The Case for Divestment

Posted March 15, 2018

Written by Isaac Serratos


If you had an investment that was losing money while harming the lives of billions in both the present and future, would you keep it?

The decision seems straightforward, but despite increasing consumer awareness and public pressure to push companies toward ethical practices/investments, many corporate shareholders are ambivalent toward the demands of activists. Shareholders are often only attentive to gains and losses in stock prices, or the pullback in support from sponsors. When boardrooms lack the moral conscience to halt harmful practices, it is our duty to become active and promote change by divesting from the institutions continuing those practices.

Divestment, as a form of protest, can change the course of history. Corporate divestment was the movement that finally broke South Africa’s entrenched apartheid government forces after years of public outcry. In the case of the fossil fuel industry, the snail’s pace of global divestment demonstrates corporate complicity in the destruction of the biodiversity of our planet.

The case for fossil fuel divestment does not solely rely on a moral argument based on the damage to future generations — it is also a financially competent strategy to move away from a largely declining or stagnant industry. The largest oil and gas companies in the US, Exxon and Chevron, haven't seen a positive return on their stock prices in five years. Exxon Mobil declined about 15% from March 2013 to 2018, whereas Chevron stock declined 5% in the same period. In contrast, the overall New York Stock Exchange grew nearly 30%.

Nearly every nation in the world has signed onto the 2015 Paris Climate Agreement, therefore implicitly supporting fossil fuel divestment. Only one country — the United States — refuses. The agreement aims to mitigate the effects of global climate change by keeping the global rise in temperature below 2 degrees Celsius by 2100, while aiming for a decrease of 1.5 degrees Celsius (Paris Climate Agreement, 2015). To achieve this, atmospheric carbon dioxide concentrations, which were already over 400 ppm, must be kept below 450 ppm (CIGI, 2016). The combustion of fossil fuels account for more than 80% of global carbon emissions (CIGI, 2016). According to the International Energy Agency’s estimates for reaching the 450 ppm goal, global demand for thermal coal will need to peak this decade, and fall to 10% of world electricity generation over the next 25 years (CIGI, 2016).

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To comply with the 2 degree Celsius limit outlined by the Paris Climate Agreement, much of the world’s global fossil fuel reserves need to remain unburned. According to McGlade and Ekins, of current global reserves: 82% of coal reserves, 49% of gas reserves, and 33% of oil reserves must stay uncombusted (McGlade and Ekins, 2015). As the fossil fuel industry continues to spend billions of shareholder dollars on the exploration of new reserves, the search demonstrates its inability to conform to a changing energy generation outlook (CIGI, 2016). Without switching from fossil fuels to more renewable forms of energy, fossil fuel companies face a poor outlook for growth and overall revenue generation.

Coal, another industry in rapid decline, also faces a serious loss of  investment. Peabody Energy, the world’s largest publicly-traded coal company, lost more than 90% of its value from 2011, until declaring bankruptcy in April 2016 (CIGI, 2016). Coal is being smothered by environmental regulations, increases in fracking, and financial markets that have determined the future of coal as risky. Unless the aforementioned variables are reversed and removed — a seemingly impossible task that would benefit only a few — the coal industry will continue its transformation into an albatross for an investment profile.

Fossil fuels aren’t just risky for corporate investors, either. Many shared investments, such as retirement and pension plans, still cling to these disadvantaged holdings. The fiduciary duty of a retirement plan dictates that the employer must act in the best interest of its workers. Institutions that control the investment plans of employees should invest in companies that show growth or are projected to show growth. In 2014, the crash in coal, oil, and natural gas prices heavily affected the the primary portfolio for Canada’s pension plans. The Ontario Teachers’ Pension Plan is projected to have fallen more than CDN$1.7 billion because of the crash (Lee and Ritchie, 2015).

The steady decline of the fossil fuel industry makes it clear fossil fuels are no longer the future. So, how do consumers and stakeholders of investment plans take action effectively? They can demand action to divest, or directly divest themselves. Divesting acts as a boycott. For example, Wells Fargo provided $120 million in loans to the developers of the Dakota Access pipeline (DAPL), a move that attracted nationwide criticism over the bank’s role in the project (Wayne Thompson, 2017). The Seattle City Council voted to cut ties with Wells Fargo after the current contract with the bank ends in 2018 (Wayne Thompson, 2017). Other cities, such as Los Angeles and Davis in California, later followed suit (Wayne Thompson, 2017).

That’s a huge hit, and it sends a clear message to the banks. Divestment organizers used grassroots efforts to gain attention and gather momentum. Protesters filled city council chambers, spoke at public hearings, and held large demonstrations in front of Wells Fargo branches. The activists also encouraged ordinary citizens to pull their money from Wells Fargo for its role funding DAPL.

Advocates may not have the ability to directly decide the investment profiles of others, but they can make it difficult for organizations to ignore the public pressure for a sustainable economy that values the health and well being of all citizens, current and future. When stakeholders listen and divest from institutions unresponsive to their calls for change, those institutions suffer the consequences. Increasingly, in a society where institutions are viewed as private citizens who need to make their positions on specific issues clear, it is important to be on the correct side of history. When the societal benefits of a weakened fossil fuel industry align with the rapid growth of the renewable energy industry, the next step is clear: Divest from fossil fuels, invest in renewables.

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