Photo by the Renewable Energy Hub

Just 20 oil and gas companies have contributed 35 percent of all energy-related carbon dioxide worldwide.  Eight of them are investor owned:

            *Chevron                                            *ExxonMobil

            *BP                                                      *Royal Dutch Shell

            *Peabody Energy                              *ConocoPhillips

            *Total SA                                             *BHP Billiton 

In a series of detailed articles, the British newspaper, The Guardian, released this important conclusion, adding that since 1965, these eight along with 12 state owned firms have emitted 480 billion tons of carbon dioxide equivalent.

350 Bay Area has a long history of pressuring major investing entities to divest from fossil fuels. This Fall, we had a major win as the UC Regents agreed to shed fossil fuel investments from its pension and endowment portfolios after six years of activism by 350 Bay Area and other community groups. Fossil Free CA focuses on the two enormous California pension funds (CalPERS and CalSTRS), pressuring them to divest. Fossil Free CA started as a 350 Bay Area program team before successfully launching as an independent entity.

Is divestment a useful response?

In December, 2015, the University of Toronto proposed that it divest itself from companies that “blatantly disregard the international effort to limit the rise in average global temperatures… These are fossil fuels companies whose actions are irreconcilable with achieving internationally agreed goals.”

The Toronto Principle, as it became known, has been adopted by a growing number of universities, cities, government entities and individual investors.  Institutional funds alone have divested over $12 trillion since the effort began.

But how, exactly, does this process work?   Is it actually making a difference or is it just a way to make some of us feel good about our actions?

Oil companies, of course, tell us that divestment will have a disastrous effect on fuel supplies and the economy in general.  The point out that the means to power the planet have to come from somewhere and that we currently don’t have ways to replace their production at the rates needed.  They maintain that oil and gas are a huge part of the global economy and that injury to their bottom line will injure the world economy as a whole.

From a completely different quarter, opponents argue that divestment won’t do nearly enough to change the behavior of oil companies.  In fact, the world’s largest banks and asset management companies have expanded their investments in coal, gas and oil companies since the 2016 Paris climate agreement.

It’s important to understand how oil and gas companies are valued.  All of them assess their value based not only on what they produce, but also on assets they still have in the ground.  A 2013 study by HSBC bank estimates that 40-60 percent of the market value of BP, Royal Dutch Shell and other European fossil fuel companies would be wiped out if assets in the ground were permanently stranded.  The only way for these companies to maintain their value is to ensure that all of their oil and gas assets are brought to market. From a monetary standpoint, there is absolutely no incentive to decrease production and every incentive to keep pulling their product out of the ground.  

The second thing to consider is that divestment isn’t happening in a vacuum. Money withdrawn from oil and gas companies is often reinvested in sustainable energy companies.  Bill Gates, who doesn’t believe divestment is a useful tool, still admits that investing in disruptive technologies – as his Foundation does – is a good way to slow carbon emissions.

Whatever reductions might eventually be forced on these companies, this is clearly not about to happen overnight; it would undoubtedly take effect over time as temperatures rose and more stringent regulations kicked in.  In fact, a 2013 study by the Aperio group, an investment advisory firm, concluded that the economic risks of divestment from fossil fuel firms in the Russell 3000 stock index were “statistically irrelevant.”

So if divestment isn’t going to stop oil and gas companies in their tracks, what’s the point and is it eventually going to make a difference?

It is hard to argue that $12 billion worth of divestment isn’t having some effect.  Activists admit that it isn’t going to immediately starve companies of capital.  But there is a more intangible effect. By highlighting the dangers of climate change and continuing to grow the amount of funds divested while publicizing that effort, climate activists hope to remove what they call the “social license to operate,” allowing the hold on investment firms and politicians to be broken.  They point to the campaign to divest from South Africa in the 1980s as a contributing factor to the end of apartheid.

And at some point, sheer, cold financial calculation may also kick in.  No less than the Governor of the Bank of England, Mark Carney, has warned that at some point, many of the assets of oil and gas companies may, in fact, be stranded.  Once this danger becomes more evident, investment managers will do what they’ve always done – look out for shareholder value, drop companies in danger of failing and invest in new ones with more potential.

Make no mistake – this is a long game. 

Just because oil companies haven’t failed overnight is no reason to quit the process now.  We don’t want that to happen anyway. A world economy spiraling downward does no one good – least of all climate activists.  The idea is to thread the needle and move the world off of oil and gas as quickly as possible without creating an economic crisis.  Time, of course, is of the essence. There are a great deal of moving parts, but the divestment movement is starting to make its mark.  This is exactly the time to keep up the pressure, with divestment, and all of the other tools at our disposal.

******For individual investors looking for ways to participate, the website is a perfect way to investigate ways to move retirement funds, 401k’s, or personal investments out of fossil fuel companies and into more climate friendly funds.

*****Also, check out the how-to-divest guides below for concrete steps on how to handle the  transition.

 by Peter Ornstein, 350 Bay Area Contributing Writer