Fossil fuel divestment – part 2: Bursting the carbon bubble

Fossil fuels have powered the world since the first industrial revolution. But as the divestment movement piles pressure on an already shrinking market, the carbon bubble could be set to burst

Fossil fuel markets are increasingly at risk of unanticipated or premature write-offs, revaluations, and conversion to liabilities. The industry is taking the threat – commonly known as the ‘carbon bubble’ – seriously. A 2018 study estimated that between US$1-4 trillion worth of fossil fuel related assets could become stranded in the near future.[1] The Bank of England and World Bank have both voiced concerns over the risks this could pose to the global economy. The Norwegian Sovereign Wealth Fund began divesting from coal in 2013.[2]

The stranding of environmentally unsustainable assets can result from a variety of driving factors; shifting social norms associated with the divestment movement being just one. Environmental challenges, changing resource landscapes, regulatory change, the falling costs of renewable alternatives, and litigation and statutory change[3] can all influence the economic value of an asset.

Patterns of coal generation vary considerably between advanced and emerging economies. Decommissioning has been the trend in Europe and the US. The construction of new coal mines is slowing in China[4], while Korea, Japan and Egypt are revising the role of coal in their affordable electricity plans. Adani Enterprises was forced to pay for the construction of the AUS$2 billion Carmichael mine in Queensland after more than 30 financial institutions refused their funding applications. The threat of stranded assets was repeatedly cited.[5] Public support for divestment has only added force to the economic argument that coal may no longer be a safe long-term investment.

In spite of multiple credible warnings about their future viability, the oil and natural gas sectors are faring somewhat better. Global powerplant capacity has continued to expand in recent years.[6] Furthermore, research suggests that oil production volumes will rise in the US, Brazil and Iran, with gas volumes set to increases in the US, Canada and Saudi Arabia.[7]

How much divestment?

This mixed picture should not be taken as proof that the fossil fuel divestment movement has stalled. In fact, it may well be the fastest such movement in history. A broad coalition of over 1300 institutions has made divestment commitments totalling some US$14.58 trillion to date with individual investors pledging a further US$5.8 billion.[8] This has all been achieved in less than a decade. The scale of these achievements is thrown into sharp relief when measured next to history’s other notable divestment campaigns. Between 1980 and 2015, boycotts of the tobacco industry caused losses of c. US$5 billion, while an estimated US$182 million left apartheid South Africa between 1985 and 1989.[9]

The movement enjoys the support of such luminary figures as Ban Ki-Moon and Barack Obama. Organisations committed to divestment include the British Medical Association and a raft of universities. Perhaps most notably, in 2017 Ireland became the first country to pledge total divestment from fossil fuels. In February this year, Bill Gates, once a high-profile critic of the movement, confessed to a complete change of heart.[10] He is now embarked on a programme of divestment across his considerable portfolio of interests.

Back in 2008, energy (comprising oil, gas and oilfield services) was the S&P 500’s second largest sector by weight, trailing only technology. It now ranks as the smallest of the 11 sectors on the index.[11] Exxon was booted from the Dow in 2020[12] and, with Chevron Corp and ConocoPhillips, saw its credit rating downgraded earlier this year.[13] Meanwhile, mining firms such as Glencore have announced plans to steer investment towards commodities that can underpin the renewables transition such as cobalt, copper and nickel.[14] The Danish group Orsted took big steps in 2012 to transition into renewables and has since seen its share price soar 132%.[15] The last year has also seen reports from BlackRock, Meketa[16], the Rockerfeller Brother Fund[17] and the Bank of England[18]  showing that divested portfolios have ‘outperformed their benchmarks’.[19]

Influencing the transition to net zero

The movement, it would seem, is exerting a measurable influence. Still, the issue remains unsurprisingly bedevilled by complexity. Fossil fuel subsidies remain a strong counterforce against the effectiveness of much environmental policy. Any overreliance on divestment as a strategy for accelerating decarbonisation will prove ineffective. Carbon disclosures and pricing, underpinned by reliable carbon measurement, will be key; work in this field is becoming more sophisticated.

Beyond divestment, there are other ways that financial institutions are acting to accelerate the net-zero transition. A coalition of investors representing US$41 trillion worth of assets has recently called on the G7 to undertake more concerted and committed action on climate.[20] Research has shown that divestment movements are more effective when policy conditions are supportive, underscoring the crucial need for progressive legislation in these matters.[21] In concert, responsible governments and an increasingly climate aware public – willing to noisily cheerlead the divestment movement – can usher fossil fuels into obsolescence.