There is a strong case for organisations to divest from fossil fuels on financial as well as moral grounds.
As the concepts of climate risk, the ‘carbon bubble’ and ‘stranded assets’ become more widely understood and fossil-free funds can be shown to outperform more conventional ones, the link between fossil fuel investments and financial returns is being broken.
This infographic lays out the key arguments. For detailed information on financial arguments, check out the sections below.
- Pioneering work by the Carbon Tracker Initiative in their ‘Unburnable Carbon’ report identified that proven fossil fuel reserves (2,795 gigatons of CO2) exceed the total carbon budget we are able to burn (565 gigatons) by a factor of 5.
- Because these ‘proven’ reserves have been factored into the share price of the fossil fuel companies already, this represents a serious overvaluing of these companies’ share prices.
- These 80% of ‘unburnable’ fossil fuel reserves run a high risk of becoming a ‘stranded’ or worthless asset and a poor investment.
- The size of this ‘Carbon Bubble’ has been estimated at $27tr.
- While climate legislation that limits fossil fuel extraction is a considerable driver for stranding these assets (which is why the fossil fuel industry is lobbying so hard against climate legislation), there are economic and physical as well as regulatory factors.
- These include the falling price of oil against the increasing cost of extraction through more extreme environments or extraction techniques and the rise and rise of renewable energy.
- A report by Carbon Tracker in May 2014 showed that, over the next decade, oil companies could invest $1.1tr in projects that require market oil prices of $95/bbl or more to earn a decent return.
- The coal industry is understood to be in terminal decline, with US coal industry losing 76% of its value in the last 5 years.
- The gas industry is also increasingly under criticism, despite often being framed as the ‘safest’ of the fossil fuels. This new report from Carbon Tracker shows that gas isn’t as safe a financial bet as has been assumed.
- A recent report by Chatham House has also highlighted the high levels of uncertainty in oil investments due to the unknown potential impacts of changing demand and legislation to address climate change.
- While historically fossil fuel investments have been highly profitable and considered a safe bet, there is now a significant body of evidence that fossil-free funds are performing much better.
- ‘The data does not support the skeptics’ view that screening negatively affects an index tracking portfolio’s return.’ – Aperio Group
- An S&P Capital IQ study which compared the performance of equities over the last 10 years concluded that a fossil-free fund would have significantly outperformed fossil-fuel invested funds.
- MSCI, who run global indices used by 6000 pension and hedge funds, found that investors who divested from fossil-fuel equities would have earned an average return of 13% a year since 2010, compared to the 11.8%-a-year return earned by “conventional investors.”
- Established financial institutions like the Bank of England, the European Central Bank, HSBC and Bloomberg recognise the financial threat of the ‘carbon bubble’
- The Bank of England is currently investigating the risk to the economy of the Carbon Bubble ‘bursting’ and senior figures from the Bank have commented:
- Mark Carney, Governor of the Bank of England said: the “vast majority of reserves are unburnable” and defended the Bank’s position taking the issue seriously.
- Paul Fisher, Deputy Head of the Prudential Regulation Authority at the Bank of England said: “As the world increasingly limits carbon emissions, and moves to alternative energy sources, investments in fossil fuels – a growing financial market in recent decades – may take a huge hit.”
- Following the Bank of England’s lead, G20 leaders are now undertaking similar analysis across their countries.
- In December 2013, Bloomberg released a new Carbon Risk Evaluation Tool, and the FTSE Group together with the major investment management firm, Blackrock, launched a fossil-free stock index.
- Asset Managers such as Storebrand have cited the financial arguments for taking a long term view on exiting from pure coal and oil sands and a number of Pensions Funds including the Norwegian Government Pension Fund have commissioned reviews on fossil fuel / climate risk.
- The development of a fossil-free index between Blackrock and the FTSE Group prompted Kevin Bourne, FTSE managing director to say: “This is one of the fastest-moving debates I think I’ve seen in my 30 years in markets.”
- An increasing number of reports, such as Beyond Fossil Fuels: The Investment Case for Fossil Fuel Divestment by Impax Asset Management, are being produced to support the financial case
For guidance on deploying these arguments with decision-makers, check out this handy guide to common misconceptions about divestment.