Fossil Fuels Divestment

Advantage Capital Strategies identifies industries that have detrimental environmental, social, and economic effects and takes action to mitigate risk both through screening and advocating for change

Economic

Risk of becoming stranded assets


Social

Divestment campaigns and government regulation

Environment

Impacts of climate change


The Fossil Fuels Industry Explained

The term ‘fossil fuels’ refers to forms of energy that are created from organic material that is millions of years old. Fossil fuels include: coal, petroleum, natural gas, oil shales, bitumens, tar sands, and heavy oils, all of which can undergo combustion to produce heat for energy [1].

  • Companies that profit off of fossil fuels can be involved in the industry at various stages of production. These include:
  • Upstream industry: engages in exploration and production of oil and gas
  • Midstream industry: transports oil and gas (e.g. pipelines)
  • Downstream industry: refines oil products and sells and distributes oil and gas (e.g. gas stations)
  • Utilities industry: converts fossil fuels into energy that is then sold for commercial and residential use
    • Utilities often use a mix of fossil fuels and renewable sources to generate electricity.  For our analysis, we consider a utility company to be fossil fuel dependent if it derives more than 30% of its total energy supply or revenues from coal, oil, or gas.

In terms of coal, we have chosen to only screen thermal coal, referring to coal used to produce energy for utilities. We are not screening for metallurgical coal, which refers to coal used to produce steel. This decision is based off the fact that metallurgical coal is a requirement for the production of steel and there is currently no feasible alternative.

The Economic Rationale for Divestment

Gas Pump - Fossil Fuels

Companies that derive a majority of their revenues from fossil fuels have the potential to incur significant losses due to stranded assets.  According to HSBC, there are three factors that could lead to fossil fuels becoming stranded assets: 1) the implementation of climate change regulation, 2) economic factors, including the elevated price of oil, and 3) the development of innovations in the energy sector such as advancements in renewables [2].

A reduction in the individual consumption of fossil fuels could also lead to stranded assets. As public sentiment towards fossil fuels shifts, people may focus on reducing their own fossil fuel consumption by purchasing an electric vehicle, installing solar panels, or making other carbon-free lifestyle changes.

Furthermore, the price of solar and wind is now on par with many other fuel types for electricity generation, and electric cars are becoming mainstream.  According to Forbes, the cost per KwH for solar and wind ranges between $0.06 and $0.10, which is competitive with the cost of electricity generation from fossil fuels, which is in the range of $0.05 to $0.17 per KwH [3]

The Social Rationale for Divestment

sweet-ice-cream-photography-670371-unsplash

There is a large overlap between the economic and social rationales for fossil fuel divestment as the social response to the negative effects of fossil fuel consumption can drive fossil fuel assets to become stranded assets. The worldwide divestment campaign is one example of a social movement that poses a threat to the fossil fuel industry.

There is a significant worldwide push for fossil fuel divestment at institutions such as universities and national funds, with $8 trillion in globally managed assets committed to the divestment from fossil fuels [4]. In July 2018, Ireland became the first country to divest its assets from fossil fuels, a significant achievement in the fossil fuel divestment movement [5]. This movement poses a significant economic risk for the share prices of fossil fuel companies, as it represents decreased demand for the stock.

Regulators, especially those countries who have signed the 2015 Paris Agreement on Climate Change, may feel pressure from citizens or global allies to impose new legislation restricting the sale of fossil fuels by either banning certain fossil fuels completely, imposing a carbon tax, or heavily subsidizing ‘green’ energies.  These forms of regulation could further depress the value of the fossil fuel industry.

The Environmental Rationale for Divestment

There is also an overlap between the social and environmental rationales for divestment. The environmental impacts of climate change pose a threat to our local and global communities.

The overwhelming majority of scientists believe that humans are causing climate change, predominantly through the burning of fossil fuels. According to the International Panel on Climate Change (IPCC), about 78% of the total greenhouse gas emission increase since 1970 is due to CO2 emissions from fossil fuel combustion [6]. These greenhouse gases are harmful because they contribute to the greenhouse gas effect, which traps heat in the atmosphere and results in warming on a global scale, i.e. global warming [7].

The 2015 Paris climate agreement agreed to “holding the increase in the global average temperature to well below 2 degrees Celsius above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 degrees [8].” Without efforts to reduce emissions, the IPCC estimates that global mean surface temperatures will increase by 3.7 to 4.8 degrees Celsius by 2100 compared to pre-industrial levels [8].

Melting Glacier

Warming of 1.5 to 2 degrees Celsius will bring with it inevitable environmental effects, including heatwaves, a decrease in the availability of freshwater, reductions in agricultural yields, a rise in sea level, and coral bleaching, among other impacts [9]. The difference between 1.5 and 2 degrees comes down to intensity: 2 degrees of warming will result in more dramatic, negative changes in all of the above.

Signatories of the Paris Agreement include Canada, China, and India, all of whom have pledged to keep emissions below that amount. The US is also a signatory, however President Trump has announced his intention to leave the agreement by 2020, when it is permitted under the terms of the agreement. At the current rate of greenhouse gas reductions, the world will fail to meet the goals of the Paris Agreement and we are set to overshoot 2 degrees Celsius of warming. 

The most effective way to reduce emissions is to stop burning fossil fuels. Recent studies indicate that “globally, a third of oil reserves, half of gas reserves, and over 80 per cent of current coal reserves should remain unused from 2010 to 2050 in order to meet the target of 2 degrees Celsius [9].” This means that these reserves must remain in the ground and not be extracted or consumed, a statement that implies we must reduce our global dependency on fossil fuels. If the global community exceeds these recommendations, 2 degrees Celsius of warming is likely inevitable.

Divesting from fossil fuels signals to companies and the industry that they should be exploring new and cleaner technologies.

Citations

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