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Fossil Fuel Divestment: What will it achieve?

Recently, the fossil fuel divestment movement has appeared frequently in the public domain. It has grown significantly since its introduction as a radical student-driven campaign.  With the support of established organisations and institutions, fossil fuel divestment has grown into a mainstream movement that is demanding the attention and response of individuals, institutions, investment houses, companies and governments across the globe.

by Amy Elliott – Intern

The Logic Behind the Movement

There is global political recognition and agreement that the global temperature rise should not exceed two degrees Celsius, as outlined by the Copenhagen Accord.  This correlates to a finite amount of CO2 that can be emitted into the atmosphere.  There is therefore a finite amount of fossil fuels that can be burned, with its associated CO2 emissions budget, as outlined in the table below by, using data from Carbon Tracker.

So why is this a problem?  The total amount of carbon dioxide in known, proven fossil fuel reserves (including those of public companies and state owned assets) is 2860Gt – this is almost six times more than the budget outlined above and enough to contribute to a catastrophic rise in average global temperatures.  Of these potential emissions from proven reserves, 65% are from coal, 22% from oil and 13% from gas.

It is important to note that in 2010, it was reported that National Oil Companies (NOCs, i.e. those held solely or majorly by the state) controlled over 90% of proven oil & gas reserves.  This is reinforced in the statistic that shows that the potential CO2 emissions of the reserves held by the top 100 publicly-traded oil and gas companies, and the top 100 publicly-traded coal companies are ‘only’ 745Gt: meaning that almost 75% of potential emissions arising from proven reserves are controlled by state organisations.  This reality highlights the challenges facing the divestment movement and whether it can really be successful in limiting emissions by creating a lack of private capital.  It is more likely that the movement will have two-fold results: first, financial protection for those who have divested if and, crucially, when regulations affect the market valuation of such listed companies, and second, to pressure boards and governments to take action on climate change resolution.

The Beginning of the Campaign

The early days of the campaign can be traced back to 2011, when Carbon Tracker, a UK energy think tank focused on informing and advising key bodies about the financial risks associated with climate change, published their first report on the matter – ‘Unburnable Carbon’.  Since then, university groups across the world have begun to adopt fossil fuel divestment as part of their portfolio of measures to tackle climate change.  These groups call for the sale of the university’s holdings in fossil fuel companies, driven by both ethical and financial motives.  Indeed, the parallels between this and the apartheid divestment movement that gained traction in the mid-1980s that contributed to the end of apartheid legislation cannot be ignored.

Who’s Making a Change

The campaign has so far led to changes at Glasgow University, where £18m is going to be withdrawn from fossil fuel companies over the next decade, and most notably Stanford University and its $18bn endowment, who have completely divested from coal.  The movement has also driven debate within Oxford University, SOAS (School of Oriental and African Studies in London), Yale and the nine University of California institutions, to formally address this issue and evaluate their holdings in such companies.  Although impressive, the movement only started gaining widespread attention when institutions such as the World Council of Churches (which is present in over 150 countries and claims 590m people as their members) decided to divest completely from fossil fuels in July 2014.  Most symbolically of all, The Rockefeller Family, whose fortune was created through oil (the family-founded company Standard Oil birthed 33 companies including the likes of Chevron Corporation, Exxon and Mobil) and whose investment portfolio is worth an approximate $860m, decided to begin the divestment process from fossil fuels in September 2014, focusing most immediately on coal and tar sands.  As the movement grew, the Bank of England issued an investigation in late 2014 into the risks associated with the potential of stranded assets in the fossil fuel industry.  Additionally, pledges from pension funds, universities and religious groups doubled in 2014 – bringing the total amount divested from fossil fuels to just above $50bn from 181 institutions and 656 individuals, according to a report by Arabella Advisors.

And Who’s Not

As the divestment movement begins to build traction, there are some who are proactively addressing the risks associated with stranded assets in the fossil fuel industry (as mentioned above).  But there is resistance and most fossil fuel companies have issued statements that reveal that they are taking a reactive approach to the situation.  As an example, the CEO of Australian mining company BHP Billiton, Andrew Mackenzie, has said that BHP is in coal due to the economic benefits and profits available in the sector, but if in the future these are overshadowed by another energy source, then this is where they will focus their efforts.  Although it seems that the German utility firms RWE and E.ON are taking a proactive approach towards climate change in mothballing more than 19,000 megawatts of coal and gas plants over the time of four years, the underlying reasons are economic rather than environmental.  E.ON’s decision to divide their business into a “Green Company” and a “Brown Company” does look like an attempt to start to segment and isolate the different risks and performances of the fossil fuel parts of their business from the renewables segment.

Up until now others have taken a ‘business-as-usual’ approach to the stranded asset risk.  BP for example, claim that unburnable carbon “overstates the potential financial impact” on the value of oil explorers.  Shell and Exxon have both issued statements revealing that they are “confident” that none of their reserves will become stranded, and that rising demand will preserve the value of its assets.  The general sense from International Oil Companies can be summed up by Chevron’s CEO, John Watson, who said “We’re going to be in the fossil fuel business for a long time”.

With the debate now moving quickly, oil and gas companies may now be acknowledging the risks.  In early 2015, both Shell and BP have urged shareholders to support a climate change resolution, which would call for ongoing operational emissions management; asset portfolio resilience to the International Energy Agency’s scenarios; low-carbon energy research, development and investment strategies; relevant strategic key performance indicators and executive incentives; and public policy positions relating to climate change. Small steps in the correct direction; maybe.

As we move into 2015, there is underlying concern about the future of energy, the climate, and how to smooth the transition to a sustainable and secure energy future. Individuals and institutions are raising concerns, partly through a strengthening divestment movement, and, although this may not directly affect NOCs, it is making inroads in pressuring public companies to increase emissions reporting and identify risks from fossil fuel reserves.  Governments, regulators and businesses who failed to identify crises in the past (as painfully demonstrated by the global financial crisis) need to take action to ensure we limit emissions to stay within a 2°C limit, whilst managing an effective energy transition.

The challenge is clear even in the UK, one of the most progressive locations for active climate change legislation in the world.  Here, there has been a recent pre-election cross-party agreement to assure international observers of the UK’s determination to battle climate change regardless of who is successful in the 2015 general election.  Yet, lift the lid slightly and you will find a government who is simultaneously deploying public funds to encourage:

  1. the reduction in emissions, the development of renewable energy systems and CCS projects, as well as
  2. the maximisation of the economic recovery of hydrocarbons from the United Kingdom Continental Shelf and “going all out for shale”.

This dilemma presents the heart of the issue, since producing fossil fuels raises profits and tax revenues.  Very few governments of nations with fossil fuel reserves have grasped the nettle, although some have already stated the encouraging intent to be fossil fuel free in the near future (e.g. Denmark & Scotland).

The campaign for fossil fuel divestment has a major role to play in highlighting the Carbon Bubble issue, but its resolution will require visionary thinking and strong leadership if we hope to avoid an energy driven financial crisis and catastrophic climate change.

Written by Pale Blue Dot Energy

Management Consultants for the Energy Transition, delivering support in three key areas: 1. Carbon Capture and Storage 2. Oil and Gas Transition 3. Emerging Energy Systems

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