Fossil Fuel Divestment: Some Points of Utility

Over time, we can expect institutions that divest from fossil fuels to face additional pressure, not less pressure, to reduce their electricity consumption from fossil fuels, and to direct their research efforts toward non-fossil energy sources.
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The Financial Times recently weighed in on the issue of fossil fuel divestment, arguing that divestment is "largely irrelevant to the ultimate objective of minimizing the threat of climate change." It's a common argument: that we can be certain that divesting won't affect anything. It's a favorite of industry-funded counterattacks and intransigent universities. The problem is that it's not a good argument. It's not based on reason, and it's not based on evidence.

Now, when we talk about the future, we are reduced to possibility and likelihood. That does not mean, however, that we may throw reason and evidence out the window. On the contrary, we need them more than ever when we attempt to read the tea leaves, and especially so when we try to convince others that our reading is a good one. This is one area where financial professionals, scientists and others who rely on demonstrable evidence can agree: The eye of the beholder can provide a vision of the future, but at the end of the day, the best proof is in the pudding.

When it comes to determining the ultimate effects of the act of divestment and the movement that surrounds it, the proof in the pudding will be a matter for history, probably decades hence. Anyone who claims to know with certainty that divestment won't have any future impact is being dishonest, intentionally or unintentionally. Likewise, the specific knock-on effects of divestment promoted by its supporters cannot be predicted with a high level of exactness. So, we must use reasoned judgment and the evidence available to us so far in determining divestment's potential utility.

Using reasoned judgment alone, there are at least three reasons why we can expect the act of divestment to be useful, perhaps extremely so, for the ultimate objective of minimizing the threat of climate change.

The first reason we can expect divestment to be useful is institutional. We can expect divestment to generate new and additional incentives, rather than countervailing incentives, for institutions to adopt policies designed to minimize the threat of climate change. These incentives derive from a need to remain consistent with a divestment stance once it is adopted, and we can expect these incentives to operate both within and between institutions. Within institutions, divesting from an industry or activity generates ongoing pressure to dissociate further from that industry or activity within the power of the institution to do so.

For example, the fact that Harvard University is divested from tobacco makes it more difficult, not less difficult, to sell cigarettes on its campus.

Over time, we can expect institutions that divest from fossil fuels to face additional pressure, not less pressure, to reduce their electricity consumption from fossil fuels, to direct their research efforts toward non-fossil energy sources, and so on. Divestment can also generate useful incentives between institutions. For example, if Harvard University were to announce an alignment of its investment policies with the 2-degree Celsius global warming goal, resulting in divestment from coal, oil sands, Arctic oil or other resources that are far out of economic alignment with the 2-degree goal, then it is reasonable to expect that other institutions, including governments, will feel more pressure, not less pressure, to align their investment policies with a 2-degree goal, or to enact other, compensatory policies. Thus, we can expect divestment to generate institutional pressure to align policies with climate goals. This is useful for minimizing the threat of climate change.

The second reason we can expect divestment to be useful is social. For climate policies to be sustained for decades into the future, they must have popular support, especially in democracies like the U.S. This means that people must believe that addressing climate change is both urgent and a moral imperative. We can't expect self-interested material cost-benefit analyses to provide the motivation needed, because investments to reduce emissions cost real money today, but they will not have discernible effects on the climate for decades to come. This means that policies of principle that set social norms, like divestment, are important. When an institution divests, it is saying that yes, we could obtain short-term returns from these activities, but that would be wrong, so we won't do it. This is exactly what politicians are being asked to do today and what voters will be required to do for decades to come in order to minimize the threat of climate change.

To enact and sustain policies on climate change, we need these actions of principle to be normalized and to be a part of common values. We can expect divestment, which is a clear and principled action on climate change, to help do that. This effect might be difficult to predict, but it should not be underestimated.

The third reason we can expect divestment to be useful is political. Prolonged and widespread divestment by mainstream institutions can cause the target industry to become politically isolated, which can increase the ease with which governments can enact policies that would disadvantage that industry. Indeed, past successful divestment movements have typically resulted in policy actions made possible by such political isolation. The fossil fuel industry is particularly vulnerable to political isolation, because it operates in an infrastructural market rather than a popular consumer market, so that it is subject to political and policy pressures much more than to direct consumer pressure.

Indeed, the need for policy to lead the market when it comes to fossil fuels -- for example, by reducing subsidies to fossil fuel companies or by pricing carbon emissions -- has long been recognized. However, fossil fuel companies have a clear and recognizable interest in preventing a transition away from fossil fuels. Thus, it is reasonable to expect that the less political influence the fossil fuel industry has, the easier it will be for governments to take effective policy actions on climate change. This means that proponents of carbon pricing and other policy actions should support divestment, because divestment makes such policy actions more likely to succeed. If divestment erodes the political influence of the fossil fuel industry, even to some degree, then it will have been useful for the ultimate objective of minimizing the threat of climate change.

Of course, universities have resisted calls to divest precisely because it generates political isolation of the target, so that divestment is argued to be "political." In practical terms, what is meant by "political" is that those who divest early (and thus push divestment further into the mainstream) might make some enemies in the process. Thus, divestment becomes an issue of priorities: Is it worth it for a university to take some flak in order to increase the effectiveness of policy action on climate?

The answer depends on where one's priorities lie, though shying away from actions that would benefit the common good out of a fear of making enemies seems a cowardly, morally vacuous position to hold (and if this is the logic of our universities, then they probably deserve to take flak). Regardless of one's position, though, it is hard to deny that we can expect divestment to contribute to the political isolation of fossil fuel companies, and thus to the effectiveness of government policy actions on climate change.

Thus, there are at least three reasons why we can expect divestment to be useful: institutional, social and political. Additional points of utility for divestment may also exist. For example, we can expect the coal industry, in particular, to show direct financial vulnerability to mass divestment, because coal stocks are relatively illiquid, and thus mass divestment could materially reduce the stock prices and thus the market capitalizations of coal companies.

In line with this expectation, last year's SEC filing from Peabody Energy, the world's largest private coal company, noted that divestment efforts, along with other related factors such as unfavorable lending policies and increased regulation, was a risk factor that could significantly affect demand for its products or securities (here, on page 29). So multiple clear lines of reasoning exist that indicate that divestment is useful.

Furthermore, the demonstrable evidence available so far also indicates that divestment is useful. For example, NRG recently announced its intention to decarbonize its operations in alignment with the 2-degree C global warming goal, and the company cited the growth of the divestment movement as a contributing factor in its decision. Another example is the time and money that the fossil fuel industry is now spending in attempts to impede the divestment movement, which indicates that the industry considers the divestment movement to be a threat to its interests. Thus, the argument that divesting won't have any affect is contradicted not just by multiple lines of reasoning, but by a growing body of demonstrable evidence.

Now, let's go back to the Financial Times' argument:

A genuine solution to the threat of climate change will require a price on greenhouse gas emissions, greater investment in energy innovation, switching from coal to gas to power generation, cost-effective means of storing carbon dioxide, and a global framework that encourages all the countries of the world to participate.

Few would dispute those goals. The argument goes on to claim, "Divestment helps with none of those."

On the contrary: We can expect divestment to help with all of those, based on multiple lines of reasoning and the growing body of evidence we see before us. This means that divestment is highly relevant to the ultimate objective of minimizing the threat of climate change.

The conclusion? Those who are serious about climate change should base their analyses on reason and evidence, not on rhetoric. And both reason and evidence say that we need to be serious about divestment.

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