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Wed Aug 12, 2015, 10:04 PM

 

Skepticism about divestment and McKibben

A veteran environmentalist sent me a link to this article: McKibben’s Divestment Tour – Brought to You by Wall Street.

The article is long, with detailed denunciation of the idea of a carbon "budget" that would allow some safe burning of fossil fuels. The author's view of divestment is that it is essentially a distraction, functioning to shield from scrutiny the actions of the people who are really the problem -- the global rich (including many of us!) who are generating most of the current emissions.

An excerpt from her summary:

• {The global Divestment campaign} provides a moral alibi and evokes illusions of white saviour/moral superiority of those that divest/divest-invest while the very people divesting are those that comprise the 1% creating 50% of all global GHG emissions (anyone who can afford to board an airplane). Shuffling their investments does not change this fact or alleviate/absolve one’s role in accelerating climate change and ecological destruction.
• Protesting fossil fuels cannot and will not have any effect on fossil fuel consumption, production or destruction without legitimately and radically addressing Annex I consumption, economic growth under the capitalist system, human population (specifically in Annex I nations), the military industrial complex and industrial factory farming.
• The chosen campaign of divestment rather than the boycott of fossil fuels in combination with proposed sanctions on fossil fuel corporations demonstrates the insincerity of the campaign and its true intentions as sought (and developed) by its funders.


(Incidentally, the "Annex I nations" -- listed here -- are essentially the industrialized countries.)

For my part, I've been skeptical of the common analogy to the anti-apartheid campaign to divest from South Africa. A big multinational corporation might have been getting only a tiny fraction of its profits from its South African operations. If the price of that small profit was constant hassle and boycotting and bad publicity in the United States and other major markets, then it was plausible to hope that the company would decide to get out of South Africa, just on the basis of costs and benefits (i.e., morality aside). By contrast, it is not plausible to hope that BP or its ilk will get out of the fossil fuel business.

I credit the divestment proponents with good intentions, but I fail to see how the movement would have any effect on fossil fuel consumption, other than as an indirect vehicle for publicizing the problem, and in that respect it seems very inefficient.

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Response to Jim Lane (Original post)

Thu Aug 13, 2015, 04:37 AM

1. "When the divestment movement began, I knew that apartheid had to end." - F.W. de Klerk

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Response to bananas (Reply #1)

Thu Aug 13, 2015, 08:48 AM

2. That article supports my criticism of divestment

 

The author was president of Hampshire College when it became the first U.S. college to divest from companies doing business in South Africa. She wrote in 2013:

Doing business in South Africa became too expensive for U.S. companies. Moreover, it did not impact their core business.

. . . .

Today, as we mourn Mandela's death, many other divestment movements are active on campus, notably targeting fossil fuel companies. I believe the fossil fuel campaigners are having an effect, but the situation is different. They are attacking oil companies' core business. In the 1980s, no one was asking GM to stop making cars. The 21st-century divestment activists face a tougher task.


That's precisely the point I made. I wish she had elaborated on what effect she thinks the campaign is having. Have any fossil fuel companies modified their core businesses, so as to move from the "divest" list to the "acceptable" list? If other companies have been deterred from entering the field, has that reduced fossil fuel consumption? I haven't followed the issue closely but I've never heard of such an effect even being claimed, let alone established.

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Response to Jim Lane (Reply #2)

Thu Aug 13, 2015, 02:56 PM

3. "Forget ethics, carbon divestment looks profitable"

http://blogs.reuters.com/breakingviews/2015/06/11/forget-ethics-carbon-divestment-looks-profitable/

Forget ethics, carbon divestment looks profitable
By Olaf Storbeck
June 11, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

As long as it was just the pension funds of the Church of England or Stanford University announcing to ditch investments in fossil fuel companies, it was easy to shrug off the trend as feel-good investing. Not anymore, now that Europe’s second-largest insurer AXA and Norway’s $880 billion sovereign wealth fund are doing the same.

They may still talk about doing the right thing. But global warming and the fight against it are likely to hurt the bottom lines of companies contributing to rising levels of carbon dioxide in the atmosphere – even if political action against climate change remains lacklustre.

The coal industry is likely to take the first and biggest hit, as it has a particularly heavy carbon footprint. In the United States, the historic link between GDP growth and coal demand broke down in 2007, and the North American coal industry has basically been in crisis since then. The industry’s global prospects are even bleaker: consultancy Mercer estimates that anti-climate change policies will erode between 26 and 138 percent of the sector’s annual returns to shareholders over the next decade.


From an investor’s perspective, climate change creates two different kinds of risk.

One is political. Future regulatory actions – be it carbon taxes, subsidies for green power or outright emission caps – may make it more expensive to operate carbon-heavy business models.

<snip>

The other type of risk is technological. Whatever politicians do in the future, the billions of dollars spent on developing green power and energy efficiency will bear carbon-reducing fruit. Already, Germany needs almost a fifth less energy to produce one euro of GDP than in 2000.

<snip>

The business models of traditional utilities have been undermined. They are closing many fossil plants prematurely. Investors have suffered. Over the last five years, the share prices of E.ON and RWE have fallen 45 percent and 64 percent respectively, while dividends tumbled. Engineering giant Siemens has given up any hope it will ever be able to sell a new gas turbine in its home country. Lignite coal is next in line for the cull.

<snip>

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Response to bananas (Reply #3)

Thu Aug 13, 2015, 03:08 PM

4. As your excerpt says, regulatory and technological changes are threats to fossil fuel profitability.

 

The divestment movement, however, is not.

If you spend time lobbying your state government to have the state employee pension fund divest from fossil fuel companies, that's time, energy, and money that you're not spending lobbying for net metering or a tax credit for installing home solar or the like. My point is that people should give priority to measures that will actually reduce fossil fuel consumption.

I agree with your excerpt that reductions in fossil fuel consumption, or the prospect of such reductions, will lead to divestment, but it doesn't work in the other direction.

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Response to Jim Lane (Reply #4)

Thu Aug 13, 2015, 04:43 PM

5. It works in both directions, it's a feedback loop.

Money taken out of fossil fuels increases the financial risk of fossil fuels for other investors, drawing other investors away from fossil fuels; and when that money is instead invested in green projects it accelerates the development and deployment of those green projects, decreasing the financial risk for green projects, drawing other investors into green projects.

I'd also like to point out that divestment isn't just a tactic, it also comes from a felt ethical sense that investing in fossil fuels is wrong.

The apartheid divestment movement on campuses was led by students and faculty who didn't want to be a part of the apartheid system, even indirectly through university investments. And corporate apartheid divestment was led by shareholders and employees who felt the same way.

I'm kind of horrified you would want people to ignore their personal sense of integrity and stop advocating divestment.

Divestment is the right thing to do, regardless of whether it's profitable or not.

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Response to bananas (Reply #5)

Fri Aug 14, 2015, 12:47 PM

6. I don't see any feedback operating.

 

You write, “Money taken out of fossil fuels increases the financial risk of fossil fuels for other investors, drawing other investors away from fossil fuels....”

No, that’s not how the market would work. Let’s assume, very charitably, that there’s enough divestment to exert downward pressure on the stock price. It’s undeniable that there’s still a huge amount of investor money that assesses stocks solely on economic grounds. The lower price will produce a lower P/E ratio and make the stock more attractive to those strictly-from-commercial types.

Furthermore, the point the author made (in the article I linked) that I agreed with is that divestment doesn’t reduce the consumption of fossil fuels. Even if the stock price fell, what effect would that have? Management generally seeks to maximize stock price, especially over the short term, but there’s a limit to what can be done. As noted in the article you linked in #1, a big MNC could respond to South African divestment by getting out of South Africa but it’s not plausible to expect BP or Exxon/Mobil to get out of the fossil fuel business. Any fall in the stock price will be something they just have to put up with.

Nor will a fall in the stock price reduce the capital they have for building new pipelines or the like. Money paid for shares already issued goes to the former owner, not to the issuing corporation. I expect that most of those companies are sitting on all the cash they need anyway.

You add, “and when that money is instead invested in green projects it accelerates the development and deployment of those green projects, decreasing the financial risk for green projects, drawing other investors into green projects.” First, it assumes that divested money will go into green projects instead of into other MNC stocks. Many institutional investors would be constrained in where they could invest, and would have to buy McDonald’s or the like rather than backing some guy who wants to build a wind farm. Beyond that, here again the market works differently. An investor who wants to back a green project will pick the one that seems to have the best chance of success. The next such investor will pick the best of the rest. As more investors enter the field, the competition means that the expected returns go down, not up.

You write:

I'd also like to point out that divestment isn't just a tactic, it also comes from a felt ethical sense that investing in fossil fuels is wrong.

. . . .

I'm kind of horrified you would want people to ignore their personal sense of integrity and stop advocating divestment.

Divestment is the right thing to do, regardless of whether it's profitable or not.


I understand that people feel uncomfortable profiting, directly or indirectly, from acts that cause climate change. I wasn’t demanding that people ignore their opinions on that score. I was simply addressing a different point: What is the practical effect of divestment? If the practical effect is limited or nonexistent, then that’s one factor that must be considered in determining what’s the right thing to do.

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Response to Jim Lane (Original post)

Fri Aug 14, 2015, 01:02 PM

7. What about grass-roots divestment?

 

As in, consumers stop using fossil fuels for anything, and stop buying products made or shipped using them?

Big Fossil isn't selling the stuff as part of some evil master plan, they're selling it because we want it and what it gives us - material goods, transportation, heating and cooling and some degree of safety. If we stopped buying it, they'd stop selling it. Who's on board for that? (Hint: not me...)

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Response to GliderGuider (Reply #7)

Fri Aug 14, 2015, 01:28 PM

8. I don't use the term "divestment" to refer to individual consumer decisions.

 

In this economy, for an individual to "stop using fossil fuels for anything, and stop buying products made or shipped using them" is essentially impossible. We can, however, make some decisions at the margin that have an effect. People who buy hybrid cars or who don't run the air conditioning at their preferred comfort level are doing that, paying more money or getting less cooling so as to reduce their carbon footprint.

In general, though, I think those individual decisions -- by a minority of people -- won't amount to much. The government must act. For example, to reduce gasoline consumption significantly requires such measures as an increase in the gasoline tax or the CAFE standard.

I agree with you that the corporations don't set out to do evil. The classical free-market view is largely correct: With some exceptions, those companies maximize profits under the market conditions in which they find themselves. It generally takes government action to have a significant impact on those market conditions and thereby affect their conduct.

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Response to Jim Lane (Reply #8)

Fri Aug 14, 2015, 02:34 PM

9. So what's the purpose of corporate divestment?

 

Is it supposed to affect the behaviour of the energy corporations in some significant way?

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Response to GliderGuider (Reply #9)

Sat Aug 15, 2015, 01:53 AM

10. That's the subject of my exchange with bananas.

 

I personally don't see it as affecting the behavior of energy corporations.

Other purposes that have been mentioned, along with my personal assessments:
* the moral purpose of not profiting from environmental harm (valid as far as it goes but less important than affecting behavior).
* the psychological purpose of "feel-goodism" for the activists (pointless).
* the tactical purpose of providing a vehicle for alerting the public to the problems of fossil fuels (an inefficient vehicle).

I haven't delved enough into the divestment movement to opine as to how most of its adherents would answer your question.

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