In 2010 students, activists, and smart investors began to tell a new story about climate change. Their message was simple: not only is it morally reprehensible to keep investing in new fossil fuels, it’s also financially risky. If you don’t watch out, your investment will go up in smoke.
The reason? Sooner or later, all sectors with close ties to fossil fuels will be history. Anyone looking to the future will invest their dollars, euros, and yens in sustainability.
Turns out the Paris Agreement, the 2015 climate pact, is also the most important investment advice of the century.
Together, the tellers of this story make up the divestment movement. Their voices were heard in universities, in hospitals, and in churches. They told their story in the meeting rooms of counties, insurance companies, pension funds, and banks. And they are changing the world.
Their success is unparalleled. By December 2015, when the Paris Agreement was forged, more than 500 organizations had promised to pull their money out of the fossil fuel industry. Their combined invested assets totaled $3.4 trillion. A new summary was published in December 2016: nearly 700 organizations and more than 60,000 private investors – with assets totaling over $5 trillion – have committed to divesting. That’s twice the figure from September 2016, when the tally was $2.6 trillion.
Even investors who are not getting rid of all of their fossil shares are beginning to budge. The Bill and Melinda Gates Foundation, for example, that manages $40 billion, has disposed of 85% of its fossil investments. Just last month, a group of investors headed up by Gates disclosed that they are investing a billion dollars in a new fund for clean energy. Other funds are turning away from oil because the profitability is poor.
The big money is moving from fossil to green, and some of that change can be attributed to the divestment campaign. But where did the divestment movement come from, and why is it so successful? Does the campaign’s central argument hold water? That is, will fossil fuel investments really lose their value? And how can individuals help? (Hint: they’re making it easy for you!) These are some of the questions I try to get to the bottom of in this article.
What can be learned from a blown-up mountain in Appalachia
The year is 2010. A group of students from Swarthmore College, near Philadelphia, travels to West Virginia. They spend their spring and fall breaks finding out more about the consequences of coal mining in Appalachia, where forests are cut down and mountain peaks blown up to extract coal. Shocked at what they see – the destruction of nature, deleterious effects on the health of area residents – the students want to do something. But what influence could they possibly have?
Being students, they have time to think that question over. By mid-October they have a strategy. Their college, they realize, owns stock in coal companies; maybe they can deliver a blow to the coal industry by way of the college. They start a campaign to convince the Board of Managers to sell their fossil fuel shares and to do so publicly. Good for the image of the college, bad for the image of the fossil fuel industry. In the long run, it could help undermine the fossil fuel companies.
“Swarthmore Mountain Justice,” the students call themselves. Their slogan: “Divest from destruction, reinvest in justice.” The money taken out of the fossil fuel industry can then be reinvested in energy sources that don’t make people sick.
The campaign grows quickly. By the spring of 2012 there are divestment campaigns on 50 college campuses. Still young, the movement takes wing thanks to a simple calculation made by financial analysts at the British think tank Carbon Tracker Initiative: how much CO2 would be released if all known oil, gas, and coal reserves were to be burned. This turns out to be nearly 2,800 gigatons – approximately five times the amount of CO2 we could release into the atmosphere and still have a reasonable chance (about 50%) that dangerous warming of the earth could be prevented.
As is often the case with the shocking implications of report numbers: they pack no punch
The implications of the new figures are shocking: The fossil fuel industry is destroying the stable habitat we need to live. But if governments crack down, the bottom will drop out of the business model of the entire sector.
However, as is often the case with the shocking implications of report numbers: they pack no punch. That is, not until 2012, when journalist Bill McKibben covers them in Rolling Stone Magazine. In his piece “The new terrifying math of global warming,” McKibben explains that we must make a choice: either an inhabitable planet, or a profitable fossil fuel industry that burns up all reserves.
Not long afterwards, McKibben begins to get involved with the divestment campaign by way of the organization he had helped found: 350.org (the number refers to the safe limit established for the amount of CO2 in the atmosphere, 350 ppm. Now, at 400 ppm CO2, we have already exceeded this amount).
Since day one, the core of the campaign has been to stigmatize the fossil fuel sector. The students and McKibben turned investing in fossil fuels into a moral issue, just as earlier divestment campaigns against the tobacco industry and apartheid in South Africa had done. They did not claim that pulling some university funds out of the fossil fuel industry would bring an end to the age of fossil fuels. Yet the campaign’s symbolic victory would indeed have consequences, even if only because the campaign itself was a handy vehicle for telling, again and again, the same story: What the fossil fuel industry is doing to the earth is both risky and unjust.
It is a story that has become so familiar that it now seems self-evident.
350 is winning
Paris, 2 December 2015. The climate summit is in full swing. In a room in the Media Center, 350 has organized a press conference. “The logic of the divestment movement is quite simple,” explains May Boeve. “If it’s wrong to cause climate change, it’s wrong to profit from climate change.”
Boeve has blond hair and a round face. She speaks rapidly of rapid developments. Though she has only recently turned thirty, she is already the executive director of 350, which has grown into an international organization with a network of employees and volunteers in more than 180 countries. The press conference has been called in order to announce the divestment campaign’s new record: more than 500 institutions have now promised to pull their money out of the fossil fuel industry, making their portfolios “fossil free,” Boeve reports. Together these invested assets total $3.4 trillion. This is up from the count in September 2015, $2.6 trillion, now that the world’s largest insurance company (Allianz) has pledged to come aboard and further increase the tally. Dozens of universities, pension funds, local governments, asset managers, and health care organizations have vowed to go “fossil free.”
When Boeve is finished speaking – including calling the fossil fuel sector a rogue industry that threatens our future – she gives the floor to Stephen Heintz, president of the Rockefeller Brothers Fund that manages 811 million dollars. Heintz, dressed in a smart suit, has gray hair and the air of a businessman. His words are no less alarming than those of Boeve. “We have to bring the entire fossil fuel period to an end in the next 20 to 30 years,” he says. “And we have to take every step we can as urgently as possible to do so.”
In September 2014, the Rockefeller Fund was one of the first big investors to decide to go fossil free. Ironically so, since the Fund manages the fortune that John D. Rockefeller earned in the oil industry. Heintz sees no contradiction. He repeats in Paris what he’s said for years: if tycoon John D. Rockefeller were alive today, he would seek his fortune in clean energy, not in destructive fossil fuels.
The press conference is illustrative of the divestment campaign’s victory march. While climate change is horrible and threatening, 350 is young, full of life, and winning with a story so perfectly clear that it’s difficult not to agree with it. Leonardo DiCaprio, Natalie Portman, Thomas Piketty, and Naomi Klein support the campaign.
Of course, the climate movement is incredibly diverse, and employs all kinds of strategies to reach its goals. But 350 has translated the demand for climate justice and the struggle for a livable earth into the ready-to-consume terminology of the modern market economy. That has made divestment by far the most successful climate campaign at present, and 350 one of the most effective organizations. Currently, 350 is involved in every serious climate protest; the organization’s arguments have reached the mainstream.
But do the arguments for divesting hold water?
Not everyone believes in divestment, and not every divestment campaign is a success. One example is the campaign begun by students at Swarthmore, which is still going on, four years later. The chair of the Board of Managers does not believe that stigmatizing fossil fuels leads to reductions in CO2 emissions, believing instead that it would be more effective to reduce the university’s carbon footprint (not that the two are mutually exclusive by the way). Moreover, he maintains, by pulling out invested funds, the university would miss out financially.
Is that true? Are fossil fuels still lucrative for investors? Is the divestment campaign more than just a good megaphone for the climate movement? Does it have additional, material consequences for the industry it is attacking, and thus for the transition to sustainability and the reduction of CO2 emissions?
In order to evaluate these issues we must look at the financial logic behind the campaign. The leading concept behind divestment is the “carbon bubble.” According to this concept, if the world undertakes radical climate action, the fossil fuel reserves, and with them the fossil fuel companies, will suddenly lose all of their value.
The Paris Accord, it would follow, could send investors into shock as they realize that the fossil fuel economy is past its prime. If investors take action en masse, the carbon bubble will burst, causing billions in losses for fossil fuel companies and their investors.
But is this not an oversimplification? “The carbon bubble is a myth,” wrote climate economist Richard Tol last year in a critical piece in the Dutch newspaper Trouw. He points out that oil companies earn their money not by owning reserves, but by exploiting them. And the companies can go on exploiting them for the coming decades in any case, since demand for their product will not disappear overnight. Since the market value of these reserves is “determined by the profits expected in the next few years,” it remains secure. “Empty talk of a carbon bubble might be popular among the general public,” Tol wrote, “but it erodes the credibility of the environmental movement.”
There is a disconnect between what the world has agreed upon in Paris and how fossil fuel energy companies see the future
Tol is not the only one to see it that way. The market value of fossil fuel companies is based on proved fossil fuel reserves, say the authors of the report Deflating the Carbon Bubble. They maintain that most reserves – 90% – will be monetized in the next 10 to 15 years, and that during that period the fossil fuel industry should be “secure.” “It is unlikely that new policy will be adopted so quickly that investors would not have time to react,” one of the authors of the report told the Dutch newspaper Het Financiele Dagblad.
The oil and gas industry also downplays the risk (which of course is not surprising, but that does not necessarily render its arguments meaningless). Shell is counting on “a growing population, increasing welfare, and a growing demand for energy,” the company wrote in a 2015 letter to investors. “A fundamental transition of the energy system is needed,” the oil giant believes, but that will take much longer than what the divestment movement tells the public. Oil company ExxonMobil had already communicated to its stockholders that it does not believe its reserves would remain untouched under stricter government climate policy.
The Kodak Moment of the fossil fuel industry
The various remarks and actions of fossil fuel companies make for a strange disparity. Oil giant BP has already declared that not all the oil on our planet can be used, and the director of Shell believes that, later this century, solar energy will be the “backbone” of the energy supply – or of the electricity supply, at any rate. “We, as a major oil and gas company, are clearly at risk,” said Patrick Pouyanne, CEO of oil company Total, in Paris. But when you look at how they conduct their daily business, you see that oil and gas companies are actually saying that they cannot imagine a world without fossil fuels. They just keep drilling and slurping and burning.
There is a fundamental disconnect between what the world has agreed in Paris and how fossil fuel companies see the future. The growing demand for oil and gas cannot be rhymed with a world trying to reduce emissions to zero in the second half of the century. If all countries keep their word and limit warming to 2°C, then – according to a 2015 report from the Carbon Tracker Initiative – no new coal mines will be needed, and the demand for oil and gas will peak much sooner than the sector now believes. Consequently, fossil fuel companies risk spending $2.2 trillion in the next ten years on projects which the new climate change target and advances in green technology will render both unnecessary and unprofitable.
Call that a “bubble” or call it destruction of stockholder capital – it’s basically the same thing: throwing away money in fossil fuel projects that we no longer want. No wonder we hear analogies to Kodak, the company that saw the end of analog photography coming but did not invest in digital photography in time because rolls of film were pretty profitable as long as they, um...still existed.
Fossil fuel energy is becoming less and less appealing...
This story – what the divestment movement has been telling ever since the first Carbon Tracker report – is gradually becoming generally accepted. In September 2015, Bank of England president Mark Carney issued a warning during a widely debated speech: that losses in the fossil fuel industry “may be huge.” The World Bank and the G20 have issued statements about the risk. A few months later, the president of the Dutch Central Bank, Klaas Knot, also said that there “is such a thing as a carbon bubble.” According to Knot, too much has been invested in the development, transport, storage, and burning of fossil fuels, and there is a genuine risk that many assets will have to be written off.
Actually, those write-offs are already in progress. Until now, most concern the most polluting form of energy on Earth: coal. Companies dependent on coal – energy suppliers and mining companies – have already made a dramatic nosedive on the market. Big financial institutions such as ING and mining giant Anglo American are declaring that they no longer wish to invest in coal. Australian mining firms BHP and Rio Tinto are reducing their coal sector interests at the same time as analysts are warning that the dirtiest coal power plants in the world are an investment liability. A full two-thirds of all mining companies in the coal sector are producing at a loss. This is why the financial sector and the big asset managers have already begun to pull their trillions out of this sector.
No matter what Donald Trump says, coal is not coming back.
And it won’t stop there. It is becoming ever more apparent that investors and businesses are taking the first steps to pulling a lot more money out of the fossil fuel industry. They start by trying to get a better sense of where the “carbon risks” are in their investment portfolios. In December the former mayor of New York, Michael Bloomberg, presented a new report on climate risks for investors. For the past year he has headed a Financial Stability Board task force whose objective was to investigate the financial stability risks inherent to climate change. He called upon businesses to identify much more clearly the extent to which their investments are consistent with the goals agreed upon in Paris.
Shell has already been put under pressure from shareholders to report, starting in 2016, on the consequences of climate change for the company’s profits. In addition, just before the Paris summit it was made known that a coalition of eleven financial institutions from the Netherlands, including ABN AMRO bank and the pension fund APG, are to collaborate on the development of measurements for estimating the impact of climate action on investments. These are all steps that necessarily precede a shift of capital from fossil to clean fuels.
All the big players are on this. “Over time,” said Mark Campanale of the Carbon Tracker Initiative, “Climate risk management will likely become an obligation.”
... and there are more and more profits in sustainable energy
The incipient shift in the financial sector is driven by a new reality: that green energy projects are becoming ever more profitable.
In November 2015, the think tank Corporate Knights, in cooperation with 350, released an analysis showing that the fourteen largest asset managers on Earth – including ABP in the Netherlands and the Gates Foundation – would have earned 22 billion dollars more if, three years ago, they had replaced their oil, coal, and gas industry stocks with greener investments. In the past year and a half, British public pension funds have lost nearly 1 billion dollars from the downturn of coal, according to another analysis.
In the long run there can be no doubt at all that “green” is more profitable than “fossil:” whereas sustainable technology is getting less expensive, the extraction of fossil fuels is becoming more costly. One example is oil extraction at sea and from tar sands, which requires enormous amounts of energy and capital. In November, when Shell director Ben van Beurden remarked before investors that there is just no money to be earned with solar energy, he was jeered.
Is this thanks to the divestment movement? To some extent. There are many explanations for the movement in the energy market and the blows to the coal industry and others. The emergence of shale gas in the US is one of those explanations. Asset managers react to it, under the influence of risk analyses. However, they can feel 350 breathing down their necks, as the most visible exponent of a much larger, worldwide social movement for climate justice.
Why the divestment campaign is so successful
In the Netherlands, for example, 350 activists put increased pressure on the pension fund ABP to dump fossil fuel interests. Thanks to the campaign, the mayors of The Hague and Amsterdam have called for ABP to put an end to investing in fossil fuels.
A documentary on a Dutch television program called Tegenlicht clearly shows how the pension fund is forced to react to the campaign. The divestment campaigns against the city council of Oslo, against universiteiten in Great Britain, against the Norwegian oil funds, have been resounding successes – and have received wide press coverage.
That is exactly why the campaign is working so well: it is applicable everywhere. Does a museum have a sponsorship agreement with oil companies? The fossil-free activists will take action. Is a Dutch insurer involved in investments in Polish brown coal mining? Action. Are the ING, ABN Amro, and other banking giants in on a controversial pipeline in North Dakota? Action.
My conclusion? The direct impact of the divestment movement is underestimated. By now it is evident that stigmatization of the sector has a direct impact. The reason is simple: image matters. When a business or sector – such as the coal industry – finds that their license to operate is in jeopardy, borrowing money becomes more expensive, and governments find it easier to subject the sector to tough regulation. A 2015 report from Cambridge University reveals that perceptions of the fossil fuel industry and of climate change are already influencing the performance of businesses.
It also states that the fossils fuel industry entails risks that even forward-looking investors cannot completely avoid. (In financial jargon: the risks are “unhedgeable”).
The most explicit investment advice of the century
What are the limits of this movement? In order to have real impact, not only fossil fuel companies in private hands must be dealt with; governments that run the biggest public fossil fuel enterprises on Earth (such as Saudi Aramco, Gazprom, Sinopec, and Petrobras) and that award hundreds of billions of subsidies to the fossil fuel sector (the twenty richest countries subsidize fossil fuel production with $452 billion a year) must be taken on. How can the divestment movement influence countries like Russia, Saudi Arabia, China, and India, that rely heavily on oil, coal, and gas for their energy and their income?
During the 2015 summit in Paris, I asked Heintz, president of the Rockefeller Brothers Fund, about this. He believes the divestment movement already has an impact on these countries. “The fact that the divestment movement has grown so quickly is a very clear signal to the private sector, to the community of investors, to governments, and other asset managers.” Countries like South Africa and Russia are now also starting to invest in sustainable energy supply, Heintz says, because they realize that they must “diversify their energy portfolio. Are [these countries] moving fast enough? No, but they are moving. And that’s why we have to keep up the pressure.”
Opposing fossil fuels isn’t radical. The radical stance would be to keep using them
The Paris Agreement puts the pressure on, as does the decreasing cost of sustainable energy. In the Tegenlicht documentary, German investor Jochen Wermuth leaves little room for doubt: “If your macro-economic vision is that we have come to a point where sustainable energy is less expensive than fossil fuels, without subsidies, then you get a macro-economic worldview that says: Brazil goes bankrupt, Russia goes bankrupt, Indonesia goes bankrupt, Saudi Arabia goes bankrupt and everyone else who depends on fossil fuels goes bankrupt. Individual oil companies will see their value collapse.”
In the years to come, 350 will be focusing more on the subsidies for fossil energy, Boeve told me in Paris. That is “divestment at the national level.” The subsidies are “a way to support the industry and to seek direct financial gains,” which just has to stop, says Boeve. The subsidies must be discontinued very carefully though, especially in the developing countries. “However, the fact remains that the industry does not serve the interests of the populace. This campaign is designed to spotlight that fact. And while we do that, we hope to create political space. The amount of attention [divestment] is getting is an indication that it’s working. This campaign has changed the discussion.”
Indeed. A strong Paris Agreement required making it clear that opposing the endless extraction of fossil fuels isn’t radical. With all the knowledge we now have about the climate problem, the radical stance would be to go on using them. The divestment movement has told that story over and over in recent years. Stigmatizing the fossil fuel industry was not a goal in itself – to me, that would not be defensible – but was rather a means to create extra political space. That space was put to use last year to forge a stronger Paris Agreement. And subsequently the Agreement itself has provided a new incentive for the tremendous shift of capital from fossil to green energy. That’s how change works.
Everyone can strengthen this movement
I had promised to answer one more question – perhaps the most important one. How can you support this campaign?
By making your voice heard. That’s the simple answer. The global Go Fossil Free campaign plays a facilitating role. You can call upon your own pension fund to invest in keeping with the goals of the Paris Agreement. It’s easy, and it works; there’s now evidence to back that up. Take a few minutes to do it.
Don’t have a pension plan but want to make yourself heard? Then call upon your local government, your bank, or your university to confine itself to investing in sustainability. Right now this is a snowball rolling down a mountainside. It keeps growing, and grows faster, with every single nudge.
—Translated from Dutch by Diane Schaap