Divestment, destabilisation, decarbonisation?

by | May 19, 2017 | All posts, Sustainable transitions | 0 comments

With The University of Manchester considering divesting its assets from fossil fuel related industries, Viki Johnson considers whether divestment can really destabilise an industry.

Just over a month ago it emerged that scientists funded by Cancer Research UK and working in British universities have been paying into USS (the main pension schemes for British university staff)—a scheme that currently has investments in British American Tobacco. This is neither shocking nor surprising. But it is embarrassing, especially when the USS website provides details on investments. How did they not know? Why did they not think to question where their money was going?

Hard to openly admit, but the truth is, it is the same pension scheme I pay into, and is one that is currently investing in fossil fuel firms and associated industries. These firms are currently playing a significant role in contributing to climate change. Not just through the extraction, processing and distribution of coal, oil, gas and other unconventional fossil fuels, but, like the tobacco industry, through decades of fighting policy and undermining scientific research —the very science that myself and my colleagues were funded to do.

The current fossil fuel divestment campaigns, sweeping across Europe and North America and inspired by UK-based NGO Carbon Tracker’s work on ‘unburnable carbon’ is an attempt to address thisgap in our financial literacy and ultimately destabilise the sector.

A campaign organised by responsible investment NGO ShareAction and the University and College Union has recently led to USS agreeing to meet with the fund’s membership annually to discuss concerns on ethical investment. The good news is, divestment from fossil fuels in on the agenda. And, in the past month, the University of Manchester has joined a growing number of universities that are or are considering divesting their own assets from the fossil fuel industry.

The Sustainable Consumption Institute has joined a number of departments and centres in submitting a letter supporting the case for divestment to the University’s consultation (see link below). But as an institute with a core research agenda that examines processes of change towards more sustainable ends, one can’t help but think critically about the efficacy of divestment campaigns.

Smoke(ing) and mirrors?

In the 19th century, lung cancer was a very rare disease. So rare in fact, doctors considered lung cancer as a, ‘once-in-a-lifetime oddity’. Improvements in diagnostics aside, public health scholars began to notice a parallel rise in cigarette consumption and lung cancer in the 1920s. By the 1950s the infamous Doll and Hill study confirmed, unequivocally, that smoking increased the risk of lung cancer.

It took around 30 years from the publication of this seminal study before divestment from the tobacco industry began, with public health groups such as the American Medical Association taking the first step. Others followed, but slowly with universities, including the University of Manchester, tending to divest in the 1990s, along with some US public pensions funds (see Ansar et al., 2013).

Did such divestment campaigns destabilise the industry? Directly, no. Indirectly, yes.

Fifteen years ago, the tobacco industry was considered to be in terminal decline. So much so, that Philip Morris had even, ‘seriously considered leaving the tobacco business’. The industry was exposed to multibillion-dollar lawsuits, clampdowns on marketing and growing consumer aversion to smoking in developed countries. In recent years, however, the FTSE All World Tobacco index, which tracks the performance of the world’s biggest cigarette companies, returned 988% since 2000, significantly outpacing the 131% return for the FTSE All World Index. Some fund managers are, now, apparently considering reinvesting.

When an investor divests, assets (e.g. stocks, bonds, and investment funds) are sold and a change of ownership occurs, often to investors with more dubious ethical standards. In fact, some ‘sinvestors’ may even welcome the opportunity to increase their holding of divested assets, particularly if they entail a short-term discount. Divestment can also lead to a higher risk profile of ‘sinvestments’ (from litigation, for example).

So the lower price of shares and the higher risk profile can lead to a mildly positive correlation between divestment and financial performance of sinvestments – with some sin stocks outperforming other stocks by 2.5 per cent per year. We note, however, that this relationship is contentious, with studies finding that ethnical investment strategies do not necessarily diminish returns. Furthermore, historically, only a very small proportion of total shares of companies subject to divestment campaigns are actually divested. For example, in the case of tobacco only 0.8% of organisations and funds have ever substantially divested from tobacco equity and even fewer from tobacco debt.

The point here is that divestment campaigns are unlikely to have a net effect on the direct valuation of ‘sinvestments’, nor should we expect them to. Rather, change will have to come from a range of measures, such as transformation of market norms or constrained debt markets (e.g. bonds).

To be fair, 350.org, the mastermind behind the wave of fossil fuel divestment campaigns, have never claimed the sole purpose has been to raise the cost of capital for fossil fuel firms. Rather, their aim is to stigmatise the industry, denying them the political, social and cultural backing to influence decisions on climate change.

While the tobacco industry might appear to be performing well for now, this is likely to be short-lived. Stigmatisation of the sector through the divestment campaigns of the ‘80s and ‘90s did create the window of opportunity for public policies that have eroded industry power (at least in developed countries), such as escalating taxation and bans on smoking in public spaces and tobacco advertising. Analysts now warn tobacco is a ‘yield trap’ (offering high, but unsustainable dividends), due to the new wave of tobacco legislation, such as plain packaging, that is diminishing brand value and pricing power.

Divestment and fossil fuels

Obviously there are significant differences between the fossil fuel and tobacco industries. The most obvious being that short-term energy security complicates policy decisions. Like the tobacco industry, divestment campaigns, however, do have the potential to be a motor for change.

First, they raise awareness and literacy of the complex financial system. Although, whether or not this translates into more active investors is another question. It also raises awareness about unsustainable and unethical practice of fossil fuel firms. Most importantly, however, stigmatisation of the fossil fuel industry does create legitimacy for political action – whether this includes policy support for green alternatives, regulation, taxation, a better global climate deal, or even increased litigation.

There has been growing rhetoric about the high-risk strategy of investing in the fossil fuel sector. Indeed, fossil fuels are what the investment industry calls a ‘yield trap’. Research I conducted in 2012 , however, showed that while investors are aware of climate change, and some even feel quite strongly about the need for climate mitigation, their models still do not ‘see’ this risk. And, while carbon pricing is often claimed to be a panacea for shifting the market, advocates often ignore that in the short-term this would be politically very difficult to achieve. Not only would this be regressive, fossil fuel firms still wield significant political power to resist change.

While you might make a quick buck from tobacco shares now, divestment campaigns have created windows of opportunity for hugely important public policies, which after almost 40 years may finally see the terminal decline of the industry.

Divestment campaigns are clearly symbolic actions, with the aim of creating the sense that an industry is a pariah. They certainly aren’t a magic bullet to industry destabilisation. But they can be the precursor to change across multiple domains: industry, technologies and infrastructure, public policies and political power, knowledge base, user relations and markets and culture.

As research conducted here at the SCI suggests, however, unless change occurs across these multiple domains it will be incremental and slow.

Unfortunately, with climate change, time is not on our side.


  • Dr Victoria Johnson