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Why divest from fossil fuels?

The ‘boycott and divest’ campaign aimed at the fossil fuel industry has hit the headlines in recent weeks. Prime Minister Scott Morrison has threatened to ban ‘secondary boycotts’ aimed at companies that service the fossil fuel sector.

Two influential voices in the investment sector have also spoken out against fossil fuel divestment. Billionaire philanthropist Bill Gates and Hostplus chief investment officer Sam Sicilia have respectively described the international divestment movement as having ‘zero’ impact and being ‘weak’. Neither of them are climate change deniers – in fact, both are keenly aware of the perilous state of the climate emergency.

Their argument about divestment is a trivial one. Small-scale divestment might only result in shares changing hands, but if there are enough sellers there will inevitably be a financial impact in the form of a lower share price and a higher cost of capital.

Why investor divestment will work

That said, the debate about the short-term impact of divestment misses the point. It is hugely important to understand why the shares are changing hands.

The current fossil fuel divestment campaign, which has to date secured US$11 trillion worth of divestment commitments including €300 million from the entire Government of Ireland, echoes a similar campaign against the South African apartheid regime in the 1980s. The anti-apartheid movement called upon US colleges and universities to divest from South African companies as well as any company with South African interests. The campaign reached its peak in August 1988 when 155 institutions had agreed to divest. This movement, along with international sanctions and consumer boycotts, is credited with hastening the end of apartheid in 1991. The widespread television coverage generated by the ‘divest and boycott’ movement played a pivotal role in generating the critical mass needed to abolish the apartheid legislation. The investors who refused to support the apartheid regime with their capital were effectively denying a social licence to companies benefiting from institutionalised racism.

In 2019, the fossil fuel divestment movement is making it clear to companies who extract coal, oil or gas from the ground that they do so without a social licence. The release of harmful greenhouse gases into the atmosphere via the burning of these fossil fuels is threatening to destabilise life on this planet.

Climate change constantly ranks as the number one issue for our members and as such we have a duty to advocate for immediate action to address it. And we will continue to do so despite efforts by the government to discourage the boycott and divest campaign.

In fact, we want the whole investment industry to divest from fossil fuels. If that happened, the effect would be tangible. Share prices of fossil fuel companies would fall, creating a higher cost of capital for expansion projects (ie, new mines or infrastructure) to the point they would become uneconomical. This would naturally reduce future supply and increase prices, which should in turn reduce future demand, especially as alternative fuel sources and energy storage become increasingly cheaper.

Action on multiple fronts

People like Bill and Sam say it’s a waste of time to divest from fossil fuels. Instead, they argue, it makes more sense to invest in technological solutions to combat climate change. We believe it’s possible to do both things at once.

In fact, divesting from fossil fuel companies inevitably frees up capital that can be invested in renewable energy and other technology that can help mitigage climate change. By shifting capital to renewables, investors help to bring down the price of renewable energy, encourage investment in more flexible electricity grids and energy storage, and contribute constructively to a sensible public discussion about energy policy.

If super funds behave like the ‘universal investors’ they are rapidly becoming, they will be acting in the financial interests of their members by helping to generate superior market returns in a lower-warming world (relative to business as usual, which will lead to a higher-warming world in which climate change creates financial and real asset catastrophes). Increased demand for the shares of companies aiming to have a positive impact also means they will be able to raise new capital at a cheaper cost in the future to pursue growth plans. In addition, public debate about the benefits and harms of different industry sectors encourages better policy from governments to promote sustainable businesses.

If we are to avoid the worst effects of climate change, there must come a point when divestment, consumer boycotts and government action ends the widespread use of fossil fuels. We believe that denying a social licence to dangerous fossil fuel companies is an important first step towards that goal.

 

David Macri is the Chief Investment Officer of Australian Ethical Investment, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any investor.

For more articles and papers from Australian Ethical, please click here.

 

6 Comments
Mr L Wells
November 18, 2019

Climate has changed from a warmer world to a cooler one, in that ice thickly covers what previous generations called 'Green land'.
Water from oceans with much higher levels is now stored in ice caps at the Earth's poles (and Antarctica has fossilised vegetation from a warmer global age).
The total quantity of Earth's Carbon and Oxygen does not increase or decrease. Only the form in which they exist changes.
The burning of thermal coal returns CO2 to the atmosphere, thus making that 'greenhouse gas' available for new trees.
If sea levels rise, they are returning toward levels much lower than in ancient times.
Accordingly, life on Earth is not endangered by burning thermal coal.
If, after 'ice ages', people chose to live in places now said to be in danger of rising sea levels, they should move.
Rising sea levels are no reason to impose a tax on producers nor to discriminate against their bank lenders.
President Trump is right to leave the Paris Climate Change Agreement, and Australia (with its massive coal reserves should imitate that sensible decision).
Instead of the Climate Change deception, use more thermal coal to generate electricity, and scientists should re-direct their skills to make coal fired power stations more efficient.

SMSF Trustee
November 19, 2019

"If sea levels rise, they are returning to levels much lower than in ancient times." So what? That's not comforting to the millions who live near the coasts that will be pushed back by the phenomenon. That's a flippant attitude to a potentially very serious disruption to many people and societies!

"Greenhouse gases are available for new trees". Oh dear, well if only we were planting new trees rather than ripping them down or burning them off or clearing them for farm land. And the rate at which greenhouse gases are building up far outweighs the capacity of the earth's trees to simply absorb.

THAT's why the earth's temperature is actually rising!

OK, maybe it's rising within a grand sweep of cooling. But then again, other climate change sceptics or deniers like Ian Plimer argue that the earth is warming up from the last mini-ice age. Can't you deniers get your story straight? Sounds to me like the people with the consistent view of things are those that believe:

- the earth's average temperature is rising;
- it's caused largely by the actions of all of us in converting carbon from stored form (coal and oil, etc) into greenhouse gases;
- the implications of that include the rising sea level threat to many millions who live on the coast as well as significant changes to weather patterns such as the extension of the fire season in Australia in both directions (April last year, now November this year)
- that we can do something about this by reducing greenhouse gas emissions through stopping burning fossil fuels
- that the economics of renewable energy sources have shifted in that direction anyway

Yes, there needs to be a transition and there's a place for existing coal fired power stations to capture more emissions, etc. That's happening anyway. But the transition needs to be accelerated now.

The "climate change deception", Mr Wells, is with you that you think the argument you've espoused is an intellectually sound retort to the thesis in the article or the climate change debate generally.

Neil Audsley
November 15, 2019

Be careful what you wish for! If we reduce investment in known resources to make them prohibitively expensive what resources do we use to create the alternatives. What do we use to get our plastics, computers, solar panels and wind turbines etc.
What we need is to lessen our impact and be aware of realities, and not be seduced by heightened paranoia created by those who blame every unpredictable event on climate change. Everything that humans do on this planet is to the detriment of our environment.
Peter Nuttall is on the right track human population is the biggest factor increasing from 1.6 billion 100 years ago to 7.8 billion today and according to UN estimates could reach 10 billion by 2050.

Alan Dove
November 14, 2019

Great article David. While Peter Nuttall does absolutely head the nail on the head re. there's basically too many of us, I do feel we need to work toward all these issues at the same time. I really hope all investors, especially the big institutional investors of this world boycott the Saudi Aramco I.P.O.

Peter Nuttall
November 14, 2019

Another article on climate change that completely ignores the real issue. Is a transition to renewable energy a good thing. Of course it is. No argument there. Will it fix the problem this planet faces, both now and increasingly into the future, no...........
The simple fact is there are too many of us. The population of our species continues to increase at an alarming rate. No one is willing to have an open and honest discussion about that. Climate change protesters march up and down the street calling for change, however refuse to make any sacrifices themselves. Many governments around the world follow a short term philosophy that continued population growth is linked to economic growth. Given their short term tenure, they have little or no interest in long term consequences, regardless of any rhetoric to the contrary.

Whatever else we may do, it simply will not be enough unless we address this problem.

Daniel
November 14, 2019

I would suggest that David Macri do some second-level thinking rather than just using the ESG spin to attract FUM.

I recommend reading Lyall Taylor's counter-argument to the prevailing ESG narrative.
https://lt3000.blogspot.com/2019/11/contrarianism-esg-investing-coal-and.html

 

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