Fossil Fuels Divesting: Time for an Upgrade
Fossil Fuels Divesting: Time for an Upgrade
Divestment has been a powerful symbolic statement, but a climate damage countermeasure? Not so much - it’s time to change the model.
Introduction
Intro
You are reading this because you see the need the fossil fuels producing and consuming industries to change. Yet, despite overwhelming consensus about the need, there is disagreement and uncertainty around how to force the change.
This three-part blog series is about using money as a powerful tool to move these industries away from their destructive practices. The first installment talked about the two levers of financial force: punish companies by divesting (directing money flows away from them) or investing (reward and support companies by directing money towards them.)
While the next article will talk about how activist, impact and ESG models are moving the investment lever, this installment will focus on what’s been happening in divestment and its impact, offer a guide for getting involved in a new generation of divestment actions.
tl;dr - Summary
There’s no question that the divestment movement has had a powerful impact in the fight to stop climate destruction: Many organizations, that collectively control an enormous amount of total assets, have announced support or implementation of divesting. The press reports widely on divestment and it is hotly debated at the highest levels. The divestment movement’s greatest achievement has been calling widespread attention to the potential role of finances in influencing the fossil fuel industry.
But along with all this attention there is churn, noise, recrimination, and backlash. There are significant issues with the numbers and statistics being used, and the charts below show that divestment has not resulted in decarbonization. There are problems with divestment as it is currently defined and manifested and it’s time to update our model of what works.
The state of the current divestment-as-climate-activism movement can be summarized in a few bullet points:
- The divestment movement that started during the last 5 to 10 years has made major contributions to the growth of ESG investing models and shifts in renewables investment.
- Despite that, there is no evidence of direct influence on fossil fuel production, or the finances of fossil fuel companies.
- There is credibility damage and misinformed debate because of how divestment numbers are being reported.
- Legislative backlash against divestment is growing
- Backpedaling and apathy from large investors demonstrates they are unwilling to forgo profits while antagonizing lawmakers and fossil fuel stakeholders.
- The current divestment environment is risking a prolonged stalemate that depletes attention and energy while the climate crisis continues unaffected.
But:
A new divestment model that I call “Divestment 2.0” matures divestment strategy, focusing less on fossil fuel companies themselves, and more on companies providing critical financial services that enable them.
These targets are more directly influenced by asset divestment because their bottom lines are not driven by commodity markets, they often have lower market caps and can be impacted more cost-effectively, and they have shareholders with different goals and risk appetites.
In a shift to Divestment 2.0 there is a larger selection of companies that can be removed from portfolios, impacting a broader swath of the financial infrastructure that powers fossil fuel companies.
And shifting divestment strategy away from fossil fuel companies might make divestment less of a political target.
Most importantly, stopping the flow of financial services into fossil fuel companies directly inhibits them from continuing to do business and damage as usual. Ironically, divesting more indirectly has a stronger direct impact.
Individuals controlling their own investments, investment managers, companies, and individual activists should be directing divestment actions at the financial supply chain the fossil fuel industry depends on. You can get involved now by taking action to stop EACOP, an egregious project to run a hot 2-billion-barrel pipeline through the heart of Africa.
For deep dive details, read on.
Divestment 1.0 – The Current State
In the first article, I pointed out that divestment can refer to several ways of directing money away from a company to punish bad behavior. In addition to selling financial stakes such as shares of stocks, withholding lending and insurance support can be another. Boycotting, taxation, and other direct financial penalties also interfere with the flow of money into a company; however, this series will not go into those strategies.
Divestment and sales of fossil fuel companies’ stock is of questionable benefit If the intention is to directly affect fossil fuel companies’ finances or inhibit their ability to do business. It is difficult, if not impossible, to connect stock price and market cap holdings with how companies behave: divestment data is unclear, missing, or misleading, and innumerable other factors besides stock prices control company strategy and action.
FUDging Stock Divestment Numbers
According to
https://divestmentdatabase.org, “Approximately $40.57 trillion” (which I’m going just call $40T) is the “value of institutions divesting” from fossil fuels, with 1546 organizations listed. The list includes faith-based organizations, educational institutions, investment firms, endowments, pension funds, and governments that have said they have divested or will divest from the fossil fuel industry.
But the problem with that figure is that it doesn’t measure actual impact on fossil fuel companies or decarbonization and it significantly overstates how much money is even potentially in play.
Stand.Earth’s divestment database only refers to the total amount of money managed, not how much is relevant to investment in target companies. Of 1546 divesting organizations listed, many are also NGO’s that have no financial stake or stocks invested in fossil fuels companies so their assets should not be counted in a tally of the “value of institutions divesting” at all. Wikipedia reports a similar statistic, “In October 2021, a total of 1,485 institutions representing $39.2 trillion in assets worldwide had begun or committed to a divestment from fossil fuels.”
Three examples show how reality differs from the impression created by that huge asset value number.
1) The Catholic Church states they manage $14T in total assets across all their investments, so Stand.Earth reporting makes it seem as if $14T in assets are being divested from fossil fuels. Earthbeat, as many others do, repeats the statistic uncritically. However, the reality is that only a fraction of their total assets is invested in fossil fuels to begin with, according to this article from Reuters.
2) Blackrock is a behemoth investment manager that has been widely touted as divesting from fossil fuels. It accounts for $8T assets under management (AUM) of the $40T amount that Stand.Earth reports. But only about 1% of their assets, about $93B, is in fossil fuel related investments.
3) Two giant California pension funds, CalPERS and CalStrs have a combined asset base of $796B. Of that, only about $7.4B is invested in fossil fuel companies, about 1% of assets under management. (https://www.calpers.ca.gov/docs/board-agendas/202204/full/item9f-00_a.pdf)
Saying that $40T has been divested from fossil creates a credibility gap – it is meaningless and misleads people into either wondering “what did we actually accomplish with all that divestment?” or believing we’ve turned the corner because “look how much money is being divested!” This gets in the way of being effective and achieving our goals. It demonstrates that a different approach to divestment strategy is needed, one that is more achievable and measurable.
Earth.Stand did not respond to my questions about the database and whether there is any data on actual divestment dollars directly moved away from fossil fuels companies, or the justification for using total assets managed as a benchmark.
Impact of Divestment 1.0
Not only is the amount of actual divestment unknown and is unlikely to move the fossil fuel industry’s needle anyway, but the divestment movement does not demonstrate any effects on the production of more greenhouse gas pollution.
These graphs below show the disconnect between divestment and fossil fuel company behavior, given that divestment assertions have been growing steadily since about 2014.
United States oil production and import levels.
U.S. Crude Oil Production - Historical Chart
The production of oil in the US has been increasing dramatically since the 2008 financial crisis. The dramatic drop in 2020 is of the result of the pandemic but has been recovering roughly along the trend line.
Oil prices and company income/earnings
The commodity and supply/demand relationship effect on company earnings is shown in the next graphs:
Earnings are a direct reflection of oil prices, and earnings are by far the most significant measure of a company’s success, as opposed to share price:
Net Income for 4 Largest US Co’s
Stock prices
And here are stock prices for four major oil companies, where you would see the divestment effect if it existed. But these graphs correlate with the charts above that show the effects of supply and demand on earnings, and no correlation with the growth of divestment pledges. Stocks move in response to the bottom line.
Stock Price for 4 Largest US Oil Co’s
So Has Divestment 1.0 Helped?
While the stock charts do show some declining trends starting around 2014, those trends can’t be attributed to divestment. There are no declines in production, no large volume spikes showing massive numbers of shares traded due to divestment. The driver for the stock price declines is the decline in sales and profit, and that decline is driven by the decline in oil prices, and that is driven by “the market” and commodity supply/demand. The metrics don’t support a claim that the divestment movement has resulted in damage to the oil industry, or direct benefit to the environment.
Fossil-fuel-stock-sales-based Divestment 1.0 has also created a culture war and opened a new front in the climate struggle. The divestment battle grabs attention, escalates hostilities, and sparks conflict between financial managers and regulators, but we’ll see that the Divestment 2.0 model has the potential to mitigate this.
Meanwhile, the charts speak for themselves – the CO2 crisis has continued to worsen because of forces at work that have nothing to do with trading shares in fossil fuel companies.
The Divestment Movement’s Greatest Success
On the positive side, there is no question that the messaging around divestment has contributed to forcing important changes and new discussions, even if it has not had a direct financial or decarbonization impact.
A global resounding and important message was added to the climate debate when the divestment movement started. The message was “we are going after the money,” and that is a powerful message for us to send. The strongest positive result of the movement to date has been forcing these other conversations to happen.
For years, the divestment theme has helped drive the creation of the ESG (Environmental, Social, Governance) investing movement. This will be the subject of the next and final article in the series. I think that part of the mission has been accomplished.
What’s Next? Divestment 2.0
It’s time to mature and evolve the divestment movement. There are other ways to affect companies that asset managers, as well as individuals, can still leverage – what I term “Divestment 2.0” means a focus on other financial flows that have a direct impact on fossil fuel company profits and ability to do business: focusing on lenders, insurance companies, and financial institutions directly funding fossil fuels projects.
This can be a more effective way to push back on fossil fuel companies and their damaging projects:
- People and companies can exert pressure by taking their business to providers that refuse to fund fossil fuels more easily than they can impact the fossil fuel companies directly.
- Financial companies’ wellbeing may be more sensitive to changes in stock price.
- Earnings at these companies is not directly affected by commodity pricing and demand.
- With smaller market caps in many cases, they can be influenced more efficiently.
If banks are pressured to refuse funding to fossil fuel projects because fund managers see outsized risk in the investments, the projects cannot proceed.
If insurance companies are pressured to refuse to ensure fossil fuel projects because fund managers deem the risk to its shareholders as unacceptable, the projects cannot proceed - the lenders can’t fund them without insurance.
And so forth.
Without new projects, fuels production doesn’t expand, supply gets depleted, price goes up, demand goes down, and other technologies step up. This creates a multiplier effect and is a more direct, visible, and powerful lever than indirect methods of selling fossil fuel company stock. This is the strategy that “Divestment 2.0” should employ at global scale. This is the “free market” – a system that conservatives and lawmakers are supposed to understand.
This is one of the most important benefits of a shift: by emphasizing that a fund manager’s sale of company’s stock (divestment) is a risk management decision in the best interests of its clients, much of the retaliatory rhetoric is neutralized. This is reframing divestment as protecting the investor class from risk, which resonates from Main Street to Wall Street and is understood across political boundaries.
This approach also allows hard clear evidence of divestment effects to be seen, eliminating FUDging and handwaving. The pressure on financial services companies results in withholding of funding to fossil fuels companies which results in stopping of projects. The size and scope of abandoned projects can be quantified.
Case Study: EACOP - Insurance Companies & Banks
For example, the East African Crude Oil Pipeline is a giant project that would run a heated pipeline hundreds of miles and disrupt massive ecosystems to deliver 2.2B barrels of oil. From Wikipedia:
The East African Crude Oil Pipeline (EACOP), also known as the Uganda–Tanzania Crude Oil Pipeline (UTCOP),[3][4] is under construction[5] and intended to transport crude oil from Uganda's oil fields to the Port of Tanga, Tanzania on the Indian Ocean.[6] Once completed, the pipeline will be the longest heated crude oil pipeline in the world.[7] Because of the large scale displacement of communities and wildlife, global environmental groups are protesting its construction and finance.[8][9]
Stop EACOP, 350.org and others has been driving a vigorous campaign to go after the sources of funding and insurance for the project.
This is the future - Divestment 2.0, as being implemented by Stop EACOP’s Go Global campaign. Quoting their website:
“Stop the flow of corporate money
If completed, the East African Crude Oil Pipeline will displace communities, endanger wildlife and tip the world closer to full-blown climate catastrophe. We need to #StopEACOP.
Building the biggest heated oil pipeline in the world is expensive work and Total and China National Offshore Oil Corporation can’t go it alone – they need support from investors, banks, insurers, technical advisors and construction contractors from around the world.
That’s where you come in!
We know from experience that companies take notice when enough people speak up about their decisions and actions. For example, following our advocacy, the African Development Bank has declared it is not financing the pipeline. So who’s next?
If we can stop the money pipeline to EACOP, then we can stop the actual pipeline.”
The African Development Bank isn’t the only successful Divestment 2.0 outcome, per these reports:
Eacop’s financing blues as lenders desert $3.5b project
Insurers refusing to secure EACOP
Banks that are in, or out on EACOP
Global PR Firm Reportedly Cuts Ties With Bank Over African Oil Project
Divestment 2.0 Fights Need Your Support
But the battle is not yet won. Giant insurance broker and risk manager, Marsh McLennan, (stock symbol MMC) is the focus of an intense skirmish as they have signed on as the “insurance arranger” for EACOP. 350.org is sponsoring a campaign against Marsh because without Marsh McLennan there may be a good chance to stop EACOP.
Here is how you can start your commitment to Divestment 2.0:
If you are an investor
- Check your portfolio for ETFs holding MMC (or check your mutual fund) – ETFs hold a combined total of 43M shares, about 9% of MMC’s market cap.
- Find replacement ETFs without MMC holdings.
- Contact your advisor and discuss how to remove MMC from your portfolio
- Make sure to send a letter to MMC telling them of your divestment
- Promote your divestment on social media
And for everyone, become part of the conversation on social media and via 350.org’s campaign and reach out to other divestment campaigns to urge adding companies in the financial supply chain to their lists of divestment targets.
Another organization to reach out to, Extinction Rebellion Bay Area, staged an action at Chase Bank in San Francisco to call attention to the financial giant’s funding of climate-destroying projects. (Although the size of Chase makes it a daunting target, its business model relies on risk management and it can be affected by more and different factors than the oil majors.)
These sorts of actions should be on your “short list” of ways to get involved and have an impact.
Next Up: Investing and ESG
In the next and final segment of this three-part series, I will talk about the other side of the divestment coin, which is INvestment - the other financial lever we can use to change behaviors. And I’ll give you as concrete example of how I personally have used investment to support the battle against EACOP.
If precision INvestment strategies can get as much traction as DIvestment and ESG, multiplier effects will continue to compound the effectiveness of exercising financial power. See you there!
If you have made it this far, I want to sincerely thank you as I feel personally passionate about effectively wielding financial power in the fight for the climate.
I hope that readers come away with new appreciation for the need to expand our definition of divestment and update divestment programs to reflect lessons learned. This can help individuals make better decisions about supporting organizations or how to manage their own assets.