Fossil Fuel Divestment – Part 1: Can it really make a difference?

By Luke Harrington

Fossil fuel divestment is a rapidly expanding idea and shareholders in the fossil fuel industry now face a curious new reality. Everyone knows about the potential power of a positive feedback effect: an action which reinforces the initial direction of change. In terms of the physical response to climate change, we can think of the Arctic - melting ice leads to more exposed ocean, resulting in less sunlight reflection, more heat absorption and hence further ice melt. Fossil fuel divestment can be seen in the same way as our CO₂ emissions were for the Arctic; investors have the ability to start the snowball effect. Though the financial risk to investors may be too low to necessitate divestment in the near term, doing so now will help to actively destabilise future fossil fuel assets, thereby making the concept of divestment more financially attractive for others shareholders later.

Introduction

There is mounting pressure on a wide range of institutions and shareholders in the fossil fuel industry to divest their financial holdings from such companies. The intention is to apply financial pressure on the oil, gas and coal companies to transition away from business-as-usual activity. But can this lobbying of universities and other organisations with investments in the industry actually make a tangible influence on the key players at the top of the game, or will this represent no more than a symbolic gesture against the prospective impacts of fossil fuel-driven climate change?

The notion of divesting from fossil fuels has started to gain traction internationally following a movement led by 350.org founder Bill McKibben – to date, some 63 US institutions (including Stanford University) have committed to divesting stocks, as well as the cities of Seattle and San Francisco … and more recently, Dunedin. Harvard University is one of the institutions that have chosen to reject the notion of divestment. 

Arguments against divestment

In an opinion piece published in Yale 360, Professor Robert N. Stavins, director of the Harvard Environmental Economics Program, explains the stance taken by Harvard’s President, Drew Faust.  Stavins believes that divestment by universities will not have any economic impact on the industry, cannot be considered as anything more than a symbolic gesture, and that any divestment of shares could be easily be re-bought by less concerned investors. He also suggests that time is wasted by lobbying for what will be effectively trivial reductions in the economic status of oil/gas companies, and that this time should instead be focused on research and other specialist roles that universities can provide*.

So given these factors, is there still a place for divestment from fossil fuels to make any considerable difference to our current climate change trajectory? To help answer this question, one can look to see if other divestment campaigns have been successful in the past.

Historical examples of success

Indeed, historical precedents are found in tobacco lobbying campaigns, and the anti-Apartheid movement of the mid-1980s. Consider the latter as an example: there was a grassroots movement in the US led by student protests which spurred widespread divestment, transforming the debate in the US Congress, and eventually leading the government to enact the Comprehensive Anti-Apartheid Act of 1986. Eventually this, combined with pressure from various other international boycotts (such as the Springbok tour protests in New Zealand), helped bring a peaceful transition to democracy in South Africa. It should also be noted that throughout this process, critics argued that the intended impacts of such action would be ineffectual.

A University of Oxford report analysed these previous campaigns and found common properties of how they evolved: divestment action was taken first by religious groups and public organisations; second by universities, cities and public institutions; only then has the wider market conceded to increasingly aggrieved public opinion.  For the anti-Apartheid and tobacco divestment campaigns, this process usually took about a decade. However, the authors suggest that only after two years, the fossil fuel campaign has already reached the second phase.

Why the divestment campaign should (and hopefully will) grow

The motivations for fossil fuel divestment can be financial as well as ideological. In particular, there is the prospect that widespread acknowledgement of the need to stop burning fossil fuels, in order to address climate change, will render capital invested in fossil fuel companies much less valuable. In order to limit overall global warming to within the dangerous 2°C threshold, only an estimated 20-40% of remaining fossil fuel reserves (that is, those which are currently listed as company assets) can be extracted. If restrictions do get brought into play to keep these reserves in the ground, be that as a result of top-down or bottom-up action, the value of the world’s top fossil fuel companies would be consequently slashed by trillions**. Unless governments agree to compensate the companies for their loss of assets, this fall in value will lead to large losses for the remaining investors.  As this prospect makes investment more risky, divestment soon becomes an attractive option for financial reasons. It is also important to note that the effectiveness of this demand for compensation may depend on the degree of prior divestment and the distribution of losses, and hence the public attitudes toward its equity.

At the end of the day, the direct impacts of divestment on the financial state of the fossil fuel industry will, for now at least, be limited. But as the Oxford University report suggests, ‘the outcome of the stigmatisation process, which the fossil fuel divestment campaign has now triggered, poses the most far-reaching threat to fossil fuel companies and the vast energy value chain.’  History shows that the possible ripple effects of such action could be huge, and therefore the divestment movement should absolutely persist.

*I personally find this latter argument to be lacking in substance, as it assumes that the people responsible for lobbying and associated activities will also happen to be the group of active scholars undertaking climate-related research; this is unlikely.

** The Carbon Tracker Initiative is conducting research on the potential for stranded assets in different sectors of the fossil fuel industry.