Divestment 2: Does the Math Add Up?

As I noted in my first divestment post, the “climate math” behind the divestment movement stems from the Carbon Tracker Initiative’s report “Unburnable Carbon” (pdf).

The report contends that our “carbon budget” between now and 2050 – if we want to avoid a rise in average global temperatures of more than 2 degrees C (which would bring tremendous damage and human suffering to our global human society) – is 565 gigatons of carbon dioxide.  The total known reserves of coal, oil, and gas represent a carbon potential (if burned) of 2,795 gigatons, which means that about 80% of the known reserves are “unburnable” if we are to avoid a really nasty climate for us, our children, and grandchildren.

The report points out that fossil fuel companies account for reserves as assets, and analysts and investors determine the value of those companies based on these assets. If 80% of these assets are unburnable (and therefore worthless) these valuations are way off.  Further, because these companies represent such a large portion of economy and the financial markets, this valuation error represents a major systemic risk for the global financial systems.

One of the co-founders of the Carbon Tracker Initiative, recently published an article, “Why the ‘Do the Math’ Tour Doesn’t Add Up” on GreenBiz questioning the value and effectiveness of divestment as a response to this dilemma.

In the article Cary Krosinsky points out that “there is a severe systemic problem,” and that instead of pointing figures we should be rolling up our sleeves and figure out “what we should really be doing.” I always tend to prefer good faith, solutions-based approaches, and couldn’t agree more that this is a systemic problem, and that one divestment campaign is going to solve it.

But I think the intent behind the divestment movement is to highlight that good faith efforts haven’t (yet) been effective enough, fast enough.  And it is one piece in a larger effort – apartheid didn’t end only because of divestment, it was one part of a much longer, sustained effort that included a lot of hardship and sacrifice by countless advocates, undertaking many strategies.

Krosinsky also questions why oil services companies aren’t being targeted for divestment, but the Fossil Free campaign is pretty clear on this, stating: “There are many more companies that contribute indirectly to climate change–the multinationals that build drilling equipment, lay oil pipelines, transport coal, and utilities that buy and trade electricity. But right now, we need to be laser-focused on keeping all that coal, gas and oil in the ground, and these 200 companies are the ones that own the vast majority of those reserves.”

I think the more relevant question around if the divestment math adds up, relates to the impact divestment will actually have on the financials and activities of fossil fuel companies. Everyone I’ve talked to in the financial sector seems to agree that the impact on stock prices won’t likely be that significant.

The VP for Investments at Bowdoin supported this view, summarizing in this recent article what was my initial reaction to the divestment movement: “Markets are efficient and it is unclear if one group of investors decides to boycott a specific sector that there is any meaningful result… Other investors will step in and buy cheaper securities.”

There’s an estimated $400 billion in college endowments in the US. At Middlebury, 3.6% of the endowment is invested in fossil fuels. I have no idea if this is indicative of other endowments, but let’s assume for a minute it is, and be generous in assuming 5% of total endowment dollars are invested in fossil fuels – about $20 billion dollars. Exxon Mobil alone has a market cap of $404 billion. On average, more than 13 million shares are traded every day – that’s over $1 billion worth of shares per day at current stock price, for just one of the 200 companies targeted.

It seems like if all the endowments in the country sold all fossil fuel stocks, there’s a good chance that the markets and companies would barely notice, much less leave 80% of their reserves in the ground as a result.

But again, it seems to me that the divestment movement is realistic about this, and recognizes that its power is in highlighting the fact that climate change is a moral issue.

Harvard students summed up this idea well in this recent Crimson article: “Divestment may not pose an immediate threat to the annual turnover of the biggest companies, yet it does help to undermine the social and political capital of a powerful industry. More than anything, divestment is a moral statement.”

Do you think this will help the general public recognize that climate change driven by extracting and burning fossil fuels is an urgent, moral human rights issue?

Stay going.

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