Follow the divested money

James Murray


The fossil fuel divestment trend is one of the biggest financial stories in years, all businesses need to understand its implications

Follow the money. It is the motto of investigative journalists everywhere. The three little words that have brought down presidents and landed corporate giants in jail. The handy reminder that once you have found the quid all you need to do is search for the pro quo.

It also applies just as neatly to business trends, although sometimes it is useful to tweak it slightly. Follow the money, by all means, but also follow the absence of money, the non-money, where the money used to be, where the investment has become divestment.

It won't get the coverage it deserves but the scale, reach and pace of the fossil fuel divestment sphere - yesterday confirmed at over $5tr, a doubling in size in just 15 months - is one of the most important financial stories of the past decade.

The fact this is already the fastest divestment trend in history by quite some distance should be shared far and wide, especially when you consider the rapid growth in divested dollars has been achieved against a backdrop of sluggish economic growth and political instability. In turbulent times capital seeks safe havens and for decades fossil fuels were regarded as the safest of safe ports - not any longer, not for a large and growing chunk of the investment community.

However, the really exciting thing about the rapidly expanding divestment phenomenon is that it is simply the tip of the smoke stack. 

The initial wave of divestment pledges, mobilised from amongst the usual suspects of faith groups, academic institutions, and celebrity investors, was hugely influential and helped serve notice on the fossil fuel industry that its public license to operate was under threat like never before. The ethical reasons for divesting from fossil fuels are valid and well-articulated, hence the private fear among some coal and oil industry execs that the political and policy privileges they had clung on to for decades are being threatened far more by divestment than they ever were by a eye-catching Greenpeace stunt.

This trend will only continue. The Nobel Foundation will soon find its reputation for controversy is fostered more by its fossil fuel holdings than its choice of Bob Dylan as winner of its literary prize. No institution with a high profile and progressive reputation to nurture will be immune from calls for divestment. Like tobacco before them, high carbon assets are fast becoming regarded as toxic in more ways than one.

Some within the fossil fuel industry will regard this approach as unfair, given how we are all still reliant on high carbon infrastructure, but an industry of unimaginable wealth that has polluted and grifted since its inception should be wary of playing the victim. Thanks to the first wave of ethically motivated divestment the fossil fuel industry looks set to spend its twilight decades on the defensive.

But what will really have the most switched on fossil fuel industry bosses concerned is the speed with which a pretty standard divestment campaign rooted in the moral understanding that those who want to build a decarbonised world should not watch idly by as their money works against their goals has morphed into a commercial trend centred on financial risks, rewards and maximised returns.

Yes, yesterday's report confirmed three quarters of the divestment pledges delivered so far have come from religious institutions, academic bodies, and individuals, but that leaves over a trillion dollars coming from institutional investors and pension funds that have considered their fiduciary duty and concluded it includes not wanting to touch high carbon assets with a proverbial barge pole.

They have reached this decision for obvious reasons. They have looked at the risk profile of high carbon firms and seen how the coming together of tightening, post Paris Agreement regulations, reputational pressure, and intensifying competition from renewables and electric cars in particular means there is a good probability fossil fuel assets will end up over-valued.

These divested investors may be wrong, high carbon firms may be able to unwind their polluting asset base and transition towards clean technologies as inevitable changes to the economy occur, or they may just burn all the carbon any way and condemn us to an overheated hellscape, while maximising medium term returns in the process. But the risk of these assets being left stranded is real and it is entirely rational for investors to conclude they will get better and safer returns surfing the transition to a cleaner economy, rather than clinging on to fossil fuel holdings that constantly run the risk of the carbon bubble bursting, leaving them with junk stock.

That is why $5tr of divested assets is just the start. When oil industry executives are publicly speculating demand could peak within five to 15 years, when the Financial Stability Board is demanding all companies report on their preparedness for a range of climate and decarbonisation scenarios, when across east Asia the pipeline of new coal plants is being rapidly curtailed, when Donald Trump's war for coal delivers negligible results and US states join with Canada to advance carbon pricing across North America, when renewables and smart grids start to undercut fossil fuel power and EVs become the cheapest cars on the roads, then more and more investors will run the numbers and conclude the risks associated with high carbon assets outweigh the rewards.

Meanwhile, as divestment continues to grab headlines something just as important will continue to play out in the background. They are not recognised in the official divestment figures, but more and more investors are quietly curbing their exposure to the riskiest fossil fuel stocks while using their remaining holdings to demand that the industry shifts its business model and steps up its investment in the survival technologies that could keep it solvent.

I recently interviewed Emma Howard Boyd, chair of the Environment Agency, who explained this is the approach taken by the agency's pension fund: a multifaceted program of gradually decarbonising its portfolio, investing in the transition to a low carbon economy, and engaging with the fossil fuel industry to encourage transformation within the sector. Legal and General's important new 'climate tilt' fund offers a similar vision, allowing investors to combine a more mainstream  investment approach with a high degree of protection against evolving climate risks.

This spectrum of divestment approaches is beginning to work. The more progressive oil majors have stumped up $1bn for clean tech R&D (a paltry sum in the grand scheme of things, but a sign of things to come) and are quietly edging away from the most capital intensive projects. Growing numbers of policymakers are acknowledging the unanswerable logic of the Paris Agreement and the carbon bubble it implies. Mark Carney is about to step the debate up another gear with recommendations from the Financial Stability Board that demand climate risks are addressed.

Of course, money will continue to flow into fossil fuels, and Trump and his team will do all they can to pump up the share prices of fossil fuel incumbents. But for many investors these short term trends will do nothing to address the long term risks the sector faces. Divestment dollars are heading in one direction and they are doing so for entirely logical reasons. Follow the money. As the latest Nobel Laureate almost said, it's not just talking about the risks the high carbon economy faces, it's swearing about them at the top of its voice.

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