Divestment or removing all fossil fuel energy companies from a portfolio has emerged as a concern for some investors. But does it have the desired impact?
Some of my clients feel very passionately about the contribution of fossil fuels to climate change and other pressing environmental issues. This can often lead to a desire to eliminate resource extraction companies from their fund portfolios entirely. This drive toward divestment has been getting more attention over the last few years.
In this post, I'll share some of the points I raise as a first discussion on the topic of divestment with my clients.
Screening, Engagement & Exclusion
First, some industries or subsections of industries that have deeply entrenched business models that are unlikely to change. Ethical fund companies commonly exclude weapons manufacturers, nuclear power, tobacco, and coal. These industries are poor targets for the elements listed below, so divestment is a valid strategy.
For the rest, mutual funds (since they are shareholders of companies they own) have the opportunity to engage with these companies directly. They can steer them to diversify their operations. Further, they can help push for innovation to find ways to lower the impact of their operations. Lastly, they can help push for internal changes to lower the demand for fossil fuels.
Divestment and Solar Energy
There is example of how pure divestment fails to encourage change in the connection between Suncor and solar power. Suncor announced they are developing solar projects that would "add 240 megawatts of solar generation capacity to the current 9 megawatts" in Alberta. If you divest from Suncor, you have missed an opportunity to support solar power generation in Alberta and a low carbon future. This mirrors the situation in the United States, where traditional oil companies have been sizeable investors in solar power generation.
Some socially responsible investment companies also advocate for the change they want to see. Ethical Funds, for example, has been lobbying government for a progressive policy that places a price on carbon.
There is also the opportunity to engage with stakeholders outside of government and industry like community and activist groups to try and establish consensus on how to make constructive steps toward a low-carbon world.
Divestment Blind Spots
Lastly, say these factors didn't convince you and divestment was your final decision. Divesting still might not have the desired effect. Divestment doesn't address the demand for fossil-fuel based energy, so the companies will continue producing. Also, selling the shares means the new shareholder will likely be less concerned about the environmental effects of the company.
And also significantly, retreating from these companies means we get further separated from people who may hold different viewpoints. I think this entrenchment of positions is a block to changing the way business is done.
Has this affected any of your thoughts on fossil fuel divestment? Drop me a line either way or subscribe below to get your hands on a whitepaper with more detail about the clean energy transition.