Is fossil fuel divestment campaign pushing institutional investors to consider climate risk in the investment decisions?

To understand the impact of fossil fuel divestment campaign on the investing criteria of institutional investors, I conducted a survey of responsible investors and fossil divestment campaigners (students). The question was a part of a broader survey on fossil fuel divestment. In totality, 77 people responded to this question in the survey. Organisations involved, directly and indirectly, in the responsible investment activities comprised more than 50% of the respondents, followed by students (36.21%). In terms of the location, almost half of the respondents come from UK, followed by the U.S. and Australia combine representing another quarter of total respondents.

Survey response suggest that both the responsible investors and students less confidently agree with the fossil fuel divestment has pushed institutional investors to consider climate risk in the investment decision making process. Response pattern of the responsible investors and students also do not vary significantly as a function of the group (χ2= 4.02, df= 4, p>0.05). Respondents also agree that due to the fossil fuel divestment campaign investors may face increased material risk in fossil fuel investments. This may be due to the stigmatization of fossil fuel companies by the divestment campaign, among other reasons suggested by Ansar, Caldecott and Tilbury (2013)[1]. Knowland (2010) also suggested that climate risk, or the risks posed to companies and investors as a result climate change, is becoming increasingly recognized as an important consideration for the private sector[2]. So if the investment in the fossil fuel companies is becoming increasingly risky, the pertinent question is-are institutional investors considering climate risk in their investment decisions? Interestingly, 86% of the responsible investors stated that they are considering climate risk in their investment decisions, either as a distinct risk category or a part of wider ESG issues.

Therefore, two things emerge very clearly from the survey. First, fossil fuel investing is a becoming a risky affair to institutional investors who focus on long-term returns (e.g. pension funds). Similar sentiments were also expressed by the UNFCCC chief during the recently concluded Lima climate talks[3]. Secondly, most responsible investors are now considering ‘climate risk’ in their investing decision making. However, for trustees of endowments and pension funds, building a portfolio without fossil fuel companies could be difficult and risky, as divestment imposes a penalty on the portfolio. Previous studies on South-African divestment, Sudan divestment, and sin-stocks (tobacco, arms etc.) divestment suggest that the restrictions imposed by divestment increases investment risk, reduce investment, and diversification opportunities. So what would it cost investors who choose to divest from fossil fuel companies? And how will divestment will impact the fossil fuel companies? I will answer these questions in my next blog!

References:

[1] Ansar, A., Caldecott, B. & Tilbury, J. (2013) Stranded assets and the fossil fuel divestment campaign: what does divestment mean for the valuation of fossil fuel assets?

[2] Knowland, C. (2010) The effects of climate risk on investors. MSc Environmental Technology. Imperial College London.

[3] http://www.reuters.com/article/2014/12/02/us-climatechange-lima-idUSKCN0JF37320141202

What are the future drivers to a green world?

To determine the future drivers to a world with less dependence on fossil fuels, I conducted a survey of responsible investors and fossil divestment campaigners (students). In totality, 77 people responded to this question in the survey. Organisations involved, directly and indirectly, in the responsible investment activities comprised more than 50% of the respondents, followed by students (36.21%). In terms of the location, almost half of the respondents come from UK, followed by the U.S. and Australia combine representing another quarter of total respondents. Survey results are presented below.

Survey results suggest that both the responsible investors and students consider falling clean energy cost as the main driver of shunning fossil fuel use in the future, followed by stringent environmental regulations and high carbon price. More than half of the respondents are not convinced with that ‘stranded assets’ arguments and place greater emphasis on the low clean energy cost and stringent environment regulations for shifting away from the fossil fuels. The views of the respondents is also reflective of the past divestment campaigns (e.g. tobacco, Sudan, South African), where due to extreme public pressure a tipping point was reached when governments responded by enacting stringent legislations. Interestingly, even the student community do not consider ‘morality’ as the one of foremost driver of fossil fuel divestment. Does this imply that the fossil fuel divestment campaign may not succeed in its mission to tackle climate change?
To determine this, we also asked survey participants to give their opinion on the chances of fossil fuel divestment succeeding in the coal, gas, and oil sector in next 10 years. Results suggest that there is a 75% chance of fossil fuel divestment succeeding in the coal sector. This probability dropped down to a 25% for the oil sector and 0% for the gas sector. So why do people think that the fossil divestment may succeed in the coal sector and not in oil and gas? Let’s look at a few reasons.
Ansar, Caldecott and Tilbury (2013) [1] argued that since the coal stocks are less liquid, divestment of coal equities would impact coal stock prices. This implies that the investors who are willing to divest from the fossil fuel sector to demonstrate their commitment to environmental sustainability, or for pure financial reasons, would first get rid of the coal stocks. Recently, Storebrand, a Norwegian pension fund and life insurance company, announced divestment of 13 coal extractors from their portfolio [2[[3]. In its divestment call, the pension fund mentioned that the divestment decision is taken to ensure long-term stable returns, besides reducing portfolio’s carbon exposure. Implying in the long term the investors’ see coal stocks as risky, which makes them a likely primary target of the divestment campaign. Divestment of oil and gas stocks seems unlikely mainly due of three reasons. First, all global economies (both developed and developing) are heavily dependent on oil and gas in many areas including, amongst others, power generation, transportation, and manufacturing. IEA (2013) [4] mentioned that present share of fossil fuel in the global mix is at 82%, as it was 25 years ago, and the strong rise of renewable will only reduce fossil fuel share to 75% by 2035. Secondly, due to the rapid industrialization happening in the developing countries, demand of oil and gas is supposed to grow. IEA (2013) states that transport oil demand is expected to rise by 25% by 2035, with most demand coming from India and China. Lastly, oil & gas companies account for roughly 11% of S&P 500 and 20% of the FTSE 100, this makes market for oil and gas stocks very liquid (Ansar, Caldecott and Tilbury, 2013). Sizeable withdrawals of oil gas equities by the responsible investors will not affect their share price, which makes them good investment and least likely candidates of divestment. Therefore, due to the huge demand of oil & gas, and excess market liquidity of their stocks, divestment seems unlikely to succeed in the oil and gas sector. Furthermore, developed economies see transition from coal to natural gas as crucial in reducing GHG emissions. This is evident from the fact that carbon intensity of electricity produced in the U.S. during 2007-12 fell by 13%, mostly due to shift from coal to natural gas (U.S. Energy Information Administration, 2013).
So if the fossil fuel divestment is likely to succeed in the coal sector, and pose a reputational risk to oil and gas companies, do investors really face an increased material risk in the fossil fuel investments? Above all, are investors considering climate risk their investment decisions? I will analyse response of responsible investors to these questions in my next post.

References:

[1] Ansar, A., Caldecott, B. & Tilbury, J. (2013) Stranded assets and the fossil fuel divestment campaign: what does divestment mean for the valuation of fossil fuel assets?
[2] http://www.mynewsdesk.com/no/storebrand-asa/pressreleases/storebrand-reduserer-co2-eksponeringen-i-sine-investeringer-19-selskaper-ekskluderes-882693

[3]http://blueandgreentomorrow.com/2013/07/05/norwegian-pension-fund-divests-from-financially-worthless-fossil-fuels/
[4] http://www.iea.org/Textbase/npsum/WEO2013SUM.pdf

Is fossil fuel divestment the best strategy to address climate change?

To answer this question, I conducted a survey of responsible investors who are signatories to the United Nation’s Principles for Responsible Investment and of fossil divestment campaigners (students). A total of 77 people responded to this question in the survey on fossil fuel divestment and climate risk. Organisations directly and indirectly involved in the investment activities comprised more than 50% of the respondents, followed by students (36.21%). Geographically, almost half of the respondents are from UK, followed by the U.S. and Australia combine representing another quarter of total respondents.

Response to the survey suggest that the responsible investors disagree with the fact that fossil fuel divestment is the best strategy to address climate change, while the student community less confidently agree. Responsible investors might have weighed other options to address climate change like implementing appropriate climate mitigation policies, increasing clean energy share in power generation, plus impact of divestment on the portfolio, before passing on the judgement. Opinion of responsible investors also suggest that a certain segment of the group favor divestment as a legitimate step to address climate change. These might be university endowments, foundations, and/or churches who have taken an ethical standing on fossil fuel divestment and decided to divest fossil equities from their portfolio.Other responsible investors like pension funds who face much more stringent regulatory constraint than endowments and religious investors may not divest just for ethical reasons. This thought was very well reflected by Mayor Mike McGinn of the City of Seattle, U.S. in his statement on fossil fuel divestment that ‘state and federal law on fiduciary responsibility requires board members to only invest funds to achieve a social or environmental objective when the resulting return on investment and related risk are comparable to other available investments’[1]. Past divestment experience (South-African, Sudan etc.) suggest that divesting fossil equities leads to reduced diversification opportunities to investors, increase portfolio risk, and additional transaction costs. Due to the mentioned reasons, among others, responsible investors might have passed the judgement that fossil fuel divestment is not the best strategy to address climate change. On the other hand, students less confidently agree that fossil fuel divestment is the best strategy to address climate change. This may be due to the ethical standing of the student community (campaigners) who consider climate change as a ‘deep moral issue’. Campaigners believe in the legitimacy of fossil fuel divestment by giving ‘carbon budget’ arguments and relying on the success of South-African anti-apartheid divestment campaign, which pushed U.S. government to enact regulation banning U.S. corporations to do business in South Africa.

Various recent articles published by academicians, investors, media professionals take different positions on the fossil fuel divestment issue, most giving reasons to justify their viewpoint. Opponents of the divestment movement suggest that divesting fossil equities will reduce financial resources of oil and gas companies, which in turn will hinder their capability to research, develop and implement carbon capture and storage technologies (CCS)[2]. Others are of the opinion that divestment will hurt oil and gas companies’ capability to undertake projects in difficult technical and political environment by constraining inflow of capital. Since in the near future dependence on fossil fuels (especially oil and gas) will only grow due to rapid industrialization in developing countries, the opponents advocate that transition to natural gas is crucial to address the issue of climate change, not divestment. Perhaps the biggest example of this came from the U.S. where carbon intensity of electricity produced in U.S during 2007-12 fell by 13%, mostly due to shift from coal to natural gas (U.S. Energy Information Administration, 2013)[3]. Proponents of divestment argue that in an era of political capture—where corporate lobbyists dictate national policy—the climate movement is using divestment to bypass a broken political system [4]. Divestment campaigners see themselves as counteracting the lobbying efforts of fossil fuel industry in delaying climate legislation, hence, justifying their standpoint. Regardless of the debate, what is without doubt is that the divestment campaign has been extremely successful in creating high profile debates on climate change and terming ‘divestment’ as a ‘deep moral issue’.

So will the fossil fuel divestment movement be the biggest driver in shifting away from the fossil fuels? I will publish survey responses to this question in the coming week.

[1] http://mayormcginn.seattle.gov/next-steps-on-fossil-fuel-divestment/

[2]http://e360.yale.edu/feature/counterpoint_robert_stavins_divestment_no_substitute_for_real_action_on_climate/2749/

[3] U.S Energy Information Administration. (2013) U.S. Energy-Related Carbon Dioxide Emissions, 2012.

[4] http://read.hipporeads.com/can-divestment-combat-climate-change/