Can Fossil Fuel Divestment Prevent The Carbon Bubble From Bursting?

Could the same movement that brought down Apartheid be the key tactic in convincing America to go fossil fuel free and preventing a new financial crisis?

Rev. Lennox Yearwood divestment campaign image via Campus Progress

If you ask activists at the more than 400 colleges, cities and states, and religious institutions who have answered 350.org’s call to push for fossil fuel divestment, the answer is a resounding yes – and San Francisco just gave the campaign its biggest win to date.

On Tuesday, the San Francisco Board of Supervisors unanimously passed a resolution calling on the San Francisco Employee Retirement System (SFERS) to divest over $583 million from fossil fuel corporations. “Divestment is an important part of our city response to climate change,” said Supervisor John Avalos. San Francisco now joins governments in Seattle, Ithaca, and seven other cities pushing for divestment, and if SFERS agrees to the request, it will become the largest pension fund in the country to divest from the fossil fuel industry.

Divesting From Ethical And Financial Risk

Divestment is the opposite of investing, and entails ridding a portfolio of stocks, bonds, or investment funds with moral and ethical risks. It’s widely credited with ending Apartheid in the 1980’s when 155 colleges and more than 130 state and local governments removed their money from multinational corporations that did business in South Africa.

With the impacts of climate change becoming more apparent every day, the 200 publicly traded companies holding the vast majority of the world’s proven fossil fuel reserves are fast becoming the very definition of risk – on moral, environmental, and investment terms.

Risk management word collage image via Shutterstock

350.org is calling on college and university presidents, religious institutions, and pension funds to immediately freeze any new investment in fossil fuel companies and divest from funds and corporate bonds with fossil fuel public equities. By divesting, these investors will not only raise moral questions about fossil fuel investments, but they’ll theoretically redirect funds toward clean energy.

The Looming “Carbon Bubble” 

Ironically, while fossil fuel investments may be among the most profitable around today, divestment could be the best financial choice any investor can make long-term. The business models of fossil fuel companies rely upon the ability to emit endless amounts of carbon into the air without financial penalty, but the global growth of carbon markets may soon flip that equation upside down.

A report issued last week identified trillions of dollars at risk in international stock markets that inflate the value of fossil fuels. These resources must remain in the ground to avoid the worst effects of climate change and represent a “carbon bubble” that could plunge the world into another financial crisis if it bursts.

In fact, HSBC warns 40-60% of total oil and gas industry market capitalization is at risk from the carbon bubble. “Business as usual is not a viable option for the fossil fuel industry,” said HSBC oil & gas analyst Paul Spedding. “Management should already be looking to new business models that reduce the risk of stranded assets destroying shareholder value.”

Now compare the outlook for fossil fuels to clean energy forecasts. New analysis from Bloomberg New Energy Finance predicts renewables will account for up to 74% of all new power capacity added worldwide by 2030 and could represent a $630 billion annual market. Talk about a growth opportunity.

Particularly Important For Colleges And Universities

But back to the pesky carbon bubble. That investment risk could be particularly acute for America’s largest colleges and universities, who rely on their investments for financial stability.

Their endowments collectively hold more than $400 billion in investments, with a considerable amount represented by fossil fuel companies. An analysis of college endowments found divestment does not subtract significant value from endowments, and only increases ordinary market risk by less than 0.01% “Statistically, it’s basically noise,” said Patrick Geddes, Aperio Group chief investment officer.

Add it up and higher education divestment makes moral sense, meets the growing importance of environmental policy for college students and trend of greening US campuses, all while preserving endowments. That equation has spurred divestment movements in more than 300 US colleges and universities, and they’re starting to pile up victories.

Four schools, Unity College, Hampshire College, Sterling College, and College of the Atlantic have committed to divestment across their estimated endowments of more than $70 million, and the University of California-Berkeley’s student government has voted to divest $3 million from fossil fuel companies.

Bottom Line, Profiting From Climate Change Is Wrong

The Go Fossil Free campaign declares that it’s wrong to profit from wrecking the climate. San Francisco’s elected government may have taken the single biggest step in divestment, but it’s far from alone, with efforts underway in more than 70 states and cities. And as the world warms, who knows – we may eventually consider fossil fuel divestment one of the shrewdest investment strategies of our lifetimes.

Divestment image via GoFossilFree.org