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Markets & Geopolitics

Fossil fuel divestment – part 1: The ethical case for divestment

Once little more than a passion project for the most committed climate activists, fossil fuel divestment has, in recent years, crossed over into mainstream consciousness. Campaigners believe the movement will be crucial to realising net zero ambitions. But, with extraction remaining a state-led enterprise across much of the oil producing world, have they overestimated the influence of private investors?

Kay Pitman, World Built Environment Forum
1 September 2021

Why divestment?

Simply put, divestment is the choice taken by private wealth owners to withhold capital from firms. Wealth owners – be they individuals, public pension funds or university endowments – do so by offloading shares, equity and debt held in these companies.

The movement has two foremost objectives. First, it seeks to limit the power and resources available for the exploitation of coal, oil and gas reserves. Estimates show that that these reserves, if burnt, would increase greenhouse gas (GHG) emissions fivefold. This will bring about a rise in global temperatures well above the 1.5-degrees Celsius target set out in the Paris Agreement. Second, it would free up the US$27 trillion in capital needed between now and 2050 to fund the transition to renewable energy.

The fossil fuel universe

Although the main focus of the divestment campaign has been on extractives, the fossil fuel industry is a broad church. It involves a chain of different companies and a variety of products and processes that are heavily interwoven through the global economy. Furthest upstream are the exploration and mining sectors. Then comes the refining process, which involves shipping and transportation industries as well as petrochemicals producers. Downstream from there are the distributers, who take fossil fuels to consumers through transportation, power generation, fertilizers and plastic products, and to energy intensive businesses and industries.

Primary targets of the fossil fuel divestment movement have been the large publicly owned companies: Exxon Mobil, Chevron, Royal Dutch Shell, BP and Total. But, at the extractive level, these firms are only responsible for approximately 10% of the world’s total oil production. The rest comes from nationally owned entities such as Saudi Aramco and China Nation Petroleum. By their nature, state-operated companies are not exposed to coercion from shareholders and cannot be subject to the same kind of divestment pressures.

Famously, Bill Gates has been critical of the movement, questioning its ‘theory of change’ and arguing that divestment will fail to achieve real world reductions in emissions. Sold shares don’t simply disappear and it is fair to assume that anyone buying into fossil fuels has been left unpersuaded by climate-based deterrents. There is, then, a risk that divestment could produce unintended consequences. It also follows that divestment from fossil fuels does not equate to investment in renewables. Share values are not directly comparable across the two categories. Fossil fuels have conventionally offered scale, liquidity, value growth and yields; renewables have yet to demonstrate the same investor attractions.

The primary targets of the fossil fuel divestment movement have been large publicly owned companies. But these firms are only responsible for approximately 10% of the world’s total oil production. The rest comes from nationally owned entities, which are not subject to the same kind of divestment pressures.

There have also been examples of institutions refusing to divest, arguing that shareholder engagement is a more effective tool of change. Shareholder initiatives and activist investor groups such as ClimateAction100+ have achieved some notable wins within the fossil fuel industrial universe. February 2020 saw a resolution requiring Chevron to disclose how its lobbying aligns with the goals set out in the Paris Agreement. Under duress from shareholders, Mizuho Financial Group has committed to cease all funding for coal power plants by 2050. Other firms have continued to hold out. Barclay’s Bank has so far resisted calls to end financing of companies not aligned with global climate goals, despite sustained pressure from a section of its shareholders.

It has been estimated that as much as 80% of coal, 50% of gas and 30% of known oil reserves are ‘unburnable’. To keep global warming within a 2-degrees Celsius limit, the majority of reserves in China, Russia and the US must remain unused. In the Middle East, around 40% of known oil must be left underground; so too most of the region’s shale gas. And the story is similar across swathes of Africa, Central Asia and the Americas. The urge to exploit these vast and untapped reserves will be difficult to resist, especially as the uneven recovery from pandemic recession continues. It remains to be seen whether the divestment campaign is a truly effective curb on temptation.