Divesting from fossil fuels – a wind of change in the energy sector

Climate change is already a major issue for fossil fuel companies, but investors are turning up the heat – wanting to know if these companies are serious about changing their business strategies. If not, they will vote with their feet – and that’s where divestment comes in.

What is divestment?

Bill McKibben, pioneer of the fossil fuel divestment movement, writes in the Huffington Post:

“The math has worked its way to the very top: everyone from the World Bank to Deutsche Bank now talks about the need to leave oil in the soil and coal in the hole.”

Historically divestment has often been a moral and ethical issue. Investors have taken measures to disassociate themselves from unpalatable practices, such as breaking links to South African fruit companies during the apartheid era or ending sponsorship of tobacco, gambling and alcohol companies in sport.

But in the last decade we have seen divestment extend to companies and activities that contribute to climate change. Starting primarily as a protest campaign among green activists at US universities in the early 2010s, it built upon mainstream environmental concerns to get out of oil, coal and gas.

Change is afoot

According to the recently released Global Climate 500 Index report by the Asset Owners Disclosure Project, several of the world’s biggest investment houses are reacting to concerns over climate change.

The trends are increasingly clear:

• Divestment is no longer just an issue of ethics
• It is now one of future planning for businesses in the energy industry
• Fossil fuel companies need to change or they will become obsolete
• These companies cannot pretend old practices can go on without facing catastrophic consequences for both them and the planet
• A more savvy generation of investors seeks assurances over what energy firms are doing
• More information is being demanded, fossil fuel companies are under pressure to disclose more

Follow the money – the financial geography of the industry

We know the fossil fuel industry is huge, encompassing 600 institutions across 76 countries, representing $5 trillion in assets, according to Maik Gunther from the Heinrich-Böll-Foundation. And for many investors, exposure to the industry may often be hidden or unknown.

To put it bluntly, an employee may have no idea that their pension contributions are re-invested through several channels into large fossil fuel companies in order to secure a return for the entire fund. Many individual investors simply do not know about the coal companies they are supporting.

Crude tactics – how a green movement fueled boardroom rebellions

Since the divestment movement mobilized, things in the energy sector have altered at a rapid pace. Bloomberg reported in April that Exxon Mobile faced a potential revolt as several shareholders – including Aviva Investors, Schroders, the California Public Employees’ Retirement System and The Church of England’s investment fund – called for more transparency in the oil giant’s plans, or lack thereof, to battle climate change.

An even more dramatic situation is unfolding at Occidental Petroleum, where shareholders actually overturned a decision by the Board to ensure the oil and gas multinational now has to report on the impact of its business activities on climate change. “The first time this type of proposal has passed over a Board’s objection”, according to the Bloomberg Intelligence Analyst, Gregory Elders.

The latest data suggest investment funds committed to divestment from fossil fuel assets jumped to $5.2 trillion, doubling in just over 12 months, according to a December 2016 report by Arabella Advisors, entitled The Global Fossil Fuel Divestment and Clean Energy Investment Movement.

As the divestment movement gathers momentum so does the impetus for change both from activists and shareholders, and from within energy companies. For example, Germany’s E.ON announced that it was divesting all its fossil fuel-related assets into a single identifiable entity, Uniper, allowing investors to know which arm of the company they would be financing. That’s a brave step.

Don’t stay in the dark – how to discover more about fossil fuel divestment

It is really important to know what is in your investment portfolio and how exposed you are to the fossil fuel industry. Take a look at our guide to getting started on this, Your Responsible Investment Roadmap.

As well as non-profits dedicated to making companies more accountable over divestment, such as 350.org , there are campaigns and groups listing companies and institutions that have made divestment pledges. Go Fossil Free is a great source of detailed information, as is DivestInvest and the AOD Project.

On top of which, a host of academic institutions like Johns Hopkins University provide material for discussion and debate, while both business titles like the Wall Street Journal  and mainstream media like The Guardian have amped up their coverage on these issues – both at a local and international level.