The moral arguments for divestment are clear. As Bill McKibben sums it up: "If it’s wrong to wreck the climate, then it’s wrong to profit from that wreckage."
The financial arguments are, admittedly, more speculative, as is the nature of any financial prediction. Nevertheless, there is much evidence for the likelihood that investments in fossil-fuel companies will become increasingly risky over the next few years. The logic is this:
- The current valuation of fossil-fuel companies is based, in large part, on the prospective market value of the coal, oil, and gas reserves which they own and plan to sell.
- If catastrophic climate change is to be averted, a large percentage of those reserves (an estimated 70-80%) must remain in the ground, unsold and unburned.
- As the effects of climate change become ever clearer, governments will increasingly implement policies to reduce the burning of fossil fuels, in the form of regulations, carbon taxes, mandatory cap-and-trade regimes, and subsidies for renewable energy.
- As the associated costs increase and renewables become less expensive, fossil-fuel supply will eventually outstrip demand, and it will become uneconomical to extract the reserves, beginning with the dirtiest and the most expensive.
- These unextracted reserves will become stranded assets; valuation of fossil-fuel companies will be reduced; and the carbon bubble will deflate.
The uncertainties in this logic lie more in the timing than the sequence; it is possible that some governments will continue to defer implementing meaningful policies and that fossil-fuel companies will manage to manipulate their profitability and apparent valuation for several years. Eventually, however, the conclusion is inescapable: oil, gas, and coal reserves will be worth less than they are now, and so will the companies that own them. Investing in these companies now is to buy high and eventually to sell low.
Here are some useful background readings:
Bill McKibben's seminal 2012 article in Rolling Stone, "Global Warming's Terrifying New Math"
Rebecca Solnit's urgent call for divestment, "By the Way, Your Home Is on Fire"
An in-depth report by the Carbon Tracker Initiative, "Unburnable Carbon"
A lengthy study by three Oxford researchers on the effects of divestment on fossil-fuel valuation: "Stranded assets and the fossil fuel divestment campaign"
A robust financial case from a former SEC commissioner, Bevis Longstreth,"The Financial Case for Divestment of Fossil Fuel Companies by Endowment Fiduciaries"
And some links to investment/reinvestment sources:
A brief investment analysis by the Aperio Group, showing insignificant historical tracking differences between portfolios with and without fossil fuels: "Do the Investment Math: Building a Carbon-Free Portfolio"
Impax Asset Management, "Beyond Fossil Fuels: The Investment Case for Fossil Fuel Divestment''
NRDC press release on upcoming FTSE ex-Fossil Free Index Series and concurrent BlackRock investment options
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