Divestment

The removal of investments from the fossil fuel energy economy is no longer just a grassroots movement; for many investors it has long since become a matter of economic survival. Even if the amount of money is still relatively low, the trend has been set: the ‘coal bubble’ must shrink, otherwise it will burst.

By Verena Kern

Translated from the German by Isabel Schuseil, Jessica Stahl, Kerstin Rosero, Rosemarie Prinsloo, Vanessa Tacken, Cathleen McNally, Hannah Al-Jamie, Svenja Thiel and Jennifer Vardaro

Bill McKibben is someone who never gives up. For years, this American author has warned people of the dangers caused by climate change. His books have been bestsellers and have been showered with awards. Some of his texts are even used as scholastic learning material in the U.S. He has not, however, been able to secure any concrete achievements. The majority of Americans still consider people like McKibben to be crazy and global warming to be a mere weather phenomenon, about which nothing can or must be done. In 2007, McKibben became a climate activist and founded the grassroots movement 350.org, which finds supporters all over the world now. The organization’s name spells out its concrete aim: the concentration of carbon dioxide in the earth’s atmosphere must not surpass 350 parts per million if we want to prevent dangerous global climate disruption. We have already reached 400 ppm and the world’s greenhouse gas emissions are still not decreasing. After five years filled with numerous campaigns and initiatives, in December 2012, Bill McKibben made a sobering statement: “None of what we have accomplished so far as a movement has been enough.”

Today, just over three years later, the situation looks different. The new climate agreement, which was signed in Paris 2015, has turned out to be more ambitious than expected. The goal of the agreement is to keep global warming ‘well’ below an increase of 2 °C, the new limit being 1.5 °C. By 2050, the world is supposed to be ‘climate neutral’. If there are still emissions at that time, they will have to be compensated for by climate protection measures elsewhere. 

Climate protection has appeared on the political agenda in other respects. With their national climate targets, which are based on the Paris Agreement, many nations have announced their massive expansion of renewable energies. The G7 nations already committed to decarbonisation during their summit in Elmau, Germany, in June 2015. In September, the UN General Assembly in New York set new ‘Sustainable Development Goals’, which require each nation in the world to promote sustainable development and climate protection.

To date, all these nice goals, however, only sound good on paper as well-meaning declarations of intent. They provide direction and make it clear to the political, economic and social players where the journey is supposed to lead – which is not unimportant. However, not a single tonne of greenhouse gas emissions has been saved this way. Emissions continue to increase even in Germany, which is shifting towards renewable energy systems. The answers to the question of how to reach the targeted climate neutrality in the foreseeable future or at all are still vague at best.

Divestment tackles the roots of the problem

At this point, Bill McKibben comes on the scene again. After the first attempt to adopt a new climate agreement failed dramatically in Copenhagen in 2009, McKibben started searching for a more promising approach. Instead of waiting for countries all over the world to finally jointly decide to save the climate, he wondered where to start in order to drive forth real decarbonisation so that climate protection is not only a fig leaf that makes the continuously increasing emission look less bleak. His idea is called ‘divestment’ and tackles the problem at its roots, which means, in this case, the money.

To date, astronomical sums of money have poured into the fossil fuel sector, thwarting all efforts to protect the climate. Although it is known that oil, gas and coal are the main cause of global warming, their use is highly subsidised. The direct subsidies amount to at least USD 500bn worldwide every year. If one adds in the costs for environmental damage, which must be borne by the general public, they amount to USD 5.3trn, as recently determined in a working paper by the International Monetary Fund. (The resulting damage to the climate was not taken into account in this calculation.)

A similar amount is raised on the stock market by groups of affiliated companies. According to the financial service provider Bloomberg, the combined market value of the approximately 1,400 oil and gas companies listed at the stock exchange amounts to USD 5trn, while the combined market value of coal companies amounts to USD 230bn. Exxon Mobil, the world’s largest listed oil company, alone is worth about USD 330bn. If the Saudi Arabian oil company Aramco indeed goes public, as recently announced, their value may amount to several trillion dollars, thus representing by far the biggest and most valuable group.

This is where the divestment campaign comes in. The aim of ‘Go Fossil Free’ is to convince shareholders to divest from fossil fuel companies so that climate-damaging business models are no longer profitable. As written in the campaign’s manifesto: “If it is wrong to wreck the climate, then it is wrong to profit from that wreckage.”

In the past, similar campaigns have already been directed against tobacco companies, the defense industry and the apartheid regime in South Africa. The reasoning is that it is not enough to stop individual projects such as oil pipelines and coal-fired power plants in order to achieve climate goals. Furthermore, it is not enough to build plenty of new wind turbines and solar farms if they are built in addition to using fossil energies instead of replacing them. In principle, financial flows must be tackled in order to make a difference.

Disassociation weakens the powerful

To help investors orient themselves, the campaign has made a boycott list containing the 200 most climate-threatening listed companies in the world. These companies own the majority of the known fossil reserves. The German RWE Supply & Trading Company is on this list as well as energy giants from the USA, China, India and Russia, among others. The online platform 350.org is certain that the more investors withdraw their assets from these companies, the sooner it will be possible to alter the course towards climate change mitigation. "When investors distance themselves from coal and oil companies, it weakens the companies’ social acceptance and thus their political power," says Melanie Mattauch who represents 350.org in Germany.

The primary objective is to keep the majority of fossil fuel reserves underground because a huge amount of money is also spent on the search for and discovery of new deposits. In 2012, energy companies spent USD 674bn on this. The Exxon Mobil Corporation spends USD 37bn annually for this purpose alone. That is USD 100m per day. It has long been clear that even the vast majority of the known reserves will have to remain in the ground in order to make a serious contribution to climate change mitigation. These reserves alone represent CO2 emissions, which are five times higher than the maximum amount that mankind can emit without reaching even the two-degree-goal. Bill McKibben's campaign began in 2010. Initially, the response was modest: even after three years, the sum of divestments was only at USD 50m and by 2013 only 40 institutions had joined in.

However, in the meantime the tables have turned. During the days leading up to the UN Climate Change Conference in Paris (COP 21), the movement has gained significant momentum. The closer it came to the day of the important climate conference, the more investors took part. And the more people are involved, the more autonomously the movement develops. Each investor who decides in favor of divestment is another incentive for other investors to do the same. "The divestment movement is catching fire,” reports May Boeve happily. Boeve recently took over the 350.org leadership.

Even oil billionaires are retreating

"The momentum of the divestment movement is growing every day," says Stephen Heintz as well. He is the president of the Rockefeller Foundation and in his position, he is responsible for a fortune of USD 860m. The Rockefeller family, once a symbol of oil wealth, announced their withdrawal from the oil business as early as in 2014. Since then, they have supported the divestment movement. "We have to stop investing in fossil fuels now," demands Heintz.

The Government Pension Fund of Norway, which is the second-largest pension fund in the world with roughly EUR 750bn, decided to do so in December 2014. The fund no longer wants to invest in activities that are "particularly climate-damaging". However, this only refers to the coal business. To date, the oil nation Norway has rejected a complete withdrawal from fossil energy projects. Melanie Mattauch from 350.org doesn’t consider this a problem. "Coal is always the first step for divestment. The Norwegians know that their oil reserves won’t last forever.”

In March 2015, Oslo followed suit, which makes it the first capital in the world that will withdraw its money from coal funds. "Investing in coal is incompatible with the concept of an environmentally friendly city," says Oslo's Finance Commissioner.

In specific terms, this means that about EUR 10m of the pension fund will be shifted into green investment funds. Also in Denmark, there are thousands of investors planning to invest their fund assets of EUR 32bn in a more climate-friendly way. Shortly before, the Oslo Stock Exchange was the first in the world to open the market for certified green bonds.

“Interest in green bonds has increased significantly”, remarks Sean Kidney of the Climate Bonds Initiative in London. He considers the expanding market for green bonds to be a “modest but positive sign for the investors’ disposition to take responsibility for the climate.” Kidney estimates the global volume to be USD 85bn by now. In 2016, it will increase by another USD 100bn. The trillion-dollar mark could be exceeded by 2020. According to the initiative, the current green bond volume corresponds to just 0.1 percent of the global bond market. There is still a lot of room for improvement.

The divestment movement has reached Germany as well. In November 2015, the Munich based insurance company Allianz stated that it will not invest in the coal business any longer. The former investments will steadily be divested. Allianz is the world’s largest insurance company and among the five biggest financial investors in the world. It has put around EUR 4bn into coal mines and coal-fired power plants so far. Such investments will no longer take place in the future. “This is a true cultural change in Germany”, said the World Resources Institute in Washington, commenting on the company’s decision.

Münster was the first German city to decide to divest itself from climate-damaging industries. The Swedish city Uppsala, the Dutch pension fund PFZW, the London School of Economics and also the Protestant Church in Hesse and Nassau have declared themselves to be divestment supporters as well. The French parliament and 19 French cities have also announced their rejection of climate-damaging investments, including Paris, Lille and Bordeaux. Meanwhile, even the commercial bank BNP Paribas, the insurance company Axa, the Stanford University, the World Council of Churches and the Californian Pension Fund are on board, as well as celebrities such as Hollywood actor Leonardo DiCaprio.

Green instead of grimy investments

UN Secretary-General Ban Ki Moon has reiterated the demands of the divestment campaign. As early as November 2014, he called on major investors to “reduce their investments in the economy powered by fossil fuels and to invest in renewable energies instead.” Ban is not the only one. The head of the UN Climate Change Secretariat, Christiana Figueres, Nobel Peace Prize laureate Desmond Tutu, the President of the World Bank Jim Yong Kim and US President Barack Obama have also called for higher investments in renewables. In Paris, 20 states and 20 private companies announced a billion-dollar initiative to accelerate the technological progress in ‘clean energies’, among them giants like Facebook and Amazon.

To summarise: more than 500 institutions and 2,000 individuals with assets totalling USD 3.4trn have committed themselves to divest their capital from the fossil fuel sector, as 350.org reports. The amount is almost equivalent to the German gross domestic product. “The movement has achieved extraordinary results in a very short time”, is the verdict of Alexander El Alaoui, expert for ethical investment at the development association Brot für die Welt (Bread for the World). “Divestment has become mainstream. By now, every company needs to consider to what extent it wants to make climate-damaging or climate-friendly investments.”

However, this calculation is flawed. This USD 3.4trn represents the total assets of the institutions that have declared their support for divestment strategies. It is not the total sum that is being withdrawn from the fossil-fuel sector, which is a lot less. Norway’s multi-billion euro pension fund, for example, has only shifted EUR 1.2bn so far, according to a recent annual report. In total, they are planning a divestment of EUR 10bn. This is really not much if we take into consideration the company’s total assets of EUR 750bn.

“The current divestment sum is a mere drop in the ocean,” admits Melanie Mattauch from 350.org. “However, the signal that the campaign is sending is more important to us.” It’s a signal with the following message: the production, selling and burning of fossil fuels is not viable for the future. “We don’t want to ruin fossil fuel corporations,” clarifies Mattauch. “It’s all about moral bankruptcy, not financial bankruptcy.”

Only a low-carbon economy makes sense for the future 

At the moment, the divestment movement is still too small to give fossil fuel corporations a really hard time. Ironically, the business model of the sector represents the actual danger. Corporations – and with them their investors – are sitting on a huge carbon bubble. They are overvalued. If the climate solutions of Paris are put into practice, the majority of the corporations’ resources will become worthless. The British Carbon Tracker initiative has been pointing out the risks of the carbon bubble since 2011 and talks about “wasted money” and “misdirected monetary flows”. Economist Nicholas Stern has been warning against the economic consequences of the climate change for years and advises “clever” investors to stay away from fossil investments. The risk of a crash is “very high”. 

This has also roused the European Central Bank to action. Their ‘risk board’ has investigated the risks of a carbon bubble and is issuing warnings against a huge and lasting negative macroeconomic shock unless the  shift towards a low-carbon economy occurs very soon. The Swiss Federal Office for the Environment conducted a study and found out that the present investment behaviour “supports” global warming by four to six degrees Celsius and, therefore, facilitates future crises. The Federal Office has requested counter measures. The upshot is that the divestment movement – with its demand to start shifting right away – will help prevent the impending crash from occurring. 

Climate scientist Hans-Joachim Schellnhuber sees a grassroots movement coming because not only majority shareholders are affected but also all the minority shareholders as well. They, too, have the choice whether or not they want to make climate-damaging investments. “The divestment movement can hold a moral mirror up to our politicians,” says Schellnhuber. “It’s going to be one of the biggest movements of the 21st century.” 

This would mean that Bill McKibbens’ perseverance will have been worth the effort. “Climate change is the greatest problem on Earth that we humans have ever caused,” according to the activist. “The only thing that needs to be even greater is our attempt to stop it.”

Verena Kern works as a freelance journalist in Berlin. She primarily focuses on topics relating to the environment, the climate and energy. Since 2011, she has been part of the klimaretter.info online magazine’s editorial staff. In addition to that, she writes for the Frankfurter Rundschau (a German daily newspaper), the Deutsche Welle (a German international broadcaster) and specialist magazines.