Global Divestment Day is being marked around the world on February 13 and 14. Not unexpectedly, a vigorous debate around the merits of divestment has emerged. We believe that this debate is a positive sign, for it demonstrates the wide range of individuals and organizations who are engaged in the conversation.
In any debate, however, it’s important to stick to relevant facts. Throughout the course of February, some flawed but high-profile arguments have surfaced against divestment, most notably those based on Prof. Daniel R. Fischel’s study, Fossil Fuel Divestment: A Costly and Ineffective Investment Strategy. This study, not unlike many arguments against divestment, focuses on potential financial penalties associated with divesting a portfolio of fossil fuel assets. What these arguments fail to take into account is that climate change, now broadly recognized, will likely result in limitations on the use of fossil fuels, with a negative impact on the financial performance of the firms involved in their extraction.
The ignoring of this reality is evident in Fischel’s study. For example, one of the analyses cited in the report looks at performance for a 50-year period (1965-2014). This analysis demonstrates that divestment resulted in a 0.7% yearly decline. The 50-year history upon which Fischel bases his return analysis, however, is one that saw the expansion of the fossil fuel industry, when renewables were a theory, climate change was not on anyone’s radar, and economic growth was fueled by the only available energy sources: coal, oil, and gas. This is, by any reasonable set of criteria, an unreliable time horizon when analyzing contemporary trends in fossil fuels. And his argument outright ignores the notion of the stranding (i.e., unexpected devaluation) of fossil fuel assets caused by responses to climate change – the growth of renewable energy options, the reduction in subsidies, the growth of regulation, the potential arrival of carbon taxes, etc.
Focusing now on the 21st century, a growing amount of data suggests that we are well out of the cycle that Fischel relies on for his report. For example, last year, FFI launched its first index, the Fossil Free Indexes US (FFIUS), based on the S&P 500, with the largest reserves-owning fossil fuel companies removed. As it turned out, our index outperformed the S&P 500 by 1.5% in 2014. And, as a historical analysis of the index shows, its performance was virtually identical to that of the S&P 500 for the ten-year period ending May 30, 2014. Of course, as is always the case, history isn’t necessarily an indicator of the future, and our index may not outperform the S&P 500 every year. However, these results are among the growing indications that the potential cost of ignoring stranded asset risk is substantial.
Concerns over climate change and its practical and financial impact are shared widely, and they are growing. Around the world, individuals and organizations with varying cultural backgrounds, financial profiles, and political interests are turning their attention to deal with what they now know to be the risks linked to the continued reliance on fossil fuels. In the past year, we’ve been witness to:
- The Department of Defense Strategic Sustainability Performance Plan, which refers to climate change as a “threat multiplier.”
- The US-China joint announcement about climate change.
- Examples of stranded assets.
- The creation and ongoing work of the Bloomberg-Paulson-Steyer-led Risky Business initiative.
- The creation of the Montreal Carbon Pledge for institutional investors.
- The attendance of hundreds of thousands at the People’s Climate March in New York.
- the New York Times/Stanford University/Resources for the Future poll about global warming, which shows that the majority of Americans polled, regardless of their political affiliation, are concerned about climate change.
All of these are real-life examples of developments that will likely lead to disruptions for the fossil fuel industry. These potential disruptions have serious negative consequences for fossil fuel investments.
Detractors of divestment argue that there is great risk in divestment. In reality, the opposite is more likely true: there’s great risk in staying the course with fossil fuels. We can and will continue to debate some of these issues, but let’s use reasonable examples to back up our points. And let’s not shirk fiduciary responsibility by ignoring the risks.