Fossil-Fuel Divestment: Where Should the Money Flow?

By Titiaan Palazzi, Curtis Probst,  RMI and Jenna Nicholas

 AUG 12, 2015,  Last September, a day after 400,000 people marched for the climate in the streets of New York City, the Rockefeller Brothers Fund made headlines, announcing it would ensure none of the fund’s $860 million would be invested in fossil-fuel companies.

In January 2014, a group of 17 foundations preceded the Fund, committing to divest $1.7 billion, which has grown to over 100 foundations and over $5 billion in pledges over the past 18 months.

In early June 2015, the Norwegian government committed to divesting 100 percent of its coal holdings from its sovereign wealth fund—the largest in the world with $900 billion in assets. In total, hundreds of billions of dollars have been pledged for divestment, including from individuals, universities, sovereign wealth funds, faith-based groups, and pension funds—forming an accelerating movement that spans sectors.

Fossil fuels play an important role in our current global energy mix. However, transitioning from fossil fuels is critical since we cannot burn more than roughly 20 percent of the current proven oil, coal, and gas reserves if we want to stay on a 2 degrees Celsius track. Divestment can help realize this goal in three ways:

• First, reduced investor interest may eventually raise the cost of capital for the fossil-fuel industry and lessen its ability to pursue certain marginal projects.
• Second, when investors sell their investments in fossil-fuel companies, they send a signal that business as usual is no longer acceptable.
• Third, and perhaps most importantly, if divested money is invested in new energy solutions, such as renewable energy and energy efficiency, an alternative future is made possible.

Divestment can be part of a comprehensive transition to a cleaner energy economy. But if billions of dollars are divested from fossil-fuel companies, where should the money flow to make the biggest impact?

SHIFTING OUR ENERGY SYSTEM

In 2013, renewable generation and energy efficiency attracted more than half a trillion dollars of investment worldwide. The money committed to divestment is of the same order of magnitude, meaning it can have a large impact on the investment landscape. What are the areas where investments could yield good returns and accelerate the shift to a clean energy system?

Renewable generation
Renewable electricity generation—wind, solar, hydro, and biomass—has many benefits. It reduces carbon emissions, reduces the need to import fossil fuels, and creates jobs. In 2014, renewable electricity capacity attracted $310 billion of new investment, more than fossil-fuel power plants.

Capital can be invested in large-scale renewable power plants (such as wind turbines in the U.S. Midwest), bundles of rooftop solar PV, and through equity investments in technology manufacturers and distributed generation providers.

Transportation
Three large shifts are happening in personal transportation: 1) the shift from internal combustion engines to electric cars, 2) the increased use of shared vehicles, and 3) a reduction in vehicle miles traveled per year.

Capital can be invested, for example, through equity investments in car manufacturers, or through debt investments in infrastructure (e.g., electric vehicle charging stations).

Energy efficiency
The cheapest way to reduce our fossil-fuel dependence is to reduce the use of energy. The declining cost of sensors and data processing equipment is making energy efficiency even cheaper, while increasing the size of the total potential savings. McKinsey estimated a $1.2 trillion efficiency savings opportunity in the U.S. alone between 2010 and 2020.

Capital can be invested through bundled building efficiency investments, and through equity investments in companies that provide energy efficiency.

MAKING A DIFFERENCE

Divesting from fossil fuels is a strategy that investors of any size can take to minimize the carbon footprint of their investment portfolio. And, as illustrated, divested funds can be reinvested in a broad range of financial products that can facilitate a transition to a clean energy economy. If you are interested in divestment there are several actions you can take and many resources available that can help inform your decision-making process:

Learn more about climate change and the divestment movement

Climate change, divestment, and clean energy investments can seem overly complex and confusing—at first. We have collected a handful of useful resources that are a great starting point to better understand the current state of the field.

• Beyond Fossil Fuels: The Investment Case for Fossil Fuel Divestment (IMPAX Asset Management)
• Fossil Fuel Divestment: A $5 Trillion Challenge (Bloomberg New Energy Finance)
• Stranded Assets: What Next? (HSBC Global Research)

For additional resources and news, please check out: www.divestinvest.org/philanthropy

Understand how the divestment process works
Over the past few years, several groups have published step-by-step guides on divesting for individuals. These detailed resources not only provide a wealth of background information, but also contain important questions you can ask yourself and your financial advisor. We recommend:

• Extracting Fossil Fuels From Your Portfolio: A Guide to Personal Divestment and Reinvestment for Individuals (350.org)
• Investing to Curb Climate Change: A Guide for the Individual Investor (U.S. SIF)

Participate in the broader divestment community
If you are interested in connecting with like-minded people to share your ideas, learn more, and even volunteer your time, below are some great starting points:

• Divest-Invest Individual
• 350.org
• carbontracker.org
• gofossilfree.org

Divestment is only one element in the transition from fossil fuels. For divestment to have a significant impact, it must be on a scale that is relatively large. Also, divestment is a blunt-edged instrument: investors can choose only between buying, selling, or holding a company’s securities. If a company has operations linked to fossil fuels and clean energy, investors cannot choose to financially support only the clean energy activities. Similarly, divesting from fossil fuel producers who serve as industry leaders in responsible practices could have negative impacts on the fossil-fuel industry’s carbon emissions.

Climate change is the most significant global challenge of our generation. One part of the solution may be reallocating your investment dollars toward creating new solutions.

Guest co-author Jenna Nicholas is co-founder and CEO of Phoenix Global Impact, a consulting company that specializes in impact investing, social entrepreneurship, and strategic philanthropy.

This article first appeared in the RMI Outlook and is reprinted here with permission