At the intersection of climate activism and finance a powerful movement has emerged to fight climate change: Fossil Fuel Divestment.
This movement has had notable successes. A whole range of actors – from universities, cities and faith-based communities to pension funds, media organisations and industry – are divesting their finances from fossil fuel companies. Norway's sovereign wealth fund and the Lutheran World Federation have been the latest organisations announcing their decision to divest.
Together with 350.org and the Greens/EFA in the European Parliament, the European Greens are co-organising a major divestment conference in Paris in order to further mobilise for fossil fuel divestment, discuss the risks of a so-called carbon bubble, and highlight opportunities for a sustainable financial system.
With Bill McKibben of 350.org, Stephen Heintz from the Rockefeller Brothers Fund, the World Council of Churches, the Carbon Tracker Initiative, climate and COP21 activists, the progressive investment and business community, and many more.
Background: The case of the carbon bubble and divesting from fossil fuels
The world is agreed: the temperature of the atmosphere must not rise by more than 2°C. At the 2010 UN Climate Conference in Cancún, Mexico, representatives of 194 states committed themselves to this target. Even the USA and China, who never signed the Kyoto Protocol, supported the decision, as do all other major greenhouse gas emitters. The 2°C target refers to the rise in temperature relative to pre-industrial levels. How this can best be achieved is the subject of much controversy. However, there is a large measure of consensus that it must be achieved in order to limit the impact of climate change to a level which humanity can bear. The Intergovernmental Panel on Climate Change (IPCC), where hundreds of international scientists analyse climate change and propose countermeasures, have on a number of occasions stressed the urgency of consistent measures if we are to keep the Earth on track towards the 2°C target.
How much CO2 emissions have to be cut and what does it mean for current fossil fuel reserves?
But what does the 2°C target mean in concrete terms? How much CO2 can humanity emit into the atmosphere without jeopardising getting there? A joint study by the Carbon Tracker Initiative and the London School of Economics has produced a detailed answer: Between now and 2050, only 900 gigatons of CO2 can be emitted if the 2°C target is to be attained with a probability of 80%. In the second half of the century, only a further 75 gigatons can be emitted. If more CO2 is emitted, the probability of remaining within the 2°C limit falls rapidly. With 1,075 gigatons by 2050, the probability is only 50%. Naturally, these values are only estimates. As far as their order of magnitude is concerned, they are largely uncontentious among climate researchers. Their explosiveness only becomes apparent when one compares them with the quantities of CO2 contained in the oil, gas and coal reserves which states and big business giants have secured for themselves – this means all sources which are already being exploited or have been earmarked for exploitation. If we calculate how much CO2 they contain altogether, we arrive at a figure of 2,890 gigatons. This is around three times the maximum which our climate could bear. There is therefore an alarming disparity between the 2°C target adopted by the international community and the action which is being taken by states and businesses. Essentially what this means is that if all fossil reserves were to be burned, our climate would warm by far more than 2°C — with disastrous consequences for humanity and our planet. The alternative is for states to ensure compliance with the 2°C target, as agreed at the World Climate Conference in Cancún. That in turn would mean that the bulk of oil, gas and coal reserves cannot be burned, and therefore worthless to their owners.
When investors realise that a large part of fossil fuel reserves cannot be burned, energy undertakings could lose 40-60% of their value on stock exchanges.
Fossil Fuel investments and the risk of stranded assets
For investors, shares in energy companies have been good business in recent years. Their share prices have risen in an apparently unending manner. But can they continue to do so forever? The share prices of energy multinationals such as BP, Shell or Statoil are partly based on the size of their oil, gas and coal reserves and on investors’ assumptions regarding the price at which these reserves can be sold in due course. But what will happen if many of these reserves prove to be worthless? What impact would this have on share prices? HSBC, Britain’s largest bank, has calculated the answer. It estimates that the principal energy companies could lose between 40 and 60% of their stock exchange value if the 2°C target is enforced. A study by business consultants – McKinsey and the Carbon Trust — have yielded a similar findings. It forecasts a possible loss of 30 to 40%. What will cause such massive losses? According to the study by HSBC's, BP, for example, would be unable to burn a quarter of its reserves if the 2°C target was enforced. This would turn these reserves into ‘stranded assets’, or worthless investments. That alone would substantially reduce its share price. There would be a secondary effect too: because of the over-supply of fossil fuels, their price would fall. Businesses might therefore only be able to sell part of their oil, gas and coal reserves — and would receive a lower price for what they did sell. To date, businesses have failed to respond to this danger. In 2012, a further 674bn USD was spent on prospecting and developing new sources of fossil fuels. Likewise, investors remain willing to invest their money in fossil fuels. But how can this be? Should they not adjust their behaviour in the light of the facts? Sir Nicholas Stern, the former chief economist of the World Bank, who is now teaching at the London School of Economics, gives the following explanation: “Either the market has not yet thought the matter through properly, or it is assuming that governments will not do much – or a combination of the two.”
It may be the case that businesses and investors are assuming that governments will not reach the 2°C target. However, that would not only be a cynical bet, but would also be a serious economic risk. As soon as it becomes clear that governments are stepping up their measures against climate change, investors could panic and withdraw their capital. If this happens, the bubble will burst – and share prices will plunge. Another explanation for the fact that investors are continuing to back fossil fuels is that the danger is simply not yet sufficiently perceived on stock exchanges. Many funds, for example, are guided by indexes such as the British FTSE 100. As the large energy companies are assigned a substantial weighting, money flows virtually automatically into oil, gas and coal. In order to prevent this, scientists, politicians and NGOs are drawing greater attention to the danger of a potential carbon bubble.
Doing this, highlighting the risks of a continued financing of fossil fuels and making the case for an orderly divestment from that sector while strengthening the field of sustainable investments is the core goal of this conference.