The Case for Fossil Fuel Divestment & Reinvestment
Everybody knows that to solve the climate crisis, we need structural change. And for that to happen, humanity must end its addiction to fossil fuels. Divestment and reinvestment (D&R) is at the forefront of the climate movement: divestment occurs when institutions take their money out of the fossil fuel industry and reinvestment involves investing in sustainable companies. This creates a two-pronged approach that punishes polluting companies whilst rewarding sustainable ones. 1612 institutions, managing a combined $40.63 trillion in assets have already committed to D&R. Because the fossil fuel industry is the main driver of the climate crisis, D&R is an essential strategy in the fight against climate change.
D&R damages the reputations of big corporations. Environmentalist Bill McKibben explained that, as a society, we must ‘revoke the social license of the fossil fuel industry’. A ‘social license’ is built upon legitimacy, credibility, and trust and is built up over time. However, fossil fuel companies use their ‘social license’ in the eyes of the public to expand their global operations, lobby politicians against climate action, and destroy the planet. Divestment strips the ‘social license’ from fossil fuel companies in two ways. First, financially backing a company by buying its stocks is a form of endorsement. This means that divesting from fossil fuels by selling company shares signals discontent. Second, institutions that undergo D&R often do so publicly. Universities such as Harvard, Oxford, and Cambridge, have all announced that they are divesting from fossil fuels, ruining the reputation of Big Oil.
However, the main impact of D&R is economic: divestment restricts fossil fuel companies’ access to capital, damaging their finances and keeping hydrocarbons in the ground. According to the Guardian, Peabody, the world’s biggest coal company, went bankrupt in 2016 because of divestment. When investors divest from fossil fuel-related assets, they signal to the market that company assets are less desirable. As a result, the market value of the company declines, making it more difficult for firms such as Peabody to raise capital. This is one of many reasons why Exxon, Shell, and Sonoco all had their credit ratings cut in February 2021.
Critics argue that divestment is not financially viable because it reduces profits. But D&R does not just help the environment: it also benefits investors. Since it began in 2012, the S&P 500’s Fossil Fuel Free Total Return Index has consistently outperformed the S&P as a whole. This is because fossil fuels are running out - scientists say reserves will be depleted by 2060. Since fossil fuel companies are valued on their reserves, this puts the profitability of the entire fossil fuel industry into question. After all, if coal, oil, and gas reserves disappear entirely, what is there to invest in? Transitioning to renewable energy sooner rather than later therefore boosts investors’ profits in the long term.
Even so, the fossil fuel industry is damaging profits in the short term too. A recent IEEFA report which investigated passive investing concluded that ‘shedding oil, gas, and coal has provided a winning financial strategy’ given the industry’s chronic underperformance. This led to a critical point in 2020 when Exxon Mobil was kicked out of the Dow Jones Industrial Average. Still, critics explain that divested portfolios have higher risk due to lower diversification. However, Blackrock, the world’s largest investment company, recently analysed the state of New York’s finances after they divested their portfolio from fossil fuels. Its report stated that D&R has a ‘minimal impact on risks and costs’. Whilst it is unrealistic to blame the fossil fuel industry’s woes entirely on the divestment movement, the past decade has shown that investments in coal, oil, and gas no longer yield reliable profits. The age of fossil fuels is over.
This is all well and good, but why should we reinvest? According to the Energy Transitions Commission, the world needs around $3.5 trillion a year of capital investment by 2050 to build a net-zero global economy up from $1 trillion per annum today. We must invest in clean technology at an unprecedented scale to hit our net-zero targets. All institutions have to develop a sustainable finance strategy and transfer capital away from fossil fuels towards the green energy transition.
Aside from the moral and financial arguments, institutions that divest and reinvest also boost their reputations. One of Stanford University’s core values is ‘sustaining life on Earth’. By divesting from coal in 2014, Stanford lived up to its promise and became a role model in sustainability. This creates a ripple effect: since Stanford is one of the most prestigious institutions in the world, their commitment to D&R inspired other institutions to divest. The High School Divestment & Reinvestment Coalition (hsDivest), for example, was established in 2023 to bring the D&R movement to the secondary school level. With more than 35 member schools in over 7 countries, hsDivest represents a growing global movement advocating for a better, brighter, and greener future.
Divestment and reinvestment alone cannot solve the climate crisis. D&R must be considered within the broader climate movement: by shifting public opinion on climate change, the divestment movement has empowered investors and shareholders to put the fossil fuel industry under scrutiny. Given its historic underperformance, the fossil fuel industry has an uncertain future. What is certain is the continued growth of the D&R movement.
