Raj Thamotheram: the fossil fuel divestment debate: Is there a consensus way forward?

First in a trilogy of articles examining the growing divestment campaign and where it could lead.

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There is now a vigorous debate about fossil fuel divestment as a strategy for addressing climate change and this heightened attention to the role of fossil fuel companies and their investors is clearly healthy. But in this increasingly heated debate about pros and cons, we observe that protagonists on both sides sometimes miss critical questions, fail to consider contradictory factual data and gloss over important connections. We believe that exploring this grey zone will uncover hidden common ground that could become the basis for coordinated action. Our recommendations will be outlined in the third article but first we need to revisit where the divestment debate is today.

Even those who oppose divestment as a strategy cannot deny the campaigners have some very powerful arguments.
First, in order to limit global warming, the world has to stop using the “dirty carbon” energy reserves – coal, gas, oil and “unconventionals” (e.g. fracked oil) – that we have already found. At this system level, it makes little sense to further invest in companies that are committed to extracting even more greenhouse gas pollutants. Yet as the Carbon Tracker Initiative has documented, “the top 200 oil and gas and mining companies have allocated up to $674bn in the last year for finding and developing more reserves and new ways of extracting them”. Even sceptical economists – like Paul Krugman – are revisiting their position on renewables. (1)

Second, our current generation of decision-makers, opinion-shapers and voters/consumers have been actively duped and dulled into torpor (2), and this is as true of finance as it is of politics. So we have to rely on younger people and there is little doubt that divestment is a motivating rallying call for this age group.(3) Finally, the campaign has picked up support from unusual players including Bevis Longstreth, a well-respected former SEC Commissioner (4) and also has some powerful advocates including Desmond Tutu (5), Bill McKibben (6) and Naomi Klein (7).More generally, and making the analogy with how the AIDS epidemic was tackled, the President of the World Bank has called for a similar coalition of campaigners and experts.(8) The divestment campaign has already had impact on popular debate; more than its supporters hoped for, and certainly more than its critics predicted. For all their good work, existing environmental NGOs have been unable to fire up the public. The divestment campaign has been very successful because it has chosen to “make climate change a deeply moral issue” and reduce the complexity to a simple message: divest! The campaign actively references the anti-apartheid campaign where divestment was also a powerful organising strategy. Given that fossil fuel companies already have a poor reputation, the campaign is on track to create a high profile and media friendly debate with, for example, more than 100 members of the Harvard faculty supporting the divestment call. (9)

Third, it is undoubtedly the case that fossil fuel companies – and the vast majority of their mainstream investors – have adopted, at best, a tokenistic approach to something that seriously threatens human civilisation; and this despite many years of constructive dialogue by scientists, governments and NGOs. In the same way that some argue that the divestment campaign lacks integrity – in that the leaders know it can’t work – the same could be said for (ESG) investors who assert that the current market-led approach is working. The fact that carbon price is actually down to 5 Euros per tonne (10) and that the amount invested in clean energy in the last year was only half of that invested in exploration and mining in fossil fuels in the same period (11) are just two hard indicators of how dysfunctional today’s approach is. More generally, leaving market professionals in charge of how climate change is managed is to accept – inevitably – a strategy of “profiting off disaster”. Given that “the hardest truth about climate change is that it is not equally bad for everyone”, this strategy is almost certain to deliver outcomes which will be unjust, if not dystopian, for many of the world’s “99%”.(12) Fourth, and even though it is not explicitly stated, the strategy of the campaign is to force political and financial leaders to choose whether to

side with fossil fuel companies or the public interest. At a minimum, the goal is to delegitimise the sector and weaken its political influence. It is important for specialists, ESG professionals included, to remember that, to date, decisions have happened in fora with which the public have low or no engagement; discussions dominated by experts representing industry interests (13), closed door meetings between government and corporates (14), stage managed conferences, (15) or perhaps worse: events which turn out to be political fiascos.(16) Unsurprisingly, the public – which is now the only hope for meaningful change – has little interest. In contrast, if companies, investors and above all, governments, knew the public were well informed, concerned and watching, that would clean up the decision-making process. It is undeniable that mainstream investors have recently become noticeably more proactive on climate matters in the last year or so. For example, the thirty largest pension funds in the US recently wrote to fossil fuel companies to challenge them on their evaluation of carbon reserves that could be unburnable. (17) More directly, endowment funds that have been actively targeted by the divestment campaign have given SRI mandates and strengthened their stewardship activities.(18) Thus, campaigners pushing for an “ideal” could result in mainstream investors doing what is “possible”, i.e. a “bad cop/good cop” strategy.
The biggest success of the divestment campaign, as Bill McKibben, the US environmentalist says, is that it has started “to sow uncertainty about the viability of the fossil fuel industry’s business model”. One practical benefit is that this has boosted client demand for contrarian technical expertise (e.g. the Stranded Assets Programme of Oxford University) and educational activity (e.g. webinars by MSCI on the same theme). It has also made it possible for media to cover the climate change story in a new way. This awareness raising is critical because it makes much harder for politicians and regulators to show the kind of “wilful blindness” (19) they displayed in response to the warnings from independent experts about the risks of a financial crisis ahead of the crash in 2008 (20) and which they are still doing on climate change. (21)

The downsides of the divestment strategy

First, whilst it is possible for some enlightened people to vigorously oppose the sin whilst loving the sinner – e.g. as Archbishop Tutu did in apartheid South Africa – campaigning on a moral issue tends towards a narrativeof “baddies” (fossil fuel companies) “victims” (the rest of society) and “heroes” (campaigners). By mobilising those who are most easily moved by such framing, the campaign risks alienating those who are concerned about climate change but have a more systemic view of the challenge: one inconvenient truth is that many sectors (including agriculture, airlines and insurance) are today profiting by ignoring climate change. If the public comes to believe that the answer to climate change is to punish one or two high profile oil and gas companies, and that other sectors don’t have a huge role to play, or that the public itself has no significant responsibility, then this is at best a major missed opportunity and, at worst, a deception. Moreover, the power of fossil fuel companies and the scale of the challenge are such that going into battle in a way which is likely to only mobilise one part of society – however committed and vocal – will turn out to have been a weak strategy. Nearly a decade ago, much hope was raised by climate change campaigns launched by experts/celebrities including Al Gore. After initial success, these initiatives – which were great at stirring pockets of society both for and against change – hit a brick wall. (22)

Second, by linking the case for urgent action on climate change (which is incontrovertible) so closely with the case for divestment (which many credible experts question), there is a serious risk of splitting the movement for change. One specific challenge to widening the divestment campaign is that, unlike religious investors and endowments, pension funds are legally much more constrained to focus on risk-adjusted returns. Another problem is that a blanket divestment campaign “lumps all fossil fuels together with the main focus on [oil], rather than prioritizing the rapid phase out of coal and non-conventional petroleum (mainly tar sands and fracked gas)”, which are much more carbon intensive. (23) (There is an attempt to address this by a so-called “Divestment 2.0” strategy that focuses on particularly ill-judged investment projects by fossil fuel companies, which we will consider in more depth in the second article in this series). (24)

Third, the campaign creates publicity for the carbon bubble hypothesis and this is an ideal topic for quantitative analysts to explore and media to cover since it feeds the trading mindset – it is a new driver for valuations and buy/sell recommendations.
But there are critical issues that the divestment campaign has not focused on and the implicit message, therefore, is that these are secondary factors. For example, there is an urgent need to counteract the perverse subsidies that go to dirty energy companies. It is quite bizarre that the body leading the “campaign” for action on subsidies is not an NGO but rather the International Energy Authority! (25) This organisation was, until a few years ago, widely considered to have been co-opted by the energy industry and this should make their stance on subsidies even more noteworthy to campaigners and investors, but apparently not. Similarly, there is a powerful case to be made that the biggest problem in 2014 is not, per se, the investment in fossil fuels companies but rather the capture of the political process by climate change denialists funded by fossil fuel companies and high-energy users, (26) and supported by ideologically motivated leaders (e.g. News Corporation’s activities in the USA (27) and Australia (28)). This is implicitly acknowledged by many of the more experienced advocates of divestment who argue that, whilst they know divestment won’t happen in the way the grassroots campaigners may think, the process of campaigning will harm the reputation of the oil and gas sector and reduce its political legitimacy. (29) This may be so but what if there were other, more direct and impactful ways, for investors to contribute to the same goal, rather than waste time in an unproductive debate over the divestment tactic? It is noteworthy that in her call to investors to take action about the carbon bubble, Christiana Figueres, the UN’s most senior climate changeofficial, highlighted that “a key first step in support of the UN Secretary-General’s Summit would be for asset owners and managers to request that all companies within their portfolios end the practice of spending shareholder funds on opposing government clean energy policies and action nationally and globally on climate change.” (30) Our underlining highlights the disconnect between what investors are actually prioritizing today and what both experts like Ms Figueres and also public citizens are concerned about. In the 2014 poll of their 35 million members, Avaaz has shown the public’s biggest concern is corporate capture of politics and other forms of bribery, with climate change and income inequality tied closely second. (31)
By making divestment the gold star for investor action, attention is being diverted from actions which are arguably needed right now. More practically, the divestment campaign has no strategy for potentially rewarding the “better” O&G companies (e.g. who do the right thing on lobbying or on energy mix) versus those who are totally part of the problem, and hence there is no possibility of dividing the sector.
To balance the above, it should also be noted that investors who argue against divestment have shown little willingness to engage with policy decision-makers with the publicity and assertiveness required. This calls into question whether these divestment critics are really looking for the best system change strategy or whether they are simply looking for reasons to justify their inaction.

Raj Thamotheram is an independent strategic adviser, CEO of Preventable Surprises and a visiting fellow at the Smith School, Oxford University. Antoine Thalmann provided research support for this article.

In the second article in the series on fossil fuel divestment, we will look at what the impact of the divestment campaign could be.

Footnote links for this article can be found on the following page
h5. Footnotes

1. Paul Krugman
2. See for example
3. 350.org
4. Bevis Longstreth
5. Link
6. Keystone
7. Go fossil free
8. World Bank
9. Harvard
10. Carbon markets
11. Christiana Figueres
12. McKenzie Funk, Windfall: the booming business of global warming, The Penguin Press (2014)
13. Link
14. Link
15. Link
16. Link
17. Ceres
18. See, for example, Middlebury College
19. Link Link
20. Link
21. Al Gore
22. Link
23. Carbon Tracker
24. Fossil fuel subsidies
25. Link
26. Link
27. Link
28. Link
29. Link
30. Avaaz
31. A recent and good example of governments back tracking is over the Financial Transaction Tax, which is clearly good for society but bad for investors who trade.