How Fossil Fuel Divestment Falls Short

Divesting from fossil fuel assets makes a big statement. Its impact, however, is murkier. Selling off an asset requires someone else to buy it, which, in the case of fossil fuels, can mean breathing new capital into the exact assets companies are trying to choke. But there’s another approach: running those assets into the ground.

Source: Harvard Business Review/sharply_done/Getty Images

Committing to divest from fossil fuels seems like a profound pro-climate statement. Selling off fossil fuel investments, the logic goes, will choke off capital from the fossil fuel companies and make it harder for them to operate. Eventually, divestment will lead to the sector’s demise and create a better environment for accelerating renewable energy efforts. By pulling money out of fossil fuel investments, companies can demonstrate how they’re taking a material step toward a more sustainable world.

Unfortunately, what looks good on paper often falls short in practice. There’s one major problem with divestment: Selling an asset requires someone to buy it. In other words, for you to divest, someone else needs to invest. As a result, divestment could end up breathing new life into fossil fuel assets—exactly the opposite of what’s intended.

So what’s a climate-minded company to do?

Divestment can work, but it needs to be part of a broader run-off strategy. Think of this comprehensive approach as taking fossil fuel investments as “running it into the ground,” the way you would an old car. Buying a new car adds one to the roads, while using the old one until it’s unusable puts off the incremental effect. To make an impact—not just a statement—companies should plan to sunset fossil fuel investments at the ends of their useful lives rather than pass the buck to someone who could try to make them productive again. Here’s how.

What Is Divestment?
Fossil fuel divestment is a simple concept. The owner of a fossil fuel assets commits to selling it to demonstrate adherence to sustainable finance practices and climate risk management. Divesting seeks to withdraw capital from businesses that threaten the environment, making divestment a tangible act of “voting with your dollars.” The goal is to create constraints on available capital in the fossil fuel sector, which should impede company operations in the target sector and limit shareholder returns, making the category less attractive to investors. Ultimately, divestment aims to render fossil fuel businesses so unattractive that they’ll struggle to survive.

The fossil fuel sector isn’t the first target of divestment campaigns. The classic example is the targeting of businesses in South Africa in the 1980s. Driven by opposition to apartheid, divestment achieved favorable perception and was believed to drive global awareness and sentiment against the South African government. A deeper look, however, reveals that divestment never truly influenced policy. Other divestment campaigns were even less impactful. Any benefits from the tobacco divestment campaign in the 1990s, similar to the South Africa and fossil fuel campaigns, but with much less fanfare, for example, would have been obscured by effects of litigation.

Despite divestment’s thin track record, it’s easy to claim that campaign against the fossil fuel sector is different, even if only because of scale. Fossil fuel divestment is largely believed to have become the most successful such campaign in history. More than $40 trillion in assets have been committed to divestment—that’s almost two-thirds of the entirety of global pension fund assets under management ($56 trillion). And it represents 1,550 institutional investors, including AXA Investment Management, the Ford Foundation, the Norwegian Sovereign Wealth Fund, and Harvard University.

Nonetheless, many still question how well divestment works, even for fossil fuels. Specifically, there have been no clear connections to the actual realignment of capital flows away from fossil fuels, and, in fact, the fundraising environment appears to have improved, growing from $234 billion in 2000 to approximately $700 million in 2015. If history is any guide, past efforts at divestment suggest limited future success at best, with capital availability emphasizing that forecast.

Read the full story here.