Divestment

Tanya Jones argues that the time has well and truly come to stop investing in fossil fuels – and not just for environmental reasons. 

Exploratory drilling for oil in Woodburn, 2016

In an increasingly polarised and intransigent political atmosphere, locally, nationally and globally, it’s worth celebrating a campaign that uniquely speaks to left and right, unionist and nationalist, conservative and liberal, Brexiteer and Remainer.  Encompassing values of common sense, fairness, rationality, responsibility, compassion and hope, the fossil fuel divestment (sometimes described as disinvestment) movement is an opportunity both to shape the future for the better and to respond to the transformation which is already being made.

Simply summarised, divestment in this context is the process of ceasing to invest in the extraction, sale and burning of fossil fuels, and of encouraging those who invest on behalf of others to do the same.

There are two major reasons to divest, reasons that are interrelated but also independent.  Most people in the divestment movement recognise both, and both impel us to urgent action.  But either path can be taken,  disregarding the other, and the destination will be the same.

The first reason is that fossil fuels aren’t a good investment.

Good (gud) adj. 1. Right, sound, reliable, efficient…

The 2015 Paris Agreement requires governments to ensure that the global temperature rise (from pre-industrial levels) is kept well below two degrees centigrade, with an aim of keeping it to 1.5.  In order for this to be achieved, we need net greenhouse gas emissions of zero by the year 2050.

Such an outcome is simply incompatible with a continuation of ‘business as usual’ by the fossil fuel companies. In order to meet the obligations of the Paris Agreement, over 75 percent of fossil fuel reserves need to be kept in the ground.  But the sector’s business models are based upon assumptions which would create a temperature rise of at least three degrees, while ongoing oil production, if continued, would be compatible with a horrific eight degree rise.

Something has to give, either the profitability of fossil fuel companies, or the hope of maintaining a habitable world, and the commitments of the world’s governments to achieving it.  As government, industry, civil society and individuals take action against the sector, its assets will become stranded and ultimately useless.  That action is already happening, in legislation, regulation, business preference for clean technology and the increasing numbers of legal cases taken against fossil fuel companies, in relation both to the damage caused by climate change and to the companies’ misleading of investors.

Mark Carney, governor of the Bank of England, highlighted the economic risks to fossil fuel companies in a 2015 speech to the Lloyds of London insurers.  He spoke of the ‘tragedy of the horizon’, saying ‘While there is still time to act, the window of opportunity is finite and shrinking.’ Meanwhile within the past month it has been reported that oil companies are maintaining their dividends by increasing debt and that 89 percent of fund managers expect oil company valuations to fall as a result of energy transition issues.

Those who make investment decisions on behalf of others owe a fiduciary duty towards them.  In the case of pension fund trustees this duty is further enshrined in Article 18(1) of the EU Directive 2003/4/EC, which requires that assets be invested in the best interests of members and beneficiaries.

There has been a common misconception that trustees should not take ESG (environmental, social and governance) factors into account when making investment decisions.  It has now been authoritatively shown that this is incorrect.  Where ESG factors are financially material, they can (and arguably should) always be taken into consideration. If there are no such financial effects, these factors may still be considered by decision-makers where the scheme members share the concern and the divestment doesn’t involve a serious risk of financial detriment.

Trustees have a further duty to treat beneficiaries and groups of beneficiaries equally, including those of different generations.  This requirement of inter-generational equity makes it imperative not simply to seek short-term high dividends, benefiting current pensioners only, at the cost of future retirees.

Delaying divestment decisions can also be a breach of fiduciary duty, as devaluations can be much more sudden than expected.  A small drop in demand can create a large drop in prices, as was shown in 2016 when a two per cent fall in demand for coal led to the bankruptcy of several companies.  And once a new technology reaches a ten per cent market share, its rise to achieve a 100 percent share can be very quick indeed.  Fossil fuel companies have consistently underestimated the growth of clean technologies, and renewable energy is now cheaper than fossil fuels in most countries of the world.

Divestment is therefore, from the most conservative and financially prudent viewpoint, a necessity if funds are to maintain their value and provide a reliable return for this and the next generation of beneficiaries.

The second reason is that fossil fuels aren’t a good investment.

Good (gud) adj. 2. Kind, wholesome, salutary, morally excellent…

We know that the actions of coal, oil and gas companies are fueling catastrophic climate change, which is already causing hunger, sickness, homelessness and conflict, affecting the most vulnerable and least complicit of the world’s people.  Over four-fifths of the UK’s human-induced greenhouse gas emissions come from burning fossil fuels, and, as we have seen, the sector’s business models are based upon climate disaster.

Whether or not government, industry and civil society act effectively to curb the destructiveness of  fossil fuel companies (and they cannot afford not to), many of us feel that we have a personal responsibility to speak and to act.  Anyone who looks honestly at global poverty will recognise the centrality of climate justice; the principle that those who have done least to cause disruptive climate change should not be called upon to bear its terrible effects.  Anyone who, with or without religious faith, acknowledges that humans have exercised a pernicious dominion over the natural world, will want to transform that tyranny into a positive stewardship.  And anyone who looks with clarity at the future for today’s children will want to make that future one of health, peace and wellbeing.

For those of us who hold a vision of a world characterised by compassion and justice, one where people live lightly but well upon the earth, financial decisions must be a part of the journey we take.  The example of divestment from the South African apartheid regime showed how ethical investment policies can be both a powerful symbol of solidarity and compassion and also a significant driver of political and economic change.

It’s sometimes suggested that ‘engagement’, that is, retaining shares in fossil fuel companies in order to try to influence corporate decisions, is a better model than divestment.  Engagement can indeed be a useful tool in nudging organisations in the right direction, notably in the case of the Living Wage campaign.  But it has to be effective: engagement that doesn’t have adequate goals and clear deadlines is little more than a futile gesture.  The only adequate decarbonisation goal in respect of a fossil fuel company would be to persuade it to give up its core business altogether: scarcely a practical use of limited resources.  By contrast, engagement with sectors such as power utilities and transport has immense potential, leading to significant changes in the fossil fuel/clean technology balance without changing the core purpose of the company.

Over eight hundred institutions, with assets of over six trillion dollars, have already divested from fossil fuels, or are in the process of doing so.  They include New York City, the Rockefeller Brothers, the Church of Sweden, Trinity College Dublin, the Woodland Trust and the Catholic charity Caritas.  Reinvestment has been in a range of positive investments, from local projects to large scale funds. Case studies suggest that institutions that have divested are doing well, both financially and in terms of their cohesion and relationships, well-placed to face the future.

Here in Northern Ireland,  Fossil Free NI  is calling upon the Local Government Pension Scheme to divest from fossil fuels.  It is a campaign which, focusing on councils, is able to flourish despite the absence of an Executive and functioning Assembly, bringing a real potential for positive co-operation against the backdrop of division and uncertainty.   For now, and for the future, it may well be our very best hope.

Tanya Jones

5 May 2018