Why Climate Change Divestment Will Not Work

| September 22, 2014
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University of Wisconsin-Madison. Light Brigading / Flickr

University of Wisconsin-Madison. Light Brigading / Flickr

Fossil fuel divestment is the latest campaign by activists to halt the dangerous progression of climate change. Earlier this year, the divestment campaign notched its largest victory to date, when Stanford University decided to pull investments in fossil fuel companies. Late last semester, Harvard students blockaded the president’s office in support of fossil fuel divestment. Activists from England to Australia seek to follow suit.

The campaign gained initial prominence in July 2012 when Bill McKibben penned “Global Warming’s Terrifying Math,” a widely read article in Rolling Stone. McKibben rightly noted that burning all of the fossil fuels in proven reserves would result in the world hurtling past its agreed target of a 2 degrees Celsius (3.6 degrees Fahrenheit) rise in the world’s average temperature, assuming no efforts are undertaken to either stop burning fossil fuels or to capture the carbon they produce. In the matter of a few weeks, the article was viewed over a million times, and was quickly followed by a film, Do the Math, and a nationwide tour. McKibben, playing climate rock star on stage, enlisted students in the charge to pull investments from fossil fuel companies.

McKibben was later joined by a number of prominent academics and public intellectuals backing the campaign. Peter Singer, Desmond Tutu, Naomi Klein, and a host of other big names have lent the campaign their support.

Unfortunately, despite the success in building an international divestment campaign, these efforts will at best be completely ineffective, and at worst distract activists from far more effective strategies of combating climate change.

The (Lack of) Divestment Logic

The logic of shareholder divestment in general is as follows. (I write as someone who spent two years on the targeted Sudan divestment campaign, which differed in important ways from present divestment efforts.) A company or set of companies are involved in an activity that is deemed problematic. Shareholders express to the companies that they ought not be engaged in these activities. Failure to change their conduct will result in shareholder divestment. The threat of the resulting drop in share price, or its actual drop as investors begin to sell off shares, causes the company to change its conduct.

In the paradigmatic divestment campaign (often appealed to by the fossil fuel divestment campaigners) shareholders pulled investments from companies operating in apartheid South Africa. This campaign was coordinated with South African anti-apartheid activists involved in a range of other civil (and occasionally violent) actions opposing the apartheid regime. For international companies, the calculation was rather straightforward. They could cease doing business in South Africa, but maintain operations in the rest of the world, and avoid shareholder divestment. The resulting economic pressure on the South African economy would lead businesses to pull support from the apartheid government and create the needed political pressure for a transition to what is the modern day South Africa. (Though the extent to which shareholder pressure, versus other economic sanctions and internal anti-apartheid tactics, led to the fall of the apartheid regime is debated.)

But no such logic exists for the fossil fuel divestment campaign.

The Target Actions for Companies Are Poorly Defined

The fossil fuel divestment campaign makes demands that no corporate executive could ever meet. This is the fundamental flaw in the campaign. What can Chevron do to avoid shareholder divestment? According to campaigners, they must: stop searching for new hydrocarbons, stop lobbying for special breaks from government, and commit to leaving 80 percent of their existing reserves in the ground.

It is reasonable for shareholders to seek to restrain pernicious lobbying by energy companies, but the other two requests essentially call on them to stop being energy companies. This is like saying to tobacco companies, unless you burn down all of the tobacco currently grown for your company and shut all of your factories, we will divest our shares. Of course, it would be good if tobacco companies had to close their doors because people stopped smoking (supported by effective public policy). But no executive at a tobacco company is going to close down shop simply because do-gooder investors won’t buy his company. Similarly for fossil fuel companies, the threat to share price from announcing that 80% of reserves will not be extracted is exponentially greater than the minor threat posed by a few universities and churches selling their shares in these companies.

The Target Companies of the Campaign Are Poorly Defined

The campaign selects as targets for shareholder divestment the largest 200 fossil fuel companies, allegedly as measured by proven carbon reserves. But amongst these 200 companies exist a wide variety of corporate practices, and responsiveness to shareholder activism. By treating size as the defining variable by which to subject companies to shareholder divestment, the campaign fails to distinguish between those companies who are more and less responsible in their environmental stewardship.

Furthermore, shareholder divestment will not scare any of the energy companies out of the fossil fuel business. But if it did, the campaign as designed would simply shift business into the hands of companies outside the top 200. Targeting companies based on size rather than conduct makes it such that shareholder pressure cannot drive companies to perform better. If anything, it simply creates a (very minor) incentive to be smaller.

The Problem of Worse Actors

Suppose (hypothetically) that many large shareholders begin to sell their shares in an entire sector of the economy that happens to be hugely profitable. What could be expected to follow?

The first most likely occurrence is that other shareholders will see that profitable energy companies are available at a discount, and will buy these discounted shares (and hold them). Less scrupulous investors buy when churches and universities sell. The net result: less opportunity for shareholder engagement on environmental issues, and no impact on the target company’s operations.

The second possibility is that the energy companies will just become privately held. Plenty of capital exists in the world that relish the opportunity to own the world’s largest energy companies, and better yet to be free of the increased regulatory burdens that often fall on publicly held corporations.

Suppose further still that against the odds a major fossil fuel company announced that it would not extract fossil fuels from its currently owned assets. What could be expected to happen next?   Those assets will simply be sold to another company that would be willing to do the extraction. If Chevron got out of the oil business, they wouldn’t just cap the wells and go home (taking massive losses, and subjecting managers to huge lawsuits as a result). They would sell their assets to other energy companies, especially those that are fully or partially state-owned and thus not subject to shareholder pressure. Petronas, China National Petroleum Company, and Saudi Aramco would be all too happy to take prized assets off the hands of the world’s western oil majors, especially at a discount price.

A Moral Obligation?

However, perhaps all of this concern about the inability of the fossil fuel divestment campaign to have an impact on climate change is misguided. Maybe fossil fuel divestment is not intended as a tactic to prevent climate change. Maybe it is simply a moral disassociation. From the campaigners’ viewpoint, it is morally wrong to profit from investments that contribute to immense and possibly irreparable damage to the planet and its inhabitants.

But shareholder profit is not the only way that individuals benefit from fossil fuels and resulting greenhouse gas emissions. Many people benefit by the reliable and affordable access to cheap sources of energy. I agree that these benefits do not outweigh both the immediate and long-term costs to justify continuing on a path of ever increasing greenhouse gas emissions, and a price should be place on carbon emissions to internalize those externalities. But if it is the case that it is morally wrong to benefit in any way from these harmful activities, then shouldn’t this principle apply across all activities engaged in by universities and religious organizations who are selling their shares? Why is it morally wrong for Stanford and its students to own shares in energy companies but it is morally permissible to use their products? Have Stanford students been banned from driving cars or heating their dorms or flying home for the holidays? It is difficult to see what is morally special about the benefit accrued from shareholder investment. The important moral point is that we are all implicated in an energy system that greatly damages the climate—and this incurs on all of us obligations to change that system through the most effective means possible. The moral costs of climate change, however, do not demand moral purity in the form of (allegedly) fossil free investments.

Late last year, Harvard’s David Keith, an expert on climate change and climate engineering, argued that he backed shareholder divestment even though it would not have an impact on climate change. Why? Because the movement could build political capital and then the tactics of the campaign would shift over time.

In other words, shareholder divestment won’t work, but a climate movement might be able to implement policies that will prevent catastrophic climate change. But why spend half a decade or more on a tactic that at best won’t make a difference? Why not direct attention to the more urgent and effective task of placing a price on carbon? This is the best hope for preventing catastrophic climate change. Absent an effective price on greenhouse gases, campaigners should rightly focus on regulatory efforts that restrict the most harmful forms of energy production and promote investment in low-carbon energy sources.

Shareholder action could be put in service of this broader goal (and activist shareholders have long pushed companies to improve their environmental impact). For example, activist shareholders could pressure companies to stop funding climate denialist think tanks and to commit to halt activities lobbying against a fair price on carbon. This form of shareholder action would contribute to rather than distract from the policy changes needed to avoid what McKibben rightly calls a bleak future for the planet.

Until the movement reforms its goals and methods, it will be drawing strength from movements to adopt policies that will effectively combat catastrophic climate change, rather than contributing to their success.

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  1. The three problems of most anti-divestment writing:

    1. Assumes divestment isn’t part of a broader effort to reduce GHG emissions. To be fair the author briefly discusses this at the end regarding David Keith, but is dismissive. People who are actually active on climate change issues seem to have a different take, and I think that’s a better assessment of its political value.

    2. Fails to mention the carbon bubble. The fossil fuel sector is over-valued and has to drop in value some day. For both economic and environmental reasons, it’s better that it happen sooner.

    3. Ignores the fact that private and sovereign companies issue bonds – divestment applies to them as well.

  2. Thank you for this consistent analyzis. The divestment campaign can create a public action against the business as usual system, but by avoiding to address the greatest part of responsability in the CO2 emissions, this campaign may miss the point.
    The point is to effectively reduce the CO2 emissions (and other green house gases). These emissions (and reductions) are mainly in the consumer hands (why is it a surprise that consuming heats our planet?).How will we divide by 2, by 4, by 10 the methan emissions of the livestock? By inventing a methan free cow or by dividing by 2, 4 or 10 our red meat consumption? How will we divide by 2, 4 or 10 the ghg emissions of the airlines? With a kerozen free engine to be invented by Rolls Royce or GE, or by dividing by 2, by 4, by 10 our air travel?
    How can we move the consumption behavior of the 1 billion of heavy consumers towards a low carbon way of consumption? By a progressively rising carbon price, a strong signal to get carbon intensive products much more expensive than low carbon products or way of living. And for this carbon price to be fair, all the money collected must be divided in equal share for every human being. So we call it a carbon price SIGNAL.

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