The Problem with Divestment

An Energy Transition is what is needed, so we should ask for it

oil rig in beaufort sea
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Bill McKibben wrote an excellent article for Rolling Stone in 2011 on the Carbon Tracker Initiative’s seminal work on the potential for Unburnable Carbon and which we should all be thankful for the attention his article raised.  

If you haven't read Bill's piece, please do, and I was proud to have introduced him to our Carbon Tracker research at the time. 

As a Board Member of the Carbon Tracker Initiative myself, it is great to see our work continue to become accepted, and given recent scientific acceptance of climate change via the IPCC findings, the need for an energy transition through investment decisions couldn’t be clearer.

 

Energy is the largest component of annual carbon emissions which needs to change, especially on the consumption side of the equation. That said, the divestment movement from oil is seriously misguided in my opinion, and needs reconsideration as soon as possible.

Oil use is, after all, systemic. 

Oil is in everything we use from plastic to shipping to enabling the only way to fly overseas. 

Divesting from a few producer companies is a personal choice, and which is fine (I have done that myself), but changing the energy mix to a more sustainable balance is much more challenging and important, as are the complications large investors face especially as concerns fiduciary duty and the use of benchmarks through passive, low-cost indexed investments. 

Fiduciary Duty calls for asset owners such as Pension Funds, Foundations, and Endowments to act prudently and for the best interest of their beneficiaries.

 

Some work has started to go into changing interpretations of Fiduciary Duty to become multi-generational, such as CalPERS construction of Investment Beliefs

However, more work on this is needed for other pools of capital to follow suit and take specific action on the back of specific guidelines such as individual investors who often have limited options in 401(k) plans.

 

It would also be ideal to develop a sense of Systemic Fiduciary Duty, which would come from an understanding that the system is stuck, and some interventions are necessary from, at the same time, a majority of investors, as well as a consensus of global policymakers and corporations to jump start an energy transition with intention.

Amory Lovins and his work on an energy transition is one place to start for scenarios as to how the energy mix can shift over time in this regard (you will see in this previous link that oil use doesn't just quickly disappear), and a capital transition needs to follow suit.

This capital transition is at present hampered by the use of Indexes or Benchmarks. The need for investors to lower costs has led to equity investing that locks in investment in companies that are members of existing indexes such as the S&P 500 and MSCI World.  

As much as 1/3 of all investing is now passive.  

A movement could be fostered to transition passive investments into indexes which evolve over time to match the sort of energy transition that is desperately needed. 

Such a movement makes more sense than a Divestment from Oil campaign. Oil will be around for decades, but we can start moving capital away now and gradually over time.

This would shield investors from below market performance that may well come from reduced oil use, carbon taxes, and cost curve changes that will benefit increasing use of solar, etc. 

The Carbon Tracker Initiative calls for consideration of reducing and eliminating capital expenditure for use by fossil fuel companies that will likely be “Wasted Capital Expenditure.” 

Also, given the very small percentage of oil companies owned by universities (something like 0.1% from my own research), divestment from oil has no potential to change the value of oil companies or the capital they deploy, so why ask for that as a strategy?   

It comes across to many, myself included, as an inauthentic ask, and the ESG industry has long been plagued by over promising and under delivering – it is time for a more realistic, practical approach.

 

Other issues emerge too on the divestment campaign, such as consideration of the developing world’s needs. 

The call for divestment from oil rings hollow in many parts of the world. Not all of the world can be Vermont, someone said recently, and it is important to consider regional perspectives. We should think hard about what is needed in every part of the world for a global energy transition to not cause financial ruin for countries. We can also heed the call of the Climate Bonds Initiative to transition capital through other asset classes.

Also, students have precious little time and energy to spend, and so wouldn’t time be best spent encouraging an energy transition? 

McKibben made clear recently that the Divestment movement from oil was politically minded. Fair enough, but that’s not what the Divestment campaign specifically asks for.

Divestment from Coal did and does make sense. 

The IEA, partly funded by the energy industry, calls for four steps to keep the world within a safe temperature increase, and those are: get off of coal, remove oil subsidies, maximize energy efficiency efforts and reduce the methane emissions from natural gas exploration. All of these steps are reasonable and can be focused on with maximum effort, as can efforts to minimize other forms of carbon pollution such as black carbon. 

What doesn’t make sense is a “divest from oil” campaign. 

It was a poorly considered strategy to a serious problem - oil use will continue at least for a time, and those companies may well transition into other areas or innovate usefully. And who to engage with such companies to do the right thing if everyone just sells? Plenty of other less responsible owners would likely emerge instead.

A rethink is needed, one that gets behind the practical steps needed to facilitate an energy transition to keep us within global safety of the sorts of catastrophes which scientists have predicted to play out over the next generation.  

A campaign such as "Jumpstart the Energy Transition" could be effective, as it is exactly what's needed and there are many points of potential influence to affect.  

Students are energized and that’s great, but they will likely feel jaded if there is no tangible result, however, if they get behind what’s needed in the long term, they can stay involved.  And we should be asking for what we actually need. It’s time to transition our energy and our thinking.