels of climate change, between
two-thirds and four-fifths of fossil fuels need to remain in the
ground. But fossil fuel companies are currently banking on these
targets not being met so are extracting these reserves and selling
them – and are actively prospecting for more. In doing so they are
setting the human race on a route to irreversible climate change that
will cause rising seas, flooding, droughts, rising disease, increased
conflicts and refugee crises.What is fossil fuel divestment and why
does it matter?
The
UN has lent
its “moral authority” to the divestment campaign, while
Desmond Tutu has said that “people of conscience need to break
their ties with corporations financing the injustice of climate
change”.
Second
is the financial argument, which rests on the premise that if
international agreements on climate change are met, the investments
will become worthless. The theory that these “stranded assets”
are creating a trillion dollar “carbon
bubble” that could plunge
the world into another economic crisis is now the subject of
an investigation by the Bank of England, after Governor Mark Carney
said publicly that “the vast majority of reserves are unburnable.”
The
World Bank has come out in support of the financial argument for
divestment, with president Jim Yong Kim stating that: “every
company, investor and bank that screens new and existing investments
for climate risk is simply being pragmatic”.
Although
the impact of divestment on share prices may be relatively small, the
reputational damage can have serious financial consequences.
What is the carbon budget?
The
carbon budget is the amount of greenhouse gas that can still be
released into the atmosphere without exceeding dangerous levels of
climate change – the 2C target agreed by governments. In 2013,
the Intergovernmental Panel on
Climate Change (IPCC) put a figure on the carbon
budget for the first time, announcing that the world burns
through about 50bn tonnes of greenhouse gases every year. It is also
very likely that more than 20% of emitted CO2 will remain in the
atmosphere longer than 1,000 years after manmade emissions have
stopped. This means that if we continue to emit at current levels, we
will “spend” the carbon budget within 15 to 25 years. Given that
we have already used two-thirds of the budget, the IPCC have urged
governments to act quickly, using the carbon budget as the basis for
international negotiations.
What is the carbon bubble?
The
“carbon
bubble” is a term that has been used by regulators, financial
companies and campaigners to describe the over-valuation of stocks
in coal, gas and oil reserves owned by fossil fuel companies around
the world. If governments pursue international targets on carbon
emissions in order to curb climate change, then between two-thirds
and four-fifths of these reserves cannot be used, rendering them
worthless. As fossil fuel companies are among the richest in the
world these “stranded assets” have the potential
to trigger a new global economic crisis if investors pull
out in quick succession.
The
carbon bubble could be inflating stocks worth trillions of dollars,
according to a study published
in 2013 by thinktank Carbon Tracker and economist Lord Nicholas
Stern. He authored an eponymous
2006 report commissioned by Gordon Brown, then UK chancellor of
the exchequer, into the economic consequences of climate change.
Shell
has refuted
the concept, predicting in a letter to its shareholders that
fossil fuels would account for between 40% and 50% of the energy
supply in 2050 and beyond. The Bank of England is
currently conducting
an investigation into the potential of a “carbon bubble”
to damage the economy.
A
demonstrator holds a placard calling for institutions across the
country to divest from fossil fuels Photograph: Samuel Hardy /
Alamy/Alamy
Who has divested?
More
than 220 institutions around the world have now committed to some
form of fossil fuel divestment, including pension funds,
foundations, universities, faith organisations and local
authorities.
A
coalition of philanthropic foundations, including the heirs
to the Rockefeller oil fortune, started to pull out their
investments last year, while cities divesting include San Francisco,
Seattle and Oslo. The world’s largest sovereign wealth fund,
Norway’s Government Pension Fund Global (GPFG), recently
revealed it had dropped 114 companies, including tar sands
producers, on climate grounds.
The
Church of England has divested
from the most heavily polluting fossil fuels, while the World
Council of Churches, which represents half a billion Christians
worldwide, has ruled out all fossil fuel investments.
In
October 2014, Glasgow University became the first
in Europe to make the commitment. In the US, Syracuse
University is the largest to divest from coal, oil and gas while
Stanford University is removing its assets from coal companies.
On
23 June, the Lutheran World Federation of churches said
it would divest from fossil fuel companies, which would affect
current and future investments, though it did not yet know the value
of funds that would be divested.
Who has decided against divestment?
A
number of key institutions have explicitly refused to divest from
fossil fuels.
In
May, Swarthmore College in the US, the birthplace of the fossil fuel
divestment movement, made the shock decision not to divest from any
fossil fuels, stating that it would focus its environmental efforts
on changing consumption habits.
In
March, the Guardian launched Keep
it in the Ground, a campaign calling on the world’s biggest
charitable foundations – the Wellcome Trust and the Bill and
Melinda Gates Foundation – to divest. Both institutions have so far
refused to do so. The
Wellcome Trust argue that engagement with fossil fuel
companies is a more effective way to reduce carbon emissions, while
the Gates Foundation have declined to comment.
Mayor
of London Boris Johnson has
recently rejected a call from the London Assembly to divest
City Hall’s pension fund from fossil fuels. He said that
divestment is “a cliff edge” and that the UK needs to rely more
on fracking as an energy source.
UK
environment secretary Liz Truss has refused to encourage the MPs’
pension fund to divest, telling the Guardian: “I believe the right
way [to affect investment] is through carbon reduction targets.”
The
president of Harvard University, Drew Gilpin Faust, has rejected
divestment as “neither warranted or wise”, calling its
endowment “an economic resource, not an instrument to impel social
or political change”. The University of Edinburgh rejected
calls for divestment, saying it would prioritise engagement with
fossil fuel companies.
Is there a difference between divesting from coal, oil and gas?
Opinion
is divided between campaigners and institutions on what level and
type of divestment is necessary.
According
to Liberal Democrat peer Lord Dick Taverne, the Keep it in the Ground
campaign “ignores the need to discriminate between [fossil fuels].
The greatest threat of a dangerous rise in global temperatures comes
from the world’s reliance on burning coal ... In the short or
medium term, the most effective substitute for coal is gas. The US
has recently reduced its carbon emissions more than any other major
country, because it has switched from coal to gas.”
Several
institutions have taken a similar line in their divestment decisions.
Stanford university in the US and the London School of Hygiene and
Tropical Medicine are two that have divested from coal alone, while
the Church of England has specified thermal coal and tar sands oil,
on the basis that these fuels are the most polluting in terms of
carbon emissions.
But
Jamie Henn of 350.org says it
is important that institutions divest from coal, oil and gas: “none
of [these fuels] are compatible with a liveable future. Coal is an
easy target. Most coal industry stocks are so low that if you’re
still holding on to them at this point, you’re either stupid or
just spiteful. Divesting is just good common sense. That said, the
commitments still make a huge impact, since they hasten the
industry’s decline and help push governments to take action.
“Coal
does the most to pollute our climate, but it’s the oil industry
that does the most to corrupt our politics. They’re the major power
players we need to stigmatise in order to make the space for
progress,” he says.
Some,
such as author and activist Naomi Klein, have called for the
plummeting oil and coal price to be used as an opportunity to tackle
climate change and “kick
oil while the price is down.”
What are the arguments against divestment?
Critics
of the fossil fuel divestment movement say that it is hypocritical
because a globalised western society (and the individuals within it)
are dependent on coal, oil and gas for their everyday lives.
Breaking up with fossil
fuels is hard to do – Environmental Policy AllianceOthers, such
as the Financial Times’ John Gapper, say
that the movement should be targeting the companies emitting high
quantities of carbon, rather than the producers alone. He argues that
divestment is only a “grand symbolic gesture” that will not have
a financial impact because others will pick up the shares.
Some,
such as Times columnist Matt Ridley, argue that the movement is
unethical on poverty grounds, because fossil fuels are needed to
build the economies of developing countries. He says it demands that
institutions “prioritise the possibility of the start of net harm
in the time of our great-great-grandchildren over the plight of the
poor today”.
Many
of these arguments are refuted in 10
myths about fossil fuel divestment put to the sword.
We all use fossil fuels – isn’t divestment hypocritical?
Of
course, much of the goods and utilities – from heating to plastics
– that we use in daily life are dependent on fossil fuels. But the
fossil fuel movement will not bankrupt the industry overnight –
and indeed its impact is being felt largely though political means,
not financial. Instead it argues that fossil fuels are driving us
towards catastrophic levels of climate change and that the world
needs to transition to much greater dependence on renewables – and
do so much more quickly.
Consumers
can of course be pro-active and make changes to their own lifestyles,
which is important. Yet it is the producers who have the power to
make the difference that will – or will not – see global
temperatures breach internationally agreed targets to prevent climate
change occurring on a catastrophic and irreversible scale. These
producers are currently committed to business models that will take
us well beyond that.
Won’t the fossil fuel stocks be bought by others?
Yes,
others may buy the stocks, although the amounts being divested are
too small to flood the market and cut share prices, so they won’t
be going cheap.
This
cuts to the heart of the impact of the fossil fuel divestment
movement – which is not to bankrupt the industry financially, but
to do so morally and politically. As research
by Oxford University pointed out, the financial loss of the
divestment campaign – the fastest growing in history – will not
be felt through the shares sold but through the reputation lost by
these companies by being stigmatised.
But
the fossil fuel divestment campaign does not only make a moral
assertion; it makes an economic one. Shares invested in fossil fuel
companies are invested in a business model that is completely
incompatible with international agreements on mitigating climate
change. If governments abide by them, such investments will become
worthless – so pulling them out now makes good financial sense too.
Will organisations that divest lose money?
Not
necessarily – in fact they may even make money. Companies such as
HSBC have warned
clients about the risks of fossil fuel investments. Even though
fossil fuel companies are some of the most lucrative on the planet,
the “stranded assets” argument – that fossil fuel investments
will become worthless if international agreements on climate change
are met – suggests they are several times overvalued.
Coal
prices have dropped significantly in the past few years and the oil
price has also done so more recently. A
recent analysis by MSCI, the world’s leading stock market index
company, indicated that portfolios free of fossil fuel investments
have outperformed those with assets in coal, oil and gas companies
over the last five years.
There
is also ample opportunity for investment in the green
economy. Researchers
predict that renewable energy will become the cheapest
source of electricity in the next decade, with the cost of solar
having fallen by two-thirds between 2008 to 2014, according to the
IEA thinktank.
Won’t divestment mean losing influence with the companies?
Jeremy
Farrar, director of the Wellcome Trust, takes
this view arguing that “all fossil fuel companies are not
equal” and can be influenced by active shareholder engagement. This
is lost if an institution divests.
But
there are few examples of engagement resulting in significant change.
The Wellcome Trust, for example, say that they cannot share any such
results without losing the confidence of those they engage with.
The
one recent example that is often used are the
shareholder resolutions at BP and Shell asking them to test
the extent to which their business models are compatible with
international agreements on climate change. However questions
have been raised about the potential impact of the
resolutions and the extent to which activists collaborated with the
oil giants behind the scenes.
Shareholder
engagement can work – to persuade companies to pay their workers
the living wage or to adopt better recycling practices – but as
campaigner Bill McKibben has pointed out, it is unlikely to persuade
a company to commit to eventually putting itself out of business.
Leading environmentalist Jonathon Porritt spent many years engaging
with such companies but concluded
recently that his efforts had been futile. It’s also worth
noting that some market regulators, such as in the US, do not allow
this kind of engagement.
Is my own money invested in fossil fuels?
Almost certainly. Most of the high street banks, including HSBC, Lloyds, Barclays, Royal Bank of Scotland and Santander, have millions invested in fossil fuel companies. Most investment funds, including the trillion dollar pensions industry, are heavily invested in fossil fuels and do not offer savers a fossil free option, although demand is rising. Responsible investment charity ShareAction can support you to approach your own pension provider, while Move your Money are campaigning for banks to divest.
As
part of the Keep it in the Ground campaign, the Guardian has
partnered with ShareAction to create
an online tool to help you contact the right person at your
pension fund easily. We will then help you decipher the responses.
Ok, I’m
interested in divesting – what does it entail? How long does it
take?
If
you are interested in personally divesting or in putting pressure on
institutions with which you are connected to divest, then see the
previous question. If you are in a position of power in an
organisation that may consider divestment, you should first consult
your investment advisers. It is likely that they will direct you to
the UN’s Principles of
Responsible Investment, which although not insignificant they are
principles alone and do not require any divestment.
A
common first step is to freeze any new fossil fuel investments while
conducting a review, which can often take several months. Different
institutions have defined divestment in different ways, but the
divestment movement asks for the removal of funds from the
top 200 companies globally (100 coal companies and 100 oil
and gas), as defined by the projected carbon emissions of their
reserves.
Once
an institution has committed to divestment, it can remove its direct
investments in these companies – some do so with immediate effect,
others choose to phase them out more gradually over a set time frame.
Next
comes the issue of indirect investments: these are much more
difficult to remove because they are in commingled funds which which
are a blend of assets from different accounts. Managers who offer
fossil-fuel-free options are currently in a minority. Investors can
engage with managers or consultants about carbon risk or switch to
managers who are able and willing to create fossil free accounts.
This takes much longer; a five year time-frame is common.
Other
organisations, such as the university of Sydney and a number of large
pension funds, have gone down the route of decarbonisation. This
means they commit to phasing out carbon emissions from all the
companies in their portfolios rather than exclusively targeting those
in fossil fuels. The UN has also supported a coalition of investors
taking this approach, called the Portfolio
Decarbonisation Coalition
Where can the money divested from fossil fuel stocks be reinvested?
Although
the fossil fuel divestment movement doesn’t stipulate where
investors should move their money to, some institutions and
campaigners have called for a focus on investing in the green
economy. When Syracuse University divested from fossil fuels it also
committed to investment in a number of clean energy solutions,
including solar, biofuels and advance recycling. A number of key
foundations who are part of the Divest-Invest coalition
have taken this approach, including the Rockefeller Brothers Fund and
the Wallace Global Fund.
Ikea
is an example of a multinational that has focused
on investment in renewables rather than divestment from
fossil fuels – it has invested £1.1bn in renewable energy
equipment, and last year met almost half of its global energy demand
by generating its own renewable energy power. Ethical investment
platforms can help with building a positive investment portfolio,
such as Ethex, a
non-profit that works with individual investors, financial advisers
and social businesses to highlight financial viable alternatives to
traditional investments on the stock market.
Which organisations are invested in fossil fuels?
Most
institutions, including universities, faith organisations, local
authorities, pension funds and charitable foundations have endowments
that are almost certainly invested in fossil fuels to some extent.
Campaigners are now challenging these investments on a local,
national and international scale and many have started to
divest. You can find out much more about this through Fossil
Free, the divestment campaign run by 350.org
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