What You Need to Know About Fossil Fuel Divestment
Divesting from fossil fuels makes sense environmentally and financially.
In recent years, the movement to divest from fossil fuels has grown from picket signs and petitions to a multi-trillion dollar crusade involving more than 350 institutions worldwide.
Norway’s Sovereign Wealth Fund, the Episcopal Church, and the British Medical Association are some of the biggest organizations that have divested from fossil fuels, and leading investment firms such as Blackrock have begun to withdraw funds from companies that exacerbate the effects of climate change, too.
Divestment efforts are underway within countless governments, universities, and companies. In most cases, divestment is still a grassroots effort, driven by customers or employees who don’t want to support the fossil fuel industry.
But as the campaign gains mainstream awareness, momentum is building, opportunities for divestment are expanding, and it’s becoming easier for ordinary people to hold powerful institutions accountable.
Here’s what you need to know about fossil fuel divestment.
What does fossil fuel divestment even mean?
Divesting is the opposite of investing. In this case, it means selling shares or bonds that had been bought in companies that cultivate, process, or sell fossil fuel. Individuals can choose to divest from fossil fuel companies on their own, but the divestment movement focuses on investment funds like pensions or big institutions like universities and churches.
Pension funds, for instance, invest people’s retirement savings into portfolios of various companies that are expected to provide strong returns over time. Oftentimes, these portfolios include fossil fuel companies. To divest, pension fund managers have to identify fossil fuel companies within a portfolio, withdraw funds, and then allocate these funds to other companies that have comparable returns on investment. The other option is to withdraw entirely from a portfolio and invest in an environmentally sustainable alternative from scratch.
What’s the argument for divestment?
Fossil fuel companies are overwhelmingly responsible for climate change. The fossil fuels they search for, extract, process, and sell are burned and release heat-trapping greenhouse gases into the atmosphere, which causes climate change. It’s a direct cause and effect. These same companies have plans to cultivate fossil fuels for the next several decades.
For countries to achieve the Paris climate agreement goal of keeping temperatures from rising more than 1.5 degrees Celsius above pre-industrial levels, the vast majority of untapped fossil fuels left in the world have to remain in the ground.
This can only happen if fossil fuel companies are forced to either close up shop or fundamentally change their business models.
Ending subsidies for fossil fuel companies, imposing carbon taxes, and banning new oil, coal, and natural gas projects are the most effective ways to stop future greenhouse gas emissions.
But until this happens on a large scale, the divestment movement helps to put financial and social pressure on fossil fuel companies. In other words, the global divestment campaign seeks to mitigate climate change by phasing out fossil fuels.
Beyond affecting fossil fuel companies' bottom lines, the divestment campaign stigmatizes them by highlighting their leading role in climate change, generating public support for their censure in the process.
Fossil fuel divestment also helps to level the playing field for renewable energy, according to the environmental advocacy group 350.org. By shifting investments from dirty energy to clean energy, solar and wind power companies can expand, invest in research and development, and reach new markets.
The most successful divestment campaign in recent history involved apartheid South Africa. Activists called on countries, companies, and organizations to divest funds from the country until the brutal system of apartheid was dismantled. While not responsible for the collapse of apartheid, the divestment campaign helped to ratchet up pressure against the regime and turn public opinion.
Divestment hinges on widespread solidarity and a belief in a better future achieved through collective action.
Does divestment actually affect fossil fuel companies?
Recent studies have shown that the divestment campaign harms the financial value of fossil fuel companies in two ways.
First, divestment directly harms fossil fuel companies by depriving them of investment for future projects. Fossil fuel companies are valued partly on the basis of future assets, or resource fields, they plan to operate in the future. These projects require immense resources to bring online, and if investment funds and banks were to withhold financing, then fossil fuel companies would be unable to pursue various projects and their value would go down.
Divestment also has a cumulative negative impact on fossil fuel companies, researchers found. When big divestment efforts are announced, the stock prices of affected companies go down. The more divestment announcements, the sharper the decline in stock prices.
One major limit to fossil fuel divestment is that there’s no way to reach state-owned oil companies that account for a significant portion of the world’s fossil fuel development.
How does divestment affect my pension?
It’s understandable to worry about the performance of your pension fund when considering divestment — after all, your retirement is on the line.
But multiple studies have shown that funds that divest actually perform better than funds that invest in fossil fuel companies. This is because enough environmentally sound companies are increasingly viable, fossil fuel companies are increasingly risky, and socially responsible funds attract ethical investors.
Other studies have shown that maintaining fossil fuel investments can cause significant financial harm to pensions.
And that’s in the short term. When taking the long view, investing in fossil fuel companies is essentially voting for business-as-usual, a scenario that will lead to catastrophic climate change. In a future where forests perennially burn, water sources dry up, agriculture fails, heat waves proliferate, and extreme storms grow exponentially stronger, pension funds won’t be of much value.
“It is, therefore, a duty of pension funds that are subject to regulation on fiduciary duty to promote climate change prevention forcefully,” Peter Kraneveld, an international pensions adviser, recently wrote.