Fossil fuel divestment campaigns can help ‘stigmatise’ industry

A new study has outlined how investors and campaigners can effectively leverage their collective influence to get the most out of the fossil fuels divestment movement.

The study, by the Smith School of Enterprise and the Environment (SSEE) at the University of Oxford, calls on investors to get to grips with the reasons and costs behind divestment strategies.

It uses the tobacco and South African apartheid divestment campaigns as examples of divestment movements that effected real change in the investment world.

The SSEE research urges investors to “closely monitor fossil fuel exposure”, adding, “There are a wide range of current and emerging environmental risks that could result in stranded assets. These risks are poorly understood and are regularly mispriced, which may result in a significant over-exposure to environmentally unsustainable assets throughout portfolios.”

Click here to read The Guide to Climate Change 2013

The report comes less than two weeks since the release of the Intergovernmental Panel on Climate Change’s (IPCC) study into the physical science of climate change. It also builds on work done by the thinktank Carbon Tracker, whose Unburnable Carbon research series suggests some 60-80% of oil, gas and coal reserves might need to be left in the ground if the world wants to avoid the worst effects of climate change.

“Prudent investors want to be ahead of pack, not following the herd, so they will be preparing for a world where we leave fossil fuels in the ground – avoiding assets that cannot be realised safely in a carbon-constrained world”, said David Nussbaum, chief executive at WWF-UK.

“If they do nothing, the risk is that policy changes and pressures such as the divestment campaign will mean investments could depreciate in value and might become stranded.”

A study by Impax Asset Management in July said that divesting from fossil fuels was a compelling win-win for investors, but not everyone in the investment community is of the same opinion. The divestment movement, some argue, has flaws that need to be addressed.

Seb Beloe, head of sustainability research at WHEB Asset Management, said, “We have been supporters of the divestment campaign, though my main take-away from the discussions that I have been part of, as well as the report, is that the indirect impacts associated with changing market norms are going to have a bigger impact than the direct impacts of divestment itself.

“My concern with the divestment movement is that the response from investors will be to avoid coal but remain quite happily invested in lower carbon – but still carbon intense – fossil fuels. This is obviously a move in the right direction, but the science clearly says that this is likely to be too little too late.”

Instead of divestment, Mark Dampier, head of research at Hargreaves Lansdown, said, “What we need is not subsidies of renewables now but huge amounts of research and development to search for something that that makes renewables the obvious and natural choice.  

“At that stage, like Kodak found with digital, the fossil fuel industry will be dead.”

Meanwhile, Mark Hoskin, a financial adviser at Holden & Partners, said that while SSEE’s research was useful to understand how markets behave, divestment for socially motivated reasons was “unlikely […] to be an important aspect in the long-term erosion of returns of oil companies”.

He added, “It is far more important to get investors to think about the downward pressures which will be put on an oil company’s profits and cashflows in the future from a lack of easily accessible reserves, alternative energy and a changing legislative approach brought on by climate change.

“Doing what our grandfathers did in the 1970s is not necessarily the best investment approach today. This should be the message to the finance world, not one about social conscience and comparisons to the Tobacco industry are unhelpful in my view.”

The SSEE report concludes, “Divestment campaigns will probably be at their most effective in triggering a process of stigmatisation of fossil fuel companies. We find that even if the direct impacts of divestment outflows are limited in the short-term, the campaigns will cause neutral equity and/or debt investors to lower their expectations of fossil fuel companies’ net cash flows in the long-term.

“The process by which uncertainty surrounding the future of fossil fuel industry will increase is through stigmatisation. In particular, the fossil fuel divestment campaign will increase legislative uncertainty and potentially also lead to multiples’ compression causing more permanent damage to the companies’ enterprise values.”

It makes it clear that even though stigmatisation could hit fossil fuel companies hard financially, it is “unlikely to threaten their survival”.

Further reading:

How to invest in energy once you’ve ditched fossil fuels

The investment case for fossil fuel divestment

Climate change a ‘firmly established’ material risk for mainstream investors

Norwegian pension fund divests from ‘financially worthless’ fossil fuel firms

The Guide to Climate Change 2013