Workshop background reading: ‘Fossil fuel divestment: Fad, necessity or opportunity?’


President Barack Obama, Commencement Address, UC Irvine, 14 June 2014.

This page carries background reading for our 10 May 2017 workshop – view the invitation here.

Some key investor resources and quotes

Arabella Advisors: Global Divestment Report 2016: ‘On the one-year anniversary of the Paris climate agreement, the value of assets represented by institutions and individuals committing to some sort of divestment from fossil fuel companies has reached $5 trillion. To date, 688 institutions and 58,399 individuals across 76 countries have committed to divest from fossil fuel companies, doubling the value of assets represented in the last 15 months. Pension funds and insurance companies now represent the largest sectors committing to divestment, reflecting increased financial and fiduciary risks of holding fossil fuels in a world committed to stay below 2° Celsius warming.’

ET Index Research SWIX Fossil Free Low Carbon Index Series: This backcast research by ET Index Research shows the improved returns that might have been enjoyed by a JSE SWIX-based fund if decarbonised to 25%, 50% and 75% levels between 2013-17 according to the ET Index Research methodology.

S&P Dow Jones Indices: The Carbon Scorecard: ‘The Carbon Scorecard acts as a barometer for the carbon efficiency of the markets today and demonstrates that there is no single metric that can capture all climate risks and opportunities in a portfolio or index. A range of metrics will offer different perspectives and inform different decisions.
With the range of metrics that is currently available, we are already seeing a significant shift in transparency and changes in the allocation of capital. Decarbonizing portfolios is a growing trend that is helping market participants build resilience against transition risks as we move toward a lower carbon economy.’

Carbon Tracker analysis of SA coal sector (2012): ‘The [SA] government’s Long-Term Mitigation Scenario suggests a ‘required by science’ option which equates to a carbon budget of 16.4GtCO2e from 2010 to 2050 for all sectors, not just coal-based activities. Our calculations indicate that current reserves earmarked for the domestic market are equivalent to 19.2GtCO2e, with 17.7GtCO2e attributable to companies listed on the Johannesburg Stock Exchange (JSX). If coal extraction and use is given a generous carbon budget of 12 GtCO2e, this results in 38.5% of reserves set for domestic use no longer being needed.’

Recommendations of the G20 Task Force on Climate-related Financial Disclosures: ‘Warming of the planet caused by greenhouse gas emissions poses serious risks to the global economy and will have an impact across many economic sectors. But until now, it has been difficult for investors to know which companies are most vulnerable to climate change, which are best prepared, and which are taking action. As the FSB has highlighted, without effective disclosure of these risks, the financial impacts of climate change may not be correctly priced – and as the costs eventually become clearer, the potential for rapid adjustments could have destabilizing effects on markets.’

European Systemic Risk Board report: ‘Too late, too sudden: Transition to a low-carbon economy and systemic risk‘: ‘In an adverse scenario, the transition to a low-carbon economy occurs late and abruptly. Belated awareness about the importance of controlling emissions could result in an abrupt implementation of quantity constraints on the use of carbon-intensive energy sources. The costs of the transition will be correspondingly higher. This adverse scenario could affect systemic risk via three main channels: (i) the macroeconomic impact of sudden changes in energy use; (ii) the revaluation of carbon- intensive assets; and (iii) a rise in the incidence of natural catastrophes.’

Smith School of Enterprise and the Environment: ‘Revolution not evolution: Marginal change and the transformation of the fossil fuel industry’: ‘The orthodox view on energy transitions argues that systemic change will take generations, implying that the energy incumbency has nothing to fear from ongoing changes to energy markets… Marginal change is key. However, what matters for companies and financial markets is marginal change, which is two orders of magnitude smaller than systemic change… In 2015, solar and wind energy sources supplied only 2% of total energy but 33% of marginal energy supply. Non-fossils as a whole supplied 51% of marginal supply. The cost of electricity from solar and wind continues to fall rapidly, challenging fossil fuels in ever more locations. And falling costs drives annual growth of around 20%… Assuming global energy demand growth of 1% and solar and wind supply growth of 20%, fossil fuel demand is likely to peak by 2020… Expect revolution. Once fossil fuel demand starts to fall, incumbent producers will face disruptive change as competition intensifies between fuels, prices fall, and assets become stranded.’

Smith School of Enterprise and the Environment: ‘The state of climate change knowledge among UK and Australian institutional investors’: ‘This research highlights a concerning level of illiteracy around five key climate concepts, with only one third of survey participants comfortable with the idea of a ‘2 degree target’ and only 30% aware of ‘stranded asset risk’. Although there is some understanding that climate change requires a holistic approach, it is still considered a ‘long-term’ issue without proper attention of the more immediate short- and medium-term trends, impacts and implications that investors should be considering in their current portfolio decisions.’

Smith School of Enterprise and the Environment: ‘Stranded assets and the fossil fuel divestment campaign: what does divestment mean for the valuation of fossil fuel assets?’: ‘There are a wide range of current and emerging risks that could result in ‘stranded assets’, where environmentally unsustainable assets suffer from unanticipated or premature write-offs, downward revaluations or are converted to liabilities. These risks are poorly understood and are regularly mispriced, which has resulted in a significant over-exposure to environmentally unsustainable assets throughout our financial and economic systems.’

Financial Analysts Journal: ‘Hedging Climate Risk’: ‘We present a simple dynamic investment strategy that allows long-term passive investors to hedge climate risk without sacrificing financial returns. We illustrate how the tracking error can be virtually eliminated even for a low-carbon index with 50% less carbon footprint than its benchmark. By investing in such a decarbonized index, investors in effect are holding a “free option on carbon.” As long as climate change mitigation actions are pending, the low-carbon index obtains the same return as the benchmark index; but once carbon dioxide emissions are priced, or expected to be priced, the low-carbon index should start to outperform the benchmark.’

Moody’s Investor Service: ‘Oil and Gas Industry Faces Significant Credit Risks from Carbon Transition’: ‘Carbon transition poses significant risks for the oil and gas industry. Under our baseline scenario for considering the credit implications of reducing greenhouse gas emissions, the oil and gas industry faces significant risks compared to the past. We use a baseline scenario consistent with the nationally determined contributions (NDCs) maintained as part of the Paris Agreement that 197 countries had signed as of 23 February.’

Green Alpha Advisors: ‘The Economic case for divesting from fossil fuels’: ‘The fossil fuels industry, big oil, big coal, natural gas, and its allied sectors, including some large financial institutions, will not quietly or willingly retire into the history of ideas whose time has passed. That fossil fuels represent the single greatest systemic risk to our collective economic wellbeing, however obvious to increasing numbers of fiduciaries1, is not a consideration for the industry’s plutocrats. A divestiture campaign to get money out of fossil fuels stocks has emerged, indicating an emerging popular awareness that we must and will transform our energy society into one that can coexist with and even thrive on a finite earth. That a massive global transition away from fossil fuels and towards renewable energies, led by solar, also means that there are and will continue to be competitive investment returns earned from carefully selected investment exposure to the sector.’

The logic of fossil fuel divestment-reinvestment

Climate change is a profound threat to humanity

  • New York Times – ‘Short Answers to Hard Questions About Climate Change’: Longer term, if emissions continue to rise unchecked, the risks are profound. Scientists fear climate effects so severe that they might destabilize governments, produce waves of refugees, precipitate the sixth mass extinction of plants and animals in Earth’s history, and melt the polar ice caps, causing the seas to rise high enough to flood most of the world’s coastal cities. All of this could take hundreds or even thousands of years to play out, conceivably providing a cushion of time for civilization to adjust, but experts cannot rule out abrupt changes, such as a collapse of agriculture, that would throw society into chaos much sooner. Bolder efforts to limit emissions would reduce these risks, or at least slow the effects, but it is already too late to eliminate the risks entirely.
  • Ten global impacts from climate change in 2016
  • Carbon Brief: ‘Analysis: Just four years left of the 1.5C carbon budget’: ‘Four years of current emissions would be enough to blow what’s left of the carbon budget for a good chance of keeping global temperature rise to 1.5C.’

Government actions to curtail climate change remain inadequate.

If fossil fuel companies burn all their reserves of oil, gas and coal, we will far exceed ‘safe’ limits to global warming

  • Carbon Tracker analysis: “Only 20% of the total [global] reserves can be burned unabated, leaving up to 80% of assets technically unburnable… Already in 2011, the world has used over a third of its 50-year carbon budget of 886GtCO2, leaving 565GtCO2. All of the proven reserves owned by private and public companies and governments are equivalent to 2,795 GtCO2. Fossil fuel reserves owned by the top 100 listed coal and top 100 listed oil and gas companies represent total emissions of 745GtCO2. Only 20% of the total reserves can be burned unabated, leaving up to 80% of assets technically unburnable.

But fossil fuel companies continue to block change

Despite this, remarkable change is already sweeping through the global energy sector

While long-term value in the fossil fuel sector appears to be gravely threatened

The international fossil fuel divestment movement continues to grow

Comprehensive list of divestment commitments: Total value of institutions divesting now $5.45 trillion and 719 institutions globally, including Ireland (national strategic investment fund), the Norwegian Sovereign Wealth Fund; the Rockefeller Brothers Fund; the cities of Berlin, Copenhagen, Melbourne, Paris, San Francisco, Seattle, Stockholm, and Sydney.

The fossil fuel sector has a great many negative impacts besides climate change

Frequently asked questions about divestment

Do the Math – the movie that started it all: