The Intergovernmental Panel on Climate Change has highlighted the need to reduce annual investment in fossil fuels by at least $30 billion per year in order to avoid catastrophic climate change.
They have also stressed that annual investment in low carbon electricity supply will have to grow by some $147 billion a year.
The divestment movement is a vital tool to help us achieve that massive redirection of investment capital:
“Divesting from fossil fuels is an integral piece of aligning the financial sector with a 2 degree scenario. The [International Energy Agency] estimates in their 2 degrees scenario [that] reductions in fossil fuel investments of $4.9 trillion [are required]”
2 degree Investing Initiative
One common criticism of divestment is that it won’t bankrupt the fossil fuel companies and it is therefore pointless. The argument goes something like this: Even if Harvard divests, with its $33 billion endowment, someone else will just snap up the stock, and therefore it is a meaningless gesture.
But the point of divestment is not to bankrupt. It is to stigmatize.
Every time an institution divests itself from fossil fuels they are chipping away at the social license with which these companies operate. When entities like the $900 billion Norwegian Sovereign Wealth Fund, the $18 billion Stanford University fund, and the $6 billion endowment of the Church of England join the divestment movement, a very strong point is being made.
Stigmatizing fossil fuel companies can also make it possible to curtail the industry’s political influence, and make it harder for them to double down on their dangerous behavior with "extreme energy" projects like Arctic drilling. If major institutions and individuals basically say "your money is too dirty for us", they can no longer pretend to be normal companies operating in a normal fashion.
“in almost every divestment campaign (…) from adult services to Darfur, from tobacco to South Africa, divestment campaigns were successful in lobbying for restricting legislation affecting stigmatized firms.”
Stranded Assets and the Fossil Fuel Divestment Campaign, Oxford University
The eventual goal of the divestment movement is to confer on oil companies the same status as tobacco companies, thus opening up the political space required to make other important demands on the industry – such as bans on political donations and advertising, and limits on further high-risk exploration.*
However, stigmatization is not the sole reason that foundations should divest. Every time an organization such as the Gates Foundation divests itself from fossil fuels, they help to undermine market confidence in the fossil fuel industry.
This is especially important when we consider the work of Nobel Prize-winning economists Robert Shiller and George Akerlof. In the opening lines of their seismic text Animal Spirits, Yale and Berekley Professors, Shiller and Akerlof write: “To understand how economies work and how we can manage them and prosper, we must pay attention to the thought patterns that animate people’s ideas and feelings. (…) We will never really understand important economic events unless we confront the fact that their causes are largely mental in nature.”
This is especially salient with regards the Gates Foundation’s divestment because of their global image, reach, and influence. If the Gates Foundation divests from fossil fuels it will help to undermine wider market confidence in fossil fuels and potentially direct far larger amounts of capital away from the fossil fuel industry and into other areas of the market – including, we hope, the renewables sector.
How this could happen is articulated by an apt allegory in Animal Spirits: “Economists have a particular interpretation of the meaning of the term confidence. Many phenomena are characterized by two (or possibly more) equilibria. For example, if no one rebuilds his house in New Orleans after Hurricane Katrina, no one else will want to rebuild. Who would want to live in desolation, with no neighbors and no stores? But if many people rebuild in New Orleans, others will want to.”
This allegory of rebuilding is pertinent to the conversation around the Gates Foundation’s fossil fuel divestment. As the IPCC has made abundantly clear, the global financial economy must itself be rebuilt (with $30 billion a year less invested in fossil fuels and $147 billion more in renewables) in order to prevent the worst of global warming.
By divesting from fossil fuels, the Gates Foundation could become that first person rebuilding a neighborhood; and they could inspire many more to start rebuilding too.
“Concerns about the environmental impacts of coal combustion (…) are resulting in (…) divestment efforts affecting the investment community, which could significantly affect demand for our product”
Peabody Energy Corporation (the largest member of the World Coal Association)
Divestment won’t bankrupt fossil fuel companies, but the divestment conversation has already started to shed some much needed light on to important topics such as the recent underperformance of the fossil fuel sector and the threat of the carbon bubble. As a result, investors are already questioning the future value of the fossil fuel companies’ assets. In this regard, it is notable that no major bank is willing to fund the massive Galilee basin coal project in Australia.
To learn more about the divestment strategy:
The Argument For Divestment From Fossil Fuels Is Becoming Overwhelming
Ten Divestment Myths Put To The Sword
Pressure is Growing