Let's Be Honest: Divestment isn't the Answer

(A version of this piece originally appeared in Responsible Investor on January 18, 2018)

New York City’s pension funds recent announcement of their intention to divest $5bn from publicly traded oil production companies by 2023 as highlighted recently here in a thoughtful piece on Responsible Investor was very interesting.

But there are a number of important issues to consider when thinking about divestment:

1) Oil and gas use is systemic. Unlike past situations such as intolerable apartheid in South Africa or genocide in Darfur where investors could ring fence and pinpoint bad behavior in supply chains and rally around specific action companies could take, this is not the case with oil and gas. There are record airplanes on order from Boeing, but oil and gas use within supply chains has not been a focus at all. The same applies to petrochemicals companies, which also use oil. Gas use is fully expected to increase per the Carbon Tracker Initiative, which does not advocate for blanket divestment. Switching from coal to gas is the only reason greenhouse gas emissions have meaningfully decreased in the US. The remaining coal in the ground is, fortunately, the majority of GHG unburned. Therefore ganging up on coal makes sense including divestment, especially where the business case and the environmental case align. In fact, divestment from coal should have occurred 5-10 years ago, and here’s where New York State certainly missed the boat. It would be interesting to see how much money this cost New York State’s retirees. For example, New York State Common Retirement Fund is believed to have owned quite a bit of Peabody Energy through its index allocations and that company went from $70 a share in the early 2010’s to where it is now. Divesting in that case would have been aligned with fiduciary duty. Here is evidence for selling bad investment ideas or investing in indexes that adhere to minimum standards which would perform financially better by avoiding companies with poor business cases and are bad for the environment at the same time - an idea worth considering in general.

2) GHG emissions continue unabated. We burn over 50 Gt of carbon dioxide and other GHGs per year. Divesting doesn’t touch this. We need a focused agenda that asset owners can really rally around. It is fine for asset owners to divest from a company that doesn’t have a business case or can’t be fixed through engagement. But someone will own the companies, so divestment only helps an asset owner with their own bottom line. This is fine, but it doesn’t fix the problem, so why the focus?

3) Climate change is only really addressable by focusing on demand. Consumption is 90% of the carbon footprint, therefore switching to renewable energy is the biggest opportunity to drive meaningful reductions. Here too the picture is systemic. In the US, transportation recently became the largest contributor to GHG emissions. A systemic effort is needed to pinpoint specific strategies within every sector where reductions can be measured and realized. This includes encouraging circular economics (or what has been known as Industrial Symbiosis or Industrial Ecology at Yale), driving a switch to renewable energy use wherever possible, as well as maximizing building efficiency and related jobs that would be generated and more. Divesting from oil and gas companies doesn’t help achieve this goal.

4) Ownership patterns also need to be understood better. A company such as ExxonMobil has long been owned 50% by individual investors in aggregate if not more when looking at holdings within BlackRock and Vanguard held on their behalf, etc. Insiders own well less than 1% of these companies. Someone will own these companies at the end of the day; divestment won’t make them disappear magically. Also, it is important to keep in mind that the remaining oil and gas reserves and resources are mostly owned by non-Western governments as well as small private players taking advantage of newer shale gas technologies. The large publicly traded oil and gas companies don’t own the largest reserves in Saudi Arabia, Iran, Iraq, Qatar or Kuwait. The Chinese government still owns most of the largest publicly traded Chinese oil companies. The Norwegian government owns most of Statoil. And of course there is the matter of shareholder voice on issues such as methane efficiency, which if we need a systemic approach – and we appear to – remains an important consideration. 

5) Students also have limited time and energy. This was our main concern back five years ago when Bill McKibben and Naomi Klein were brought in to ramp up the divestment machine by funders. Going beyond coal makes sense. Divestment from oil and gas is fine at the end of a thoughtful investment process. But as a primary strategy it has become a cult, creating a spirit of defensiveness among university endowments who instead could and should be setting themselves as examples of real strategies for meaningful change. Students who want to get active can and should encourage the changes we require. This is still possible, but we need to stop the posturing. 

I had similar concerns back in 2014 when at PRI in Person in Montreal, both the Montreal Carbon Pledge and Portfolio Decarbonization Coalition simultaneously launched. Neither of these efforts – nor divestment as a primary focus – are more than awareness raising exercises, which is fine. McKibben long ago admitted divestment was a political strategy; also fine. But climate change isn’t political. It is the paradigm of our times that needs fixing. This will take intentionality from investors at scale in the many trillions of dollars. Sorry, but $5bn is not a lot of money when we need $50 trillion or so to make necessary change happen. It can be hard to get ones head around numbers at this scale, but $50 trillion is about 10% of the value of all tradeable assets. What is needed is a very big ask of investors, and we need to get our heads around this and focus better.

As we concluded in the working group of the PRI that I helped lead in 2015 with some of the largest signatories, there are important things we can do.

1) Increase allocations to solutions and sustainable investing. The larger the percentage of assets dedicated to better outcomes, the closer we get to the sustainability/financial value paradigm we need running in parallel for financial and societal success. It’s rewarding to see the increase in financially viable sustainable investing, which remains our best chance of driving change within the system.

2) If you hold companies, you have responsibilities. More asset owners need to be responsible investors. All the work of shareholder engagement is only more important, and it’s why we put a large emphasis on this at Real Impact Tracker.

3) It has been fantastic to see shareholder engagement and support for climate resolutions reach record levels. It is starting to drive change, but only starting. Much more engagement, both public and private, is needed.

4) Leave coal in the ground. Asset owners should sell when there is no business case. If you held Peabody Energy at $70/share you were missing out on the changes that were coming. Exhaust engagement but don’t rely on it as the only tool. 

5) Look at a country-by-country plan to specifically achieve demand reduction. This is the big opportunity on oil, not a religious fervor approach to production. It is happening but it needs to be accelerated. Gas is more complicated. But on both oil and gas we can and need to push for efficiency on methane and other produced GHG emissions. It’s time to get specific on the strategies we need to see implemented. A consensus should form around what we need to collectively do to achieve the outcomes we require. It was actually time for this approach years ago. Time is wasting which we don’t have.

Sell stocks by all means, but please stop pretending that divestment will affect the climate in any meaningful way. Let’s get on with the work we really need to be doing at necessary scale.