Financial Divestment from Fossil-Fuel Companies Very Significant

by admin on April 7, 2021

Think about this, investments need to look to the future, take the long view!

The Powerful New Financial Argument for Fossil-Fuel Divestment

From an Article by Bill McKibben, New Yorker Magazine, April 3, 2021

A report by BlackRock, the world’s largest investment house, shows that those who have divested from fossil-fuels have profited not only morally but also financially.

In a few months, a small British financial think tank will mark the tenth anniversary of the publication of a landmark research report that helped launch the global fossil-fuel-divestment movement. As that celebration takes place, another seminal report — this one obtained under the Freedom of Information Act from the world’s largest investment house — closes the loop on one of the key arguments of that decade-long fight. It definitively shows that the firms that joined that divestment effort have profited not only morally but also financially.

The original report, from the London-based Carbon Tracker Initiative, found something stark: the world’s fossil-fuel companies had five times more carbon in their reserves than scientists thought we could burn and stay within any sane temperature target. The numbers meant that, if those companies carried out their business plans, the planet would overheat. At the time, I discussed the report with Naomi Klein, who, like me, had been a college student when divestment campaigns helped undercut corporate support for apartheid, and to us this seemed a similar fight; indeed, efforts were already under way at a few scattered places like Swarthmore College, in Pennsylvania.

In July, 2012, I published an article in Rolling Stone calling for a broader, large-scale campaign, and, over the next few years, helped organize roadshows here and abroad. Today, portfolios and endowments have committed to divest nearly fifteen trillion dollars; the most recent converts, the University of Michigan and Amherst College, made the pledge in the last week.

No one really pushed back against the core idea behind the campaign— the numbers were clear — but two reasonable questions were asked. One was, would divestment achieve tangible results? The idea was that, at the least, it would tarnish the fossil-fuel industry, and would, eventually, help constrain its ability to raise investment money. That’s been borne out over time: as the stock picker Jim Cramer put it on CNBC a year ago, “I’m done with fossil fuels. . . . They’re just done.” He continued, “You’re seeing divestiture by a lot of different funds. It’s going to be a parade. It’s going to be a parade that says, ‘Look, these are tobacco, and we’re not going to own them.’

The second question was: Would investors lose money? Early proponents such as the investor Tom Steyer argued that, because fossil fuel threatened the planet, it would come under increased regulatory pressure, even as a new generation of engineers would be devising ways to provide cleaner and cheaper energy using wind and sun and batteries.

The fossil-fuel industry fought back — the Independent Petroleum Association of America, for instance, set up a Web site crowded with research papers from a few academics arguing that divestment would be a costly financial mistake. One report claimed that “the loss from divestment is due to the simple fact that a divested portfolio is suboptimally diversified, as it excludes one of the most important sectors of the economy.”

As the decade wore on, and more investors took the divestment plunge, that argument faltered: the philanthropic Rockefeller Brothers Fund said that divestment had not adversely affected their returns, and the investment-fund guru Jeremy Grantham published data showing that excluding any single sector of the economy had no real effect on long-term financial returns. But the Rockefeller Brothers and Grantham were active participants in the fight against global warming, so perhaps, the fossil-fuel industry suggested, motivated reasoning was influencing their conclusions.

The latest findings are making that charge difficult to sustain. For one thing, they come from the research arm of BlackRock, a company that has been under fire from activists for its longtime refusal to do much about climate. (The company’s stance has slowly begun to shift. Last January, Larry Fink, its C.E.O., released a letter to clients saying that climate risk would lead them to “reassess core assumptions about modern finance.”) BlackRock carried out the research over the past year for two major clients, the New York City teachers’ and public employees’ retirement funds, which were considering divestment and wanted to know the financial risk involved.

Bernard Tuchman, a retiree in New York City and a member of Divest NY, a nonprofit advocacy group, used public-records requests to obtain BlackRock’s findings from the city late last month. Tuchman then shared them with the Institute for Energy Economics and Financial Analysis, a nonprofit that studies the energy transition.

In places, BlackRock’s findings are redacted, so as not to show the size of particular holdings, but the conclusions are clear: after examining “divestment actions by hundreds of funds worldwide,” the BlackRock analysts concluded that the portfolios “experienced no negative financial impacts from divesting from fossil fuels. In fact, they found evidence of modest improvement in fund return.” The report’s executive summary states that “no investors found negative performance from divestment; rather, neutral to positive results.” In the conclusion to the report, the BlackRock team used a phrase beloved by investors: divested portfolios “outperformed their benchmarks.”

In a statement, the investment firm downplayed that language, saying, “BlackRock did not make a recommendation for TRS to divest from fossil fuel reserves. The research was meant to help TRS determine a path forward to meet their stated divestment goals.” But Tom Sanzillo — I.E.E.F.A.’s director of financial analysis, and a former New York State first deputy comptroller who oversaw a hundred-and-fifty-billion-dollar pension fund — said in an interview that BlackRock’s findings were clear. “Any investment fund looking to protect itself against losses from coal, oil, and gas companies now has the largest investment house in the world showing them why, how, and when to protect themselves, the economy, and the planet.” In short, the financial debate about divestment is as settled as the ethical one —you shouldn’t try to profit off the end of the world and, in any event, you won’t.

These findings will gradually filter out into the world’s markets, doubtless pushing more investors to divest. But its impact will be more immediate if its author — BlackRock — takes its own findings seriously and acts on them. BlackRock handles more money than any firm in the world, mostly in the form of passive investments — it basically buys some of everything on the index. But, given the climate emergency, it would be awfully useful if, over a few years, BlackRock eliminated the big fossil-fuel companies from those indexes, something they could certainly do. And, given its own research findings, doing so would make more money for their clients — the pensioners whose money they invest.

BlackRock could accomplish even more than that. It is the biggest asset manager on earth, with about eight trillion dollars in its digital vaults. It also leases its Aladdin software system to other big financial organizations; last year, the Financial Times called Aladdin the “technology hub of modern finance.” BlackRock stopped revealing how much money sat on its system in 2017, when the figure topped twenty trillion dollars. Now, with stock prices soaring, the Financial Times reported that public documents from just a third of Aladdin’s clients show assets topping twenty-one trillion.

Casey Harrell, who works with Australia’s Sunrise Project, an N.G.O. that urges asset managers to divest, believes that the BlackRock system likely directs at least twenty-five trillion in assets. “BlackRock’s own research explains the financial rationale for divestment,” Harrell told me. “BlackRock should be bold and proactively offer this as a core piece of its financial advice.”

What would happen if the world’s largest investment firm issued that advice and its clients followed it? Fifteen trillion dollars plus twenty-five trillion is a lot of money. It’s roughly twice the size of the current U.S. economy. It’s almost half the size of the total world economy. It would show that a report issued by a small London think tank a decade ago had turned the financial world’s view of climate upside down.

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David Carlin April 8, 2021 at 10:23 pm

The Case For Fossil Fuel Divestment

From David Carlin, Forbes Magazine, February 20, 2021

A decade ago, noted environmentalist Bill McKibben had a radical-sounding idea. To save the planet, we needed to “revoke the social license of the fossil fuel industry.” His comprehensive vision of fossil fuel divestment would require financial institutions and civil society to stand shoulder-to-shoulder. This plan was audacious; in 2011 Exxon Mobil was the largest company in the world, and nearly every foundation and academic endowment invested in fossil fuels.

However, divestment has gained remarkable traction in recent years, going from a fringe strategy to a $14.5 trillion movement with over a thousand major investors, pension plans, and endowments committed. Today, as institutional and retail investors pour money into environmentally conscious funds, it is time to consider the financial and social benefits of the movement.

The divestment movement changed the conversation around fossil fuel finance. Investors and banks are increasingly questioning the long-term viability of the entire sector. Divestment seeks to stigmatize fossil fuels and raise uncertainty around their continued use, to reduce the financial desirability of fossil assets. Fossil fuel mining, exploration, and extraction all are capital intensive activities that demand constant access to capital. If capital costs rise or the supply of capital is reduced, projects can become uneconomical and fossil fuel companies can see their valuations fall.

This process is well underway in financial markets for the most polluting and least efficient fossil fuel, coal. Even for oil and gas, a study across thirty-three nations indicates that increased divestment pledges are associated with decreased debt and equity capital flows to fossil fuel firms. Unsurprisingly, the effectiveness of divestment is amplified in countries with strong environmental policies and diminished in those that subsidize fossil fuels.

Proponents of divestment may seek to starve fossil fuel producers of capital, but they are also making a savvy business decision. Over the past decade, the fossil fuel supermajors (e.g., Exxon, Chevron, Shell, BP) have tumbled from their perch as the planet’s largest companies. In 2020, Exxon was booted from the Dow. The once mighty energy sector is now the smallest sector in the S&P 500. Since its inception in 2012, the S&P 500’s Fossil Fuel Free Total Return Index has consistently outperformed the S&P 500 overall. As fossil fuel equity prices plummet, holding onto these companies has been value-destroying for many shareholders, leading market commentator Jim Cramer to declare “I’m done with fossil fuel stocks.”

Fossil fuel debt has also proven a risky proposition. The raft of bankruptcies last year among fracking companies (including fracking pioneer Chesapeake Energy) revealed the volatility, capital-intensity, and unsustainability of their business models. Even larger companies are feeling the pain. Exxon, Shell, and Sonoco all saw their credit ratings cut this month.

Fundamentally, fossil fuel companies are valued on their reserves. Climate science tells us that to maintain a safe climate, most of those reserves must remain in the ground. Unexploitable reserves become worthless, stranded assets. Write-down the value of these potentially stranded assets and fossil fuel companies are looking at a grim financial future. Financial institutions can choose divestment to avoid major losses and gain the opportunity to reinvest in more promising industries.

Despite the accelerating growth of the divestment movement, capital has continued flowing into fossil fuels since the 2015 Paris Climate Agreement. Some might argue that these continued inflows indicate that divestment has not worked. However, considering only immediate financial impacts of divestment misses the wider effects of the movement. An Oxford study made this point, stating, “the most far-reaching threat to fossil fuel companies” comes from increased social and political stigmatization of their activities and the resultant uncertainties around their long-term viability. Within finance, government, and civil society, the divestment movement has forced a fundamental reckoning with the future of the global energy system.

Divestment has its share of critics. Many of them look at the continued financing of fossil fuels and see divestment as a blunt, or perhaps, naïve approach to addressing a complex problem. While the divestment movement alone may not solve the climate crisis, divestment must be considered within the broader ecosystem of climate action. Although it sits at one end of the climate finance spectrum, divestment has shifted the discourse around climate considerations in finance, which empowers other climate actors.

In terms of avoided emissions, the divestment movement’s impact will continue to grow, but it has already succeeded in putting the fossil fuel sector on notice.


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