The Rise of Divestment (Part II)

In December 2021, the Center for American Progress and the Sierra Club reported that “8 major US banks and 10 major US asset managers financed the equivalent of nearly 2 billion tons of carbon dioxide in 2020”. This is more than what Russia – the world’s 4th largest emitter – and almost as much as India – the world’s 3rd largest emitter – emit annually. From a long-term perspective, investment in fossil fuel assets is counterproductive: there is mounting evidence that fossil fuel divestment is in fact financially beneficial, and that banks investing in carbon-intense projects risk damaging not only their brand reputation but also their credit ratings, performance and even their customer bases.

Read The Rise of Divestment (Part I).

Over the past decade, divestment campaigns have reached some tangible results: extractive corporations increasingly admit that they face more challenges with raising capital for their projects. Furthermore, more banks have been facing investor pressure to downsize fossil fuel financing, and debt financing has become more expensive. There is also a growing number of investors who no longer consider fossil fuel stocks as a viable investment. 

The United Nations (UN) estimates that the world population will reach 9.7 billion by 2050. As a result, energy demand will increase significantly. While there will be attempts to meet this demand with as much renewable energy as possible, the US Energy Information Administration forecasts that in 2040 about 50% of the total energy consumed in the world will still be generated by natural gas and oil. This forecast seems to be questioning the green ambition of the divestment movement by pointing out that the complete transition to sustainable energy is an unattainable goal in the foreseeable future despite increased efforts.

The push of the divestment movement for net-zero emissions has caused misconceptions about the energy transition, note finance experts of Citi and J.P. Morgan. Valerie Smith, Chief Sustainability Officer at Citi, observes that many people equate this transition with divestment. In her opinion, the energy transition will be very disruptive “if divestment is part of that conversation”. She argues that the potential of divestment to decrease air pollution is very limited: “We really need to focus on identifying opportunities to decarbonize, not on divesting… divesting does not really change the math on greenhouse-gas emissions in the atmosphere at all.” 

As increased focus on sustainability has forced many firms in the oil and gas industry to become more transparent about their environmental, social and governance (ESG) efforts, there is a need to establish a working relationship with the banking sector as its role in the process of energy transition will be critical. Despite increasing criticism of fossil fuel investments, they are unlikely to stop any time soon as renewable sources of energy will not be able to meet the steadily increasing demand for energy as the world population continues to grow. Therefore, the divestment movement’s goal of decarbonizing the global economy can only be achieved partially in years to come. 

Opponents of the divestment movement argue that efforts to artificially constrain “carbon-derived energy supplies and essential materials” will not “structurally reduce” the use of carbon fuel, but will cause energy scarcity and price spikes instead, as many gas consumers are experiencing at the moment. Any artificial constraints on fossil fuel energy without properly addressing demand will be met with a harsh consumer backlash. It will also initiate new flows of capital and financing structures that might be less climate-friendly than the current ones. There is also a great chance that a bigger part of ‘the world’s oil and gas supply portfolio’ might shift to less transparent firms, which will have a more negative impact on the environment in the end. These examples show that if firms are pushed too hard to divest from fossil fuels, it might be in fact counterproductive as it might hinder the transition to a greener global economy.  

References:  Ilana Cohen, | Ray Levy Uyeda, | Mary Holcomb, | Gabriel B. Collins,