Fossil Fuel Divestment and Climate Change

On September 9th, 2021, Larry Bacow, the president of Harvard University, announced plans to phase out investments in oil, gas, and coal. The primary catalyst for such divestment is climate change pressure. But, in fairness, the institution has been on this path for over a decade.

In his disclosure, he urged scholars, institutions, investors, and citizens to play their part in addressing climate risk. Such sentiments echo a wave that’s gaining momentum. Over the last decade or so, the impact of climate change is costing society and economies billion of dollars. As such, organizations are facing increased scrutiny for the role they play both directly and indirectly. Just to give you an example, the United States is losing about 1.5 % per year and Canada up to 5% per year due to climate induced natural disasters.

As a result, companies in carbon-intensive sectors have been called out to reduce their carbon emission more aggressively. In a bid to aid such decarbonization efforts, other institutions with interests in such sectors are now divesting. To some, the announcement by Harvard to divest is shocking. For others, it's well overdue. But, more importantly, it signifies the new commitment of investors to sustainability and more transparent disclosures on climate damaging business practices.

Motivation Behind Divestments

Arguably the most polarizing debate over the last two decades has been climate change. But at present, even those who have been skeptical of its existence (oil and gas leaders) now find it difficult to deny climate change and its negative impacts on the economy and life in general. After years of uncontrolled carbon emissions, deforestation, and other factors, the unreversible impacts are evident. We now have about 400 giga-tonnes (Gt) of CO2 budget if we are to stay below the 1.5°C threshold (as envisioned by the Paris Climate Agreement) and with emission at today’s level, the budget will be consumed up in about eight years from now.

Data from Nasa demonstrates the results of such actions:

The global temperature has risen by 2.12 degrees Fahrenheit within the last century

Ice sheets in the Antarctic and Greenland have decreased in mass by an average of 279 billion tons annually since 1993

Glacial retreat noticeable in the Himalayas, Alps, Africa, Alaska, Rockies, and the Andes

Reducing severely snow cover in the Northern Hemisphere

While melting snow and a two-degree Fahrenheit rise in temperature may not seem much, it's quite significant. This is because it's the outcome of a considerable increase in the heat accumulated on the planet. The result of this accumulated heat is disruption of weather patterns, climate variability and climate change. In turn, extreme weather events such as hurricanes, wildfires, cold fronts are becoming more frequent and intense.

Beyond the environmental and social impact, climate change also impacts the business landscape. An increase of extreme weather events:

Destroys facilities, equipment, and inventory

Disrupts production and supply chains

Interrupts business continuity

It affects consumers' purchase ability

As such, the impact of climate change extends far and wide across all sectors and all scopes of life. This is why there is now increased proactivity towards decarbonization efforts.

While climate change is a key motivation towards sustainable developments, it's not the only one. Initially, there were reservations that investments in sustainability come at the expense of revenues and growth. However, data suggests otherwise.

In another article I wrote, I explain how corporations are benefiting from ESG investing. One area where this is evident is the stock market. Over the last two years, ESG stocks have proven to be more resilient to bear market conditions. Moreover, they have performed better than the market.

For corporations, an ESG strategy offers lower costs of production and increased revenues. As more organizations realize this, the rate of sustainable investments will increase. Along with this, so too will the rate of divestment as companies hold each other accountable.

Institutions Divesting from Fossil Fuels

The institutions that have been divesting or taking a stance against carbon-intensive sectors have done so independently. However, the trend is catching on. Now known as corporate activism, it has become a powerful tool for facilitating decarbonization efforts.

Some of the institutions leading this charge include:

Endowments

Universities are some of the oldest and respectable institutions in the world. So, their opinions on matters such as climate risk justifiably have a big impact on societal accountability. But beyond this, universities also have significant investments in endowments that have stakes in the fossil fuel sector.

While Harvard is now the most notable university to divest, others have also done the same. Earlier this year, Columbia University announced its divestment with an endowment of $11.26 billion. In 2020, Brown did the same by halting all its investments in fossil fuel companies.

Global Asset Management

Large asset managers have a significant influence on the trajectory of investments in the world. They are one of the primary reasons for the increasing rate of ESG investment.

With close to $9 trillion of assets under management (AUM), BlackRock is the largest asset manager in the world. In April 2021, they indicated their plans to cut ties with companies that make 25% of profits from thermal coal. While it's not a complete exit, it's indicative of the direction asset managers are going.

Another notable mention is the Nordic asset manager Storebrand. In total, the institution has an AUM of $91 billion. They were the first major asset manager to divest from miners and oil produces in August 2020. They had a total divestment of $29.2 million from oil producers such as Chevron and ExxonMobil.

Pensions and Sovereign Wealth Funds

Led by Ireland, several countries have withdrawn their sovereign and pension funds from fossil fuel companies. To this effect, the president of Ireland assented to the Fossil Fuel Divestment Bill in 2018. The resolve of the bill was to divest the nation's holdings of $10.5 billion within five years.

Other notable nations to take such a step include Norway and Japan. The Norwegian Sovereign Wealth Fund of $1.3 trillion is the largest in the world. Such steps at a national level indicate the political goodwill for addressing climate change.

Impact of Divestments

The increased rate of divestment in various sectors is increasing the commitment and action in the fossil fuel industry towards decarbonization. But, more importantly, it's being accompanied by more discussions on addressing climate change. Over the last 10 years about $ 15 trillion have been divested from carbon intensive industries, and I anticipate this trend will accelerate.

The UN Climate Summit Glasgow is one robust platform that will continue to drive the climate agenda forward. This will bring global leaders and members of the private sector and capital markets together to agree on the future climate action plan. Among the key goals of COP26 is to continue creating the incentives for all parties, particularly (lets be frank here) the leading economies and business to act on the climate roadmap, thus keeping the good “climate momentum” up. This will see the Paris Rulebook further formalized, moving towards a “painful operationalization” of the Paris Agreement, setting the stage to potentially reaching global net-zero emissions by 2050.