To divest or not divest

To divest or not divest? That is the question.

Bastardising a quote from Shakespeare is one thing.

But whether to avoid companies bastardising the Earth, that’s an entirely other beast.

So does divestment work?

First up, what is it:

Simply put, divestment is the opposite of investment. It is the withdrawal of an investment from a company for financial, ethical, or political objectives.

There’s been a growing movement to divest from fossil fuel companies.

Universities, cities and even countries have pulled out of the dirty stuff in recent years.

The theory goes that removing funding from fossil fuel companies will remove their ability to grow, which ultimately harms the business.

A simplistic view: new funds open up new oil exploration opportunities which in turn grow profits.

Divestment reverses this.

But does it work?

MotherTree looks at the arguments for and against divestment as well as the potential impact on your wallet.

The argument against divestment:

The “no point recycling as my neighbour doesn’t bother” argument:

• If enough investors sell their shares in an oil and gas company, let’s call it Shell, then the share price should fall, damaging Shell’s ability to get a loan or buy other companies and so decreasing its prospects.

• But, we are still in a world where some people want to buy shares in fossil fuel companies.

• For now, at least, there are those who will buy shares in Shell without caring about the consequences. As Alice Ross states: “if the share price falls low enough, some people will spot a bargain.” [1].

• So even if you divest, currently, there is someone else willing to take your place.

The “stay in and vote for change” argument:

• Looking past the short-term financial reason to keep fossil fuel funds, there is one way you can have a positive impact on the planet while keeping the shares. This sounds paradoxical but is happening.

• It’s through voting.

• An increasing number of people, helped by great organisations such as Tumelo and ShareAction, are using their shares to vote at fossil fuel AGMs.

• This means they have a platform to challenge CEOs and the board on their commitments and hold them to account on their past promises. It goes further than that, in most publicly traded companies, shareholders elect the CEO.

• And it’s working! Earlier this year, a leading UK fracking company, Third Energy, were taken over by a green energy group. They immediately installed anti-fracking campaigner, Steve Mason, as a director. The result? Third Energy now has ‘absolutely no interest in fossil gas’ and is targeting renewable energy. Fracking marvellous.

The “stop the mad CEO” argument:

• If you are a climate-conscious investor, and you own shares of a public oil company (let’s imagine you owned these before your climate-conscious “awakening”), and that oil company’s CEO says “being owned by climate-conscious, public shareholders is holding us back, I’ve raised some money, let’s go private”: Should you vote to approve the deal?

• On the one hand, if the company goes private, you are: (1) reducing the carbon emissions of your portfolio and (2) getting bought out at a premium.

• On the other hand, you are (1) definitely increasing the amount of carbon emissions in the world, since the company is going private specifically in order to pollute more, and (2) missing out on the profits of doing that.

• A climate-conscious strategy of “we will own all the oil companies, to prevent someone worse from owning the oil companies” makes a weird kind of sense. [2]

The argument for divestment:

It’s worked before:

• Divestment is not a new movement. In the 1700s, American Quakers divested completely from the slave trade with Quakers of London following soon after. Their actions raised awareness and showed definitive action in the fight to abolish slavery. [3]

• Apartheid South Africa: In the 1980s, the UK’s National Union of Students put particular pressure on Barclays Bank, with their “Don’t Bank on Apartheid” campaign. In 1986, Barclays sold its South African arm. The bank cited commercial reasons but the Chairman of Barclays at the time, Sir Timothy Bevan, told the New York Times: “World opinion counts.”

The “divestment will make you more money in the long term” argument:

• Divestment may actually make financial sense.

• Of course, fluctuations in oil prices can easily lead to higher returns for fossil fuel investment, we’ve seen this recently with Putin’s invasion of Ukraine.

• However, investors increasingly believe that stricter regulation and consumer sentiment will ultimately harm fossil fuel companies and harm their investments over the long term.

• The regulators are mounting up:

  • A Dutch court has ordered Shell to reduce its emissions by 45% compared to 2019 levels.

  • The Massachusetts high court ruled that ExxonMobil must face trial over accusations that it lied about the climate crisis and covered up the fossil fuel industry’s role in worsening environmental devastation.

• Consumer sentiment is growing:

  • Based on Deloitte’s annual report on consumer sentiment

  • 40% of the UK public chose brands that have environmentally sustainable practices / values. This is up 8% on 2021

  • 11% changed some, or all, of their personal financial investments for more ethical or sustainable related investment options. Up 3% from 2021.

• And it might even make you money in the short term: A report by ESG Book discovered that companies with a strong environmental performance had stronger performing share prices. Need a second example? The annual London Stock Exchange report on the Green Economy, consistently shows Environmental funds (FTSE Environmental Opportunities All Share index) outperforming the average (FTSE Global All Cap index).

The “stranded asset” argument:

• Oil and gas companies have a nightmare problem: stranded assets (if you own a coal mine but no one is buying coal, you are stuffed. You have a stranded asset).

• They own huge reserves of oil and gas, valued at $900bn – about a third of the value of the big oil and gas companies.

• As renewable energy prices continue to drop, those stranded assets start to look very precarious. This happened in the US in 2015, with over 24 coal companies going bankrupt as a result of cheap renewable energy. If you hadn’t divested from your US coal stake in 2015, you would have lost money.

The “we are in this together” argument:

• Even if your neighbour refuses to recycle, our actions still make a difference.

• Barclays divested from apartheid South Africa because of changing world opinion. (Enough people decided to recycle, so now your neighbour does it as well)

• We can do the same for fossil fuels. Leave Barclays and make sure you tell them why on your way out. When Barclays’ CEO wakes up to this, there’s a good chance he’ll change how Barclays invests.

• If enough people divest, at a fast enough rate, the stranded assets will be, well, stranded, while the banks will be forced to change. And the divestment movement is gaining pace:

  • 86 UK universities have committed to divestment. Up from 78 in 2020.

  • 12 major cities have begun divesting, including New York, Los Angeles and London.

  • Countries are following. Ireland has committed to completely divest by 2023.

So what can you do?

• If you already have shares in a fossil fuel company and don’t want to sell them, then make sure you vote. Check out Tumelo, sign up to ShareAction. Make your voice count.

• If you're comfortable giving up potential short-term gains, then get your money out of fossil fuel companies.

• Even if you don’t have any shares, you can still have an impact by switching banks. Getting your money out of providers who invest heavily in fossil fuel, such as Barclays and HSBC, sends a message that you no longer stand for supporting oil & gas companies.

[1] - Alice Ross, Investing to Save the Planet, p. 50

[2] - Matt Levine, Money Stuff, Thursday 16th June, 2022

[3] - Alice Ross, Investing to Save the Planet, p. 48