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October 26, 2015

Top 5 Misled Arguments in the UK Divestment Debate

This past week, Cambridge City Council, under pressure from such global (read: not local) organisations as 350.org, announced that it would move toward a “fossil-free future” by passing a motion to end its investments in fossil fuel companies. The council joins a handful of local governments and pension funds that have made similar divestment pledges under the guise that the decision will bring about a step-change in the fight against global warming.

During the debate, Lib Dem Councillor Marcus Gehring declared:

Divestment will not solve climate change, we all know that. But divestment sends a very important commercial signal and gives an institutional framework for discussions.”

Rest easy, Catabrigians, this change in investments won’t actually have a tangible impact on the issue at hand! Not only will the council’s decision not support climate solutions, but it may also put the financial health of Cambridgeshire in jeopardy. Double win!

While Cambridge may take the rest of 2015 to bask in its symbolic victory, Divestment Facts UK has developed a list of the top five most popular – and misled – arguments in support of divestment to ensure the next council or board meeting to raise this issue have more facts to fuel the debate than purely emotion:

  1. If enough of us divest of fossil fuel stocks, they will eventually become worthless.

According to FossilFree UK’s report on the “transition to a new economy”, “When governments finally take climate change seriously and legislate to leave fossil fuels in the ground, shares in oil, gas and coal will become worthless.” It seems that everyone with a PhD – or a bit of logic – disagrees with this widely-held assumption. As leading academics from Oxford University’s Stranded Assets Programme concluded about divestment strategies:

“Divested holdings are likely to find their way quickly to neutral investors. These investors might have less developed corporate engagement toolkits and might be less willing to pressure fossil fuel companies on issues of environmental sustainability. This could have unintended consequences…”

Not only could fossil fuel stocks end up in ‘less sympathetic’ hands, but also the assumption that valuations of fossil fuels will decline is exactly that: an assumption. Following the release of his study on the costs associated with divestment strategies, University of Chicago Law School emeritus professor Daniel Fischel explains that “current stock prices already incorporate broad market expectations about the future of the industry—expectations that include knowledge about possible political or consumer changes,” leaving assertions on the future valuations of fossil-fuel companies to be unreliable.

  1. ‘Fossil fuel investments’ are defined as being large public oil & gas companies and coal companies.

In the same FossilFree UK report, the group came to its conclusions by looking only at the 100 largest public oil and gas companies and 100 largest public coal companies, and admittedly did not include service companies or even smaller listed “extraction companies.” Even if you consider the fact that the group ignored small oil and gas companies – as if they are any less a part of the oil and gas industry as their larger counterparts – this definition of what makes a fossil fuel stock seems arbitrary — and according to Prof Fischel, it is:

“The question of which companies have unacceptable ‘fossil fuel exposure’ is not simple in most cases. For instance, what about an oil and gas company that also performs substantial ‘green’ energy research? What about an automobile manufacturer? What about a bank that holds the debt of an oil-and-gas firm? What about index funds?”

  1. Divestment from only one sector within the fossil fuel industry is divestment.

Well, this statement is technically true: divesting of, say, coal is a form of divestment. However, activists have attempted to advance their campaign by naming all of the institutions that have decided to divest when in fact many of those same organisations have decided that maintaining investments in other fossil fuel sectors makes sense.

As part of its divestment debate agenda, the Cambridge City Council was sure to consider “the Norwegian Government’s decision to divest from fossil fuel investment in its pension fund,” when the Norwegian’s have only decided to divest of coal. Moreover, in 2014, the fund increased its stakes in 59 out of 90 oil and gas companies in which it holds shares by $30 billion.

This is a common misperception when announcing the divestment of university endowments as well, as was reported by Bloomberg. Not only have many universities decided to divest solely of coal, but in many cases, the universities have announced the divestment of holdings it didn’t even have. As Bloomberg found:

“Oxford University, calling itself ‘a world leader in the battle against climate change,’ said in May it would avoid direct investments in coal and oil-sands companies in its $2.6 billion endowment. The British university, in fact, held none, it said.”

  1. Oil and gas companies are the problem, not the solution.

Divestment campaigns operate under the assumption that if you remove the problem (i.e. fossil fuel companies) then there is room for real solutions to the climate problem. But why can’t fossil fuel companies be a part of that solution?

ExxonMobil recently set the record straight after allegations were made by InsideClimate News that it failed to ‘alert’ other organisations about the threat of climate. In a response posted on its website, ExxonMobil explained that the facts pointed to “a robust culture of scientific discourse” around climate science that took place at the company since the ‘70s and the reasons behind why the company “would work with the Intergovernmental Panel on Climate Change and leading universities like MIT and Stanford on ways to expand climate science knowledge.”

Not only is knowledge-sharing a key component to developing practical solutions to lowering global emissions, but so too are efforts made daily by companies to do their part to make their operations more efficient. Take Statoil for example, which has lowered its CO2 emissions per barrel of oil to half of the global average over the last 20 year span.

  1. Divestment is one step in preventing the rise of global temperatures.

We all may know, as Councillor Gehring said, that divestment will not solve climate change, but that doesn’t stop national newspapers reporting the opposite. In reporting on the decision by the UK’s Environment Agency Pension Fund to cut its exposure to coal by 90 percent over the next five years, the Financial Times characterized the decision as a move made “in accordance with the UN-agreed principles of preventing global temperatures from rising by more than 2C.” If “we all know” divestment won’t actually solve climate change, then how can such investment decisions prevent a rise in temperatures?

So what can positively impact the fight against climate change? As Jeremy Farrar, director of the £18 billion Wellcome Trust, said in response to pressure from The Guardian to divest:

“We’ve found it’s more constructive to actively engage with the companies in which we invest.”

Farrar isn’t alone in making this assertion. Among them is Anne Stausboll, chief executive officer for the $300 billion California Public Employees’ Retirement System, whose direct engagement with oil and gas giants BP and Shell led to the companies committing to adjust their business models in accordance with international pledges to limit global warming.

We all “know” divestment doesn’t solve climate change. So why do it?