This piece highlights the merits of the fossil fuel divestment approach. My next piece covers an alternative view, evaluating the advantages of engagement with fossil fuel companies.
A decade ago, noted environmentalist Bill McKibben had a radical-sounding idea. To save the planet, we needed to “revoke the social license of the fossil fuel industry.” His comprehensive vision of fossil fuel divestment would require financial institutions and civil society to stand shoulder-to-shoulder. This plan was audacious; in 2011 Exxon Mobil was the largest company in the world, and nearly every foundation and academic endowment invested in fossil fuels.
However, divestment has gained remarkable traction in recent years, going from a fringe strategy to a $14.5 trillion movement with over a thousand major investors, pension plans, and endowments committed. Today, as institutional and retail investors pour money into environmentally conscious funds, it is time to consider the financial and social benefits of the movement.
The divestment movement changed the conversation around fossil fuel finance. Investors and banks are increasingly questioning the long-term viability of the entire sector. Divestment seeks to stigmatize fossil fuels and raise uncertainty around their continued use, to reduce the financial desirability of fossil assets. Fossil fuel mining, exploration, and extraction all are capital intensive activities that demand constant access to capital. If capital costs rise or the supply of capital is reduced, projects can become uneconomical and fossil fuel companies can see their valuations fall. This process is well underway in financial markets for the most polluting and least efficient fossil fuel, coal. Even for oil and gas, a study across thirty-three nations indicates that increased divestment pledges are associated with decreased debt and equity capital flows to fossil fuel firms. Unsurprisingly, the effectiveness of divestment is amplified in countries with strong environmental policies and diminished in those that subsidize fossil fuels.