What started as a trickle has grown into a stream, and by most accounts, is likely to turn into a flood. We are, of course, talking about fossil fuel divestments as an increasing number of investors and fund managers are pledging to cleanse their portfolios of dirty assets – whatever that means.

It started with a few environmental activists, notably Bill McKibben’s 350.org, which initially focused on gaining a foothold among American universities with sizeable financial endowments (Table below). The thinking was to persuade university students and rich alumni to pressure the university fund managers to dispose of stocks of companies and/or industries deemed to be fossil fuel heavy, polluting, environmentally damaging, unsustainable, and so on.

Whose got big endowments?

Top American university endowments, 2012 data, $US , Source: CNN Money, 28 Jan 2014

Rank	School	Endowment
1	Harvard University	$32,334,293,000
2	Yale University	$20,780,000,000
3	University of Texas System	$20,448,313,000
4	Stanford University	$18,688,868,000
5	Princeton University	$18,200,433,000
6	Massachusetts Institute of Technology	$11,005,932,000
7	Texas A&M University System and Foundations	$8,732,010,000
8	University of Michigan	$8,382,311,000
9	Columbia University	$8,197,880,000
10	Northwestern University	$7,883,323,000

 

As reported in the Oct 2014 issue of this newsletter, the tactic appears to be gaining traction. With each passing day another university joins the ranks of others who have already pledged to divest their fossil fuel holdings. The latest was Australian National University (ANU), a decision which caused a political uproar in a country where coal has historically been king, not just for generating most of the country’s electricity but as a major source of income and employment in a resource rich, export dependent economy.

Australia’s fossil fuel loving Premier Tony Abbott called ANU’s decision “stupid,” while environmentalists called it a brave and highly significant step. Stupid or not, it is certainly symbolic and likely to be followed by other institutions of higher learning.

Rockefellers shun oil. Will others follow?

 

Moreover, the trend is spreading beyond universities and their ivory towers. In September 2014, the Rockefeller family – the descendants of legendary oil man who founded Standard Oil – announced that they would move away from oil. Once Rockefeller’s shun oil, others are likely to follow (photo on left). While the size of the fund is negligible in absolute terms, what it symbolizes is not. In making the announcement Stephen Heintz, president of the Rockefeller Brothers Fund, said,

“John D Rockefeller, the founder of Standard Oil, moved America out of whale oil and into petroleum. We are quite convinced that if he were alive today, as an astute businessman looking out to the future, he would be moving out of fossil fuels and investing in clean, renewable energy.”

In other words, it is not just about saving the environment, but about making good investments, moving away from potential risks and into growing sectors of economy.

So what is the reaction of the fossil fuel industry? Judging from the intensity of the attacks mounted against divestments, one can say if not threatened, they are greatly annoyed to have to deal with the new and unwanted grief and the negative publicity just as the business of getting more fossil fuels, especially oil, tougher, more expensive and more carbon-intensive.

Carbon heavy league: Oil (left) and coal (right)

Making matters worse, oil prices have recently softened with tepid demand growth and the long term prospects look less rosy.

According to Ben Zycher of American Enterprise Institute, at last count, over 180 institutions, local governments, cities and individuals with assets worth over $50 billion have already pledged to divest their holdings of oil, gas and coal.

As Zycher notes, “Divest is a curious term” in the sense that it is not universally clear what divestment exactly entails, nor is it entirely clear what assets should be shunned and which can be retained. One metric may be to unload shares of companies or industries with heavy carbon content in their assets, say companies engaged in mining, transport or burning of coal.

No matter what definition or metric is used, however, one quickly ends up with the proverbial slippery slope. For example consider a company such as Caterpillar, who makes the heavy equipment that digs and hauls coal in mining operations. Or GE, a company that makes locomotives that power the coal trains and turbines that burn coal to generate electricity. Caterpillar, however, also makes equipment that are used to build roads and flatten land to install solar PVs. GE makes medical imaging equipment, builds wind turbines and jet engines. How should such companies be treated?

Other critics of fossil fuel divestment say that it is pointless, hypocritical and ultimately self-defeating since every modern enterprise, universities included, uses energy to run its business, some more than others, and it is not clear where one should draw the line.

Where would you move the money? Oil & gas and coal companies compared to other sectors (market cap and yield)

Moreover, despite the gathering momentum, the $50 billion of pledges made to date do not even amount to small change in the grand scheme of things, i.e., relative to the size of global fossil fuel assets, estimated to be over $5 trillion in market capitalization.

As noted in a white paper by Bloomberg New Energy Finance, “Today, clean energy sector as an asset class is simply not big enough to absorb substantial amounts of capital divested from fossil fuels. There are, however, a number of trillion dollar-plus sectors that could absorb divested dollars” (graph on right).

Yet as a Chinese proverb says, a journey of 5,000 miles starts with a single step. Fossil fuel divestment has already passed the first step and there is no telling how fast it may move towards its ultimate goal, once it is agreed what the goal may be.

Published Originally in EEnergy Informer: The International Energy Newsletter November 2014 Issue.