Sylvie Willis
The divestment of fossil fuels has gained traction in recent years, with over 1500 institutions representing $40 trillion in assets committing to some form of divestment. The primary motivation for divesting is moral and based on the belief that profiting from damaging the planet is wrong, especially when the impacts are borne disproportionately by those who have benefitted the least. Divestment aims to stigmatize fossil fuel companies, reduce their access to capital, and accelerate the transition to renewable energy. While there is evidence that divestment has positively impacted investors' returns and hindered the fossil fuel industry's ability to carry out its business model, critics argue that the impact on the industry's profitability is modest and transitory.
| Characteristics | Values |
|---|---|
| Number of institutions divesting from fossil fuels | 1593 |
| Total assets of institutions divesting from fossil fuels | Over $40 trillion |
| Percentage of pension funds | 56% |
| Percentage of private companies | 37% |
| Number of faith-based groups | 27% |
| Number of foundations | 24% |
| Number of governmental organizations | 13% |
| Impact on investors' returns | Positive impact in the longer term |
| Impact on the fossil fuel industry | Hinders the fossil fuel industry's ability to carry out its business model |
| Impact on public opinion | Little evidence of increased public support for policies addressing climate change |
| Impact on social change | Induces social change by starving offending companies of funds |
| Impact on financial performance | Very limited |
| Impact on emissions | Will continue to grow |
| Impact on stigmatization of fossil fuels | Widespread stigmatization of fossil fuels in public discourse |
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What You'll Learn
The impact on financial performance and emissions
Fossil fuel divestment campaigns have gained significant momentum since their emergence on college campuses in 2011, with students urging their administrations to shift investments from the fossil fuel industry to clean energy initiatives. By 2015, this movement had become the fastest-growing divestment campaign in history, with institutions recognising the need to align investments with core values, combat the fossil fuel industry, and mitigate climate-related financial risks.
The impact of fossil fuel divestment on financial performance has been a subject of debate. Some critics argue that despite the movement, capital has continued flowing into the fossil fuel industry since the 2015 Paris Climate Agreement, indicating that divestment has not significantly eroded the industry's profitability. However, supporters of divestment highlight the long-term benefits. A study by the University of Oxford found that stigmatising fossil fuel companies through divestment can increase uncertainty about their future cash flows, leading to a compression in trading multiples and negatively impacting their share prices. This social and political stigmatisation poses a far-reaching threat to fossil fuel companies, challenging their long-term viability and forcing a reckoning within the finance industry.
Financial research suggests that fossil fuel divestment has positively impacted investors' returns in the long term. By withdrawing investments, companies demonstrate their commitment to sustainability and reducing their exposure to climate-related financial risks. Additionally, divestment campaigns empower individuals and signal a shift in public beliefs and policy preferences, pressuring policymakers to address climate change.
In terms of emissions, the divestment movement has already put the fossil fuel sector on notice. By starving fossil fuel companies of capital, divestment campaigns aim to weaken these companies financially and accelerate the transition to renewable energy sources. While the direct impact on emissions may be challenging to quantify, the movement has succeeded in raising awareness about the environmental and social consequences of fossil fuel reliance, with over 1500 institutions controlling almost $40 trillion in assets joining the movement.
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The moral and ethical implications
Fossil fuel divestment campaigns have emerged from college and university campuses, with students urging their administrations to turn endowment investments in the fossil fuel industry into investments in clean energy and communities most impacted by climate change. The moral motivation for fossil fuel divestment is based on the belief that profiting from damaging the planet is wrong, especially when the impacts of that damage are borne disproportionately by those who have benefited the least from fossil fuel extraction and use.
Philosopher and climate justice campaigner Alex Lenferna presents three interlocking moral arguments in favor of fossil fuel divestment: investing in fossil fuels contributes to grave, substantial, and unnecessary harm and injustice; divesting from fossil fuels helps fulfill our moral responsibility to promote climate action; and investing in fossil fuels morally tarnishes those who do so by making them complicit in the injustices of the fossil fuel industry.
The legal argument for divestment is that as the fossil fuel industry faces long-term structural risks, investors who continue to invest in it may be breaching their fiduciary duties. Divestment is a prominent strategy championed by activists to induce positive social change and reduce climate change by exerting social, political, and economic pressure for the institutional divestment of assets connected to companies involved in extracting fossil fuels.
The goal of divestment campaigns is to create new global moral norms that shift the market away from fossil fuel investments. Recent evidence suggests that, in addition to having social impacts, fossil fuel divestment hinders the fossil fuel industry's ability to carry out its business model. Financial research also suggests that, in the long term, fossil fuel divestment positively impacts investors' returns.
However, some argue that divestment from fossil fuels is not ethical when considering the needs of developing countries. Many countries in the developing world rely on fossil fuels to generate economic growth, and if economically developed countries fail to take these needs into consideration, large parts of the globe will fall into poverty. Therefore, developed countries must continue to invest in fossil fuel projects abroad while simultaneously developing renewable energy infrastructure.
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The role of social change
The divestment movement has empowered individuals and communities to challenge the power of the fossil fuel industry and its supporters. It has provided a platform for people to express their concerns about the climate crisis and has led to a widespread stigmatization of fossil fuels in public discourse. This stigmatization has created uncertainty around the future cash flows of fossil fuel companies, impacting their share prices and long-term viability.
The social change brought about by the divestment movement has influenced public beliefs and policy preferences, pressuring policymakers to address climate change. It has also forced a fundamental reckoning within finance, government, and civil society, leading to a shift in the conversation around fossil fuel finance. Investors and banks are increasingly questioning the long-term viability of the fossil fuel sector and the responsibility of fossil fuel firms for their externalities.
The movement has also had a direct impact on the operations of fossil fuel companies. By divesting from fossil fuels, institutions and individuals are cutting off capital from these companies, making it harder for them to operate and potentially forcing them to change their behavior or go out of business. This financial mechanism of starving offending companies of funds is a powerful tool for inducing social change and creating a more sustainable future.
Overall, the role of social change in the fossil fuel divestment movement has been significant. It has empowered individuals, shifted public opinion and policies, and created economic and political challenges for the fossil fuel industry. This social movement continues to gain momentum, and its impact on society and the environment is expected to grow in the years to come.
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The influence on public beliefs and policy preferences
Divestment from fossil fuels is a strategy used by activists to induce positive social change. The movement includes over 1,500 institutions that control $40 trillion in assets, including the Irish government, New York City, The Rockefeller Foundation, Harvard University, and the World Council of Churches. The primary pathway through which divestment is expected to be effective is by influencing public beliefs and policy preferences, thereby pressuring policymakers to take action.
Research has shown that exposure to information about divestment movements impacts public beliefs by acting as a signal about the beliefs of the divesting organizations. This new information can lead individuals to view fossil fuel companies less favourably and be more concerned about climate change, making them more likely to support government policies to combat it. However, a national survey experiment in the US, India, and South Africa found little evidence that exposure to information about the fossil fuel divestment movement increased public support for policies addressing climate change.
Divestment campaigns aim to stigmatize fossil fuel companies and create new global moral norms to shift the market away from fossil fuel investments. This stigmatization increases uncertainty about the future cash flows of fossil fuel companies, which can lead to a permanent compression in their trading multiples. While some argue that divestment has only had a modest and transitory financial impact on targeted entities, others believe it has forced a fundamental reckoning with the future of the global energy system.
The moral motivation for fossil fuel divestment is based on the belief that profiting from damaging the planet is wrong, especially when the impacts are borne disproportionately by those who have benefitted the least from fossil fuel use. Philosopher and climate justice campaigner Alex Lenferna presents three interlocking moral arguments in favour of fossil fuel divestment: investing in fossil fuels contributes to harm and injustice, divesting helps fulfil moral responsibility to promote climate action, and investing morally tarnishes those who do so by making them complicit in the injustices of the industry. Additionally, as the fossil fuel industry faces long-term structural risks, investors who continue to invest in it may be breaching their fiduciary duties.
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The impact on the fossil fuel industry's ability to operate
Divestment from fossil fuels is a strategy championed by activists to induce positive social change and weaken the fossil fuel industry. The movement has gained remarkable traction, with over 1500 institutions controlling more than $40 trillion in assets committing to some form of divestment as of July 2023. This includes prominent entities such as the Irish government, New York City, The Rockefeller Foundation, Harvard University, and the World Council of Churches.
The primary goal of divestment is to starve fossil fuel companies of capital, making it harder for them to operate and eventually leading to their demise. By divesting, investors are taking a critical stand against the industry's harmful practices and environmental impact, as well as fulfilling their moral responsibility to promote climate action. The social and political stigmatization of the fossil fuel industry caused by divestment increases uncertainty about its long-term viability, which can lead to a compression in trading multiples and negatively impact the industry's ability to carry out its business model.
Financial research supports this notion, suggesting that fossil fuel divestment has positively impacted investors' returns in the long term. Additionally, a study by the Smith School of Enterprise and the Environment at the University of Oxford found that the stigmatization of fossil fuel companies caused by divestment can materially increase the uncertainty surrounding their future cash flows, leading to a permanent compression in trading multiples. This process of stigmatization poses the most far-reaching threat to fossil fuel companies, as it shifts the market away from fossil fuel investments and hinders their ability to operate.
However, critics argue that despite the accelerating growth of the divestment movement, capital has continued to flow into fossil fuels since the 2015 Paris Climate Agreement. They question the effectiveness of divestment, pointing to mixed results in the short term and the continued financing of the fossil fuel industry. Nevertheless, proponents of divestment emphasize that considering only immediate financial impacts overlooks the wider effects of the movement. The divestment movement has forced a fundamental reckoning within finance, government, and civil society, challenging the long-term viability of the fossil fuel sector and empowering individuals to create social change.
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Frequently asked questions
Fossil fuel divestment is when an organization gets rid of its investments in the fossil fuel industry, ending its relationship with fossil fuels.
Fossil fuel divestment campaigns have had a positive impact on investors' returns in the long term. By stigmatizing fossil fuel companies, divestment campaigns can materially increase the uncertainty surrounding the future cash flows of fossil fuel companies, leading to a permanent compression in their trading multiples.
There are several reasons for divesting from fossil fuels. For some, it is a means of aligning investments with core values, for others, it is a tactic for combating the fossil fuel industry, and for others, it is a way to protect portfolios from climate-related financial risk. The moral motivation for fossil fuel divestment is based on the belief that it is wrong to profit from damaging the planet.
Despite the accelerating growth of the divestment movement, capital has continued to flow into fossil fuels since the 2015 Paris Climate Agreement. Critics of divestment argue that these continued inflows indicate that divestment has not worked. Some studies have also shown that divestment has only had a modest and transitory financial impact on the targeted entities.
