Does defunding fossil fuel companies make economic and environmental sense?

Analysis: The fossil fuel financial divestment movement is gathering pace, removing some $14.5 trillion from the sector. But it has been criticised in some quarters as unrealistic and even counterproductive. Ben Chu examines the arguments

Extinction Rebellion protesters have targeted Barclays bank for funding fossil fuel companies (Reuters)

Environmental campaigners have been increasing pressure on banks in recent months to stop financing fossil fuel companies. Campaign groups have highlighted the trillions of dollars of financing made available by global financial institutions to the sector since 2016, despite those banks insisting they take the Paris Climate Agreement seriously.

And a recent analysis by Greenpeace and WWF claims that UK banks and asset managers, via their international fossil fuel investments, are responsible for almost double the UK’s total domestic emissions.

A growing number of financial institutions and pension funds are being urged to divest themselves of their shares in such companies, starving the fossil fuel sector of the capital it needs to operate.

More than 1,000 have, in fact, done so, moving an estimated $14.5 trillion from the sector.

But the fossil fuel financial divestment movement has been criticised in some quarters as unrealistic and potentially counterproductive.

Bill Gates suggested to the Financial Times in 2019 that the campaign of divestment “has reduced about zero tonnes of emissions”.

The Microsoft founder and pioneering philanthropist argued that it was more effective to invest in new green companies, such as firms developing zero-carbon meat substitutes, than try to deprive fossil fuel companies of money.

Some have also warned that by depriving multinational stock market-listed oil companies of funds there’s a danger their place would be taken by state-owned oil producers that are not subject to such market pressure and whose production operations might well be more polluting.

Finally, the oil companies themselves generally claim they are in the process of moving “beyond petroleum” and that starving them of capital will merely slow down or set back this beneficial process of technological adaptation.

So: is this self-serving “greenwash” from companies that hope to maintain the polluting status quo? Or does the fossil fuel divestment agenda genuinely risk being an environmental and economic own goal?

Fossil fuel firms are certainly a massive force in global public stock markets, accounting for around 3 per cent of the equities by value. Their share of UK markets is as high as 9 per cent.

That means that anyone who has their pension in those ubiquitous funds that passively track national or global markets will most likely own a slice of the likes of BP, Shell, Exxon and Total.

Fossil fuel firms’ operations are also extremely “capital intensive”, meaning they require significant up-front financial investment. So anyone whose pension includes some company bond funds – which invest in the debt obligations of companies –will almost certainly be financing fossil fuel firms too.

Stefan Andreasson of Queen’s University Belfast has stressed that the listed multinational oil companies in which people might find their pensions invested – the likes of Shell, Total, Exxon and BP – only produce about 25 per cent of the world’s oil supply.

Around half comes from state-owned national oil companies, such as Saudi Aramco, the National Iranian Oil Company, China’s National Petroleum Corporation and Petroleos de Venezuela to name but a few.

These behemoths tend to be more polluting in their extraction process than multinationals and most have no net-zero transition plans. If a divestment drive destroyed publicly-listed fossil fuel companies it’s indeed a danger that such state-owned oil firms would step into the gap created.

“The future for [state-owned companies] is bright,” says energy analyst Cyril Widdershoven. “Without activist shareholders to worry about, easy access to financial markets and sovereign wealth funds, [they] are not only able to reap the rewards of the current [divestment] onslaught, they are also willing.”

The Independent’s Stop Fuelling The Climate Crisis campaign is calling for an end to investment in fossil fuel projects.

Tim Lord, senior net-zero fellow at the Tony Blair Institute agrees that divestment, on its own, can’t be relied upon to secure the transition to net zero.

“Demand is the key,” he says. “In the end if there’s a demand for these products supply will come and meet that demand.” This means governments will have to continue and intensify efforts to reduce demand for fossil fuels through a combination of carbon taxes, regulation and subsidies for zero carbon alternatives.

However, Lord argues that divestment campaigns aimed at listed companies can, nevertheless play an important role in terms of putting pressure on fossil fuel firms that aren’t fulfilling their public commitments.

“A lot of them are increasingly talking a good game but when you look at what they’re doing in terms of their investment strategies, in terms of the detail and ambitions of their net-zero strategies, in most cases the credibility is a lot weaker,” he says.

Shell, for instance, has a 1.5C “pathway” in its internal planning but there are some assumptions about global reforestation (to soak up carbon emissions from continued fossil fuel burning) that analysts dismiss as non-credible.

Analysts agree with the claims of multinational oil companies that they have an important part to play in the global net-zero transition, using their engineering expertise and skills in new areas such as carbon capture and storage and green hydrogen generation.

The problem, experts warn, is that if they’re not genuinely committed to the transition – and are not putting their resources where their rhetoric is – it’s not realistic to imagine that they will play this beneficial role.

Divestment campaigns can send a powerful message to the executives of these firms from both investors and society at large that they want to see them commit properly to this transition. It’s a message that they want to see them use their resources to build the new clean energy economy – and not in thirty years but starting immediately.

“To some extent it doesn’t really matter whether divestment is a good thing or not,” concludes Lord.

“It’s going to continue to be one of the strategies because it’s one of the few levers that the movement has available to it – and oil and gas companies have to respond to that.”

And it’s not unreasonable to believe, despite what the sceptics says, that this financial pressure can drive corporate change. In recent years the market valuations of more climate progressive energy companies such as Denmark’s Orsted (which transformed itself from a fossil fuels company to a renewables) have been outperforming Shell or BP and others.

Research from Imperial College London has shown that the shares price of fossil fuels companies are up by 57 per cent over the past decade, versus 423 per cent growth for renewables firms.

Exxon was even demoted from the US Dow Jones Industrial Average index last year due to its sliding valuation.

For Mark Campanale, of the Carbon Tracker think tank, the case for divestment by investors is less about putting pressure on fossil fuel boards than persuading investors and banks where their own financial self-interest really lies.

“This is fundamentally about a technology shift, where an old technology [fossil fuels] is being driven out by a new more reliable and efficient and cheaper technology and investors are just responding,” he says. “It’s not a moral case, it’s a technology argument.”

“What I fear is happening is that people are conflating climate as an ESG [environmental, social, governance] issue,” he says.

“This is fundamentally about investment risk – it’s about who is going to win the technology race.”

Campanale says that the problem is that the investment world has not yet caught up with the sheer speed of the revolution, which has resulted in collapsing wind and solar power prices, and the fact that it’s essentially “game over” for the fossil fuel economy.

Divestment campaigns, from this point of view, are a salutary wake-up call.