Is divestment just a moral issue?

When I started to hear about fossil fuel divestment movements, I simply thought that was a moral argument;  Fossil fuels are major drivers of climate change, which imperils our future and therefore endowments and pension plans should divest from the fossil fuel companies to align their investments with shareholders’ values.

Then I learned that Carbon Tracker Initiative has been saying divestment of oil & gas company stocks makes economic sense. Here is their rationale.

As the prices of renewables continue to drop and the shift to renewables accelerates, the demand for oil and gas will continue to decline, while the big oil and gas companies continue to project increasing demand and profitability in their business plans and annual reports.  In addition, their operations  will also be negatively affected in the future by decreasing availability of ingredients and water, vulnerability and risks of their physical operations and negative impact on employee health and safety, etc.  Higher costs will further depress their profitability.

The era of production of cheap oil and gas is getting close to an end and the energy companies are not even covering their CAPEX for producing those fossil fuels at the current market prices.  They need to invest millions or billions of dollars now in order to benefit from their investments in oil & gas exploration in the 10-15 years time.  If they continue to invest such huge sums, they would most likely end up with “zombie” (or stranded) assets in the future, thus the valuations of the companies need to be discounted.  It is a bad investment decision to buy the stocks of those companies.   It doesn't make sense for the shareholders to continue to support such moribund business model, either. Those companies need to shift gears to reinvent their business with an eye on the effect of the 2°C ceiling, not doing business as usual.

It thus makes a perfect financial sense for big pension funds, endowments and investment funds to divest from the assets that are unlikely to perform well in the coming years if they are concerned about the long-term growth and returns.

Climate Change is indeed a financial issue as well as a moral issue.

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Kanako McPhailComment