Divestment: It is not all or nothing

One of the more remarkable aspects of the global divestment campaign is the manner in which it has enjoyed significant success while being so commonly misunderstood and frequently misrepresented.

For two reasons - one well-intentioned, the other categorically not - fossil fuel divestment has been widely characterised as an ethical, moral and absolutist crusade against an irresponsible polluting enemy. In fact, it is a much more nuanced trend rooted in the dispassionate world of investment returns and corporate risk management, but sadly that was never going to generate headlines.

The first explanation for the misapprehensions that dog the divestment movement is provided by the very campaigners who successfully pushed the concept up the political and boardroom agenda. A complex argument centred on variable stranded asset risks and the likelihood of what Al Gore refers to as "multiple pathways to stranding" playing out is not the easiest sell to the wider public, so campaign group 350.org and the Guardian condensed the argument down to a simple mantra: 'keep it in the ground'.

This approach has proven effective, fuelling public interest and successfully cranking up pressure on public-facing organisations while convincing the more progressive pension funds and billionaire investors to divest from fossil fuel assets. It has also deliberately drawn parallels with morally motivated divestment campaigns, such as those against South African apartheid, further bolstering the impression that the primary reasons to divest are ethical.

However, the focus on ditching any and all fossil fuel assets has, in some respects, played into the hands of the fossil fuel companies and their apologists, who have been able to misrepresent divestment as a hypocritical attempt to bring fossil fuel production to an immediate halt and deny developing economies access to much-needed power.

Which brings us to the second reason divestment remains poorly understood: fossil fuel industry misinformation. As I've argued before, the fossil fuel industry response to the argument that its valuations are based on assets that we cannot burn if we are to stand a reasonable chance of meeting internationally agreed climate change targets boils down to 'we are going to burn it anyway'.

But while the more arrogantly reckless end of the industry (Exxon, we're looking at you) is happily trotting out this nihilistic argument, the rest of the industry has sought a more credible line in response to warnings of stranded assets. The unanswerable logic of the carbon bubble has forced it to plump for a deliberately confusing mixture of greater transparency in its climate-related reporting, vague dismissals of the divestment argument as a 'red herring' and repeated attempts to mischaracterise stranded asset warnings as a call for a sharp halt to all fossil fuel production, while presenting fossil fuel development as the only way to meet emerging economy power demands.

The reality is that these wilfully confusing arguments conceal a fascinating and nuanced reality - one that should have every fossil fuel company on the planet deeply worried.

Fossil fuel divestment and the carbon bubble is not a binary campaign requiring investors to make a simple hold/offload decision. Rather it is a prism through which investors make numerous investment choices, ditching the highest-risk assets based on a more comprehensive understanding of financial risk than investors have typically displayed in the past.

Some investors will undoubtedly see fossil fuel divestment as an ethical choice akin to apartheid and will want to exclude all carbon-intensive assets from their operations. But many will assess carbon-related risks on a case-by-case basis and divest some firms while retaining others. Hence, the decisions by the Norwegian Sovereign Wealth Fund, the Church of England and Oxford University to divest coal-rich companies from their portfolios looks to be a more significant trend with a greater chance of becoming a mainstream investment practice than full-blown divestment of all fossil fuel assets. This is not just an environmentally responsible decision, it is a financially responsible decision given demand for coal in the world's largest markets is stalling, valuations of coal companies have performed woefully and any tightening of climate policies will hit coal first and hardest. A lot of coal assets still look overvalued - it is a good time to get out.

This tiered approach to divestment demonstrates how those (including London Mayor Boris Johnson) suggesting that full-blown fossil fuel divestment will push the energy industry and the global economy off a cliff edge are so wide of the mark. But any oil and gas companies tempted to breathe a sigh of relief should not be celebrating just yet. The primary focus of financially motivated divestment will be coal, but it will spread very quickly to any capital and carbon-intensive projects that would see returns compromised if tighter regulations or alternative clean technologies prove successful. More risk-averse investors are already looking to divest assets linked to tar sands, Arctic drilling and other costly exploration projects. The list of companies that face credible divestment risks will only lengthen over time.

Divestment is not a simplistic all-or-nothing punt, it is a complex decision-making matrix. But over time the end result will be the same: any investors with an interest in long-term returns will gradually ditch carbon-intensive assets and shift towards more sustainable investments that evidence increasingly suggests offer safer and more attractive returns.

It is against this backdrop that the fossil fuel industry's two great strategic missteps become obvious. First, as has been well-documented by Carbon Tracker, too many oil majors are continuing to invest in carbon and capital-intensive assets that are loaded with risk and could struggle to deliver promised returns if regulations tighten, oil prices remain low or clean technologies continue to prosper. But, second, they have also singularly failed to diversify their business model and guard against the risk presented by clean energy alternatives eating their lunch.

Yesterday's BP Statistical Review confirmed growth in consumption of coal, oil and even gas were all below the 10-year average last year, while growth in global demand for energy was also well below the long-term average and evidence continued to mount that the link between energy demand, emissions and economic growth is being decoupled. Historically speaking, shale gas and the oil price crash will prove a blip; the big long-term trends in the energy sector are the surge in renewables capacity (admittedly from a low base) and the drastic improvements in energy efficiency. These trends are increasingly obvious, and yet still the oil majors (with arguably one or two exceptions) soft-pedal with their efforts to exploit this revolution and deliver their own large-scale clean energy offerings.

As former Shell exec James Smith, now of the Carbon Trust, has repeatedly argued, the failure of the oil and gas industry to step up investment in carbon capture, hydrogen and other clean technologies represents the most appalling short-sightedness.

Divestment may all too often be misunderstood, but it is easy to understand why the fossil fuel industry does not represent a good long-term investment. It is loaded with risk and is guilty of ignoring a technology transition that is staring it in the face. Widespread, full-blown divestment is a good few years away yet, but it is coming and the only way for the fossil fuel industry to avoid it is to divest itself through the development of credible sustainable business models.

Some within the oil and gas industry ignore this reality; others acknowledge it, but appear to hope that the transformation won't come for another 40 or 50 years. As BP's Bob Dudley observed yesterday: "Our task as an industry is to meet today's challenges while continuing to invest to meet tomorrow's demand, safely and sustainably." Amen, to that. Now all that is required is for the industry to recognise that over-reliance on unabated fossil fuels is neither safe nor sustainable, nor a good long-term investment proposition.

Further reading

North American scientists call for end to tar sands mining

• Climate change
• 11 June 2015

UN: Businesses 'can help win fight against climate change'

• Management
• 11 June 2015

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