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Climate and Energy

The Divestment Movement: a Climate Policy Game Changer?

By Jakob Ache , Tim Pfefferle

For several years now the divestment movement across the globe has been running campaigns aiming to withdraw investment from fossil energy sources – with surprising success. How much does the success of the discussions going on at COP 22 depend on divestment? Will it give new impetus to the climate protection movement? Is divestment a sideshow, or a central issue in the fight against climate change? How can politics – and how can Greens – respond to it?

COP 22 in Morocco will be one of the first decisive tests of how viable the Paris breakthrough is, particularly in light of Donald Trump’s election to the US Presidency, which does not augur well for the environment. Whether the aims of the climate treaty really will be successfully implemented – and whether they can be implemented – depends in no small way on the success of efforts to steer private capital flows away from fossil fuels and towards sustainable investments. ‘Green Finance’ is fast becoming one of the biggest topics on the international level, including within the G20.

New approaches, unusual alliances – the idea of divestment and important successes

Until now, a strategy focused on demand has dominated global efforts for a sustainable energy policy: lower energy intensity, saving energy, promoting renewables. This formula was supposed to eventually lead to a reduction in the use of fossil fuels. However, in light of the facts appearing every day, this approach is no longer enough.

The focus is now instead increasingly on limiting the supply of gas, oil, and especially coal. The fossil fuel divestment movement is spearheading this change. The movement focuses on pushing investors to withdraw their investments from the fossil fuel industry. Unlike traditional environmental campaigns based on morality, this movement seems to take a different approach entirely.

Divestment stands out from the often abstract climate movement, which often makes vague demands, by clearly setting out who its opponents and what its aims are. Institutions such as municipalities, universities, banks, and pension funds are examined and then targeted in the hopes that they will not invest their money in companies that make money from coal, oil, and gas.

Environmental activist Bill McKibben eloquently explained the essence of the logic of divestment in 2012. If the international community truly takes seriously its goal to limit global warming to below 2 degrees, then the use of fossil fuels must come to an end relatively soon. Researchers from the University of Oxford recently found that adhering to this goal would fundamentally mean that from 2017 no new coal power stations could be permitted to be built – globally. Furthermore, a study of various NGOs led by Oil Change International concluded that even the potential emissions from coal miles and oil and gas fields currently operating will lead to a global temperature increase of over 2 degrees Celsius, without even considering the development and exploitation of new reserves.

This means a large chunk of fossil reserves must stay in the ground. The market value of conventional energy giants such as Shell, Total, and Exxon Mobil, though, largely depends on these reserves. If the reserves cannot be exploited that in turn would mean these companies become an investment risk. A study by HSBC Bank shows that companies in the fossil energy sector could lose between 40 and 60 per cent of their value if the the 2-degree Celsius target were to be consistently implemented. This means investments in fossil infrastructures would sooner or later become what are known as “stranded assets” and lose their value. In macroeconomic terms, this leads to an ever-expanding carbon bubble. That’s how the theory goes.

Though the divestment movement is a newcomer to the climate debate and is causing a stir, the basic strategy is anything but new. From the arms trade to the tobacco industry to pornography – the list of divestment campaign target goals is a long one, and one that includes some success. A campaign in the 1980s contributed to the apartheid regime in South Africa being isolated by the international community. The movement played a major role in ensuring that South Africa lost its legitimacy thanks to an increasingly negative public perception of the state.

The momentum is becoming gradually stronger – the divestment movement is therefore one of the few movements of its kind that is growing and gaining influence on both a European and international level. And they are aiming for some very specific successes. A range of universities, particularly in the US and the UK, have already decided to phase out investments in fossil fuels. Large cities like Oslo, Berlin, Paris, and San Francisco have done the same. The State of California’s huge pension fund decided to remove all coal investments from its portfolio; so did the Norwegian pension fund, which is one of the biggest investors globally.

Private companies such as Allianz AG, Nordea Bank, and Axa Insurance have also reported (partial) divestments. In addition, faith organisations such as the Church of Sweden and the Lutheran World Federation have done the same, and so have professional organisations like the British Medical Association. Even the Rockefeller Foundation, whose endowment comes from the oil industry, is now waving goodbye to fossil investments.

The value of the institutions that have withdrawn their investments so far amounts to some $ 3.4 billion. These figures are now also reflected in the media. For example, British newspaper The Guardian launched a huge media campaign in 2015 explicitly demanding divestment. This makes it difficult to dismiss divestment as a fringe movement.

The divestment strategy

Political discussions are often polarising: Democrats against Republicans, for or against Brexit, organic or conventional farming. But history tells us that campaigns are particularly effective when players with originally opposing motivations come together in a common cause.

This is shown particularly well in the case of the ‘smugglers and Baptists’. During prohibition in the USA, smugglers were making huge profits from illegal alcohol sales. At the same time, certain religious groups supported a ban on alcohol for moral reasons. This resulted in an implicit partnership between these groups, which both favoured the continuation of prohibition for very different reasons.

Profit and morality also take centre stage when it comes to promoting divestment. To be able to act most effectively the movement has to reflect both aspects. Economic actors and environmental activists working together is not actually a new phenomenon.  Traditionally, this happens in areas offering a win-win situation. But looking at investment, on the other hand, is about cutting off an entire industry.

This makes it particularly important to find influential partners within the economy. The movement will only gain enough traction by adopting and using the language and internal logic of the financial sector. It is also a question of weakening the business lobby, as these two sectors only work at full power when working together to fight regulation.

Ultimately, though, the divestment campaign is based on political demands. The demands are centred around adhering to the the 2-degree target as a base upon which to build. This was given a boost by last year’s Paris Agreement. Current national climate goals do not go far enough and, taken as a whole, would lead to a global temperature increase of over 3 degrees, as shown by the UN Environmental Programme UNEP’s most recent report. Additionally, the final text of the Paris Agreement does not explicitly mention fossil fuels despite these being widely recognised as the core of the issue. In parallel to the decisions made by investors, then, the world of policy must also shift.

When considering divestment as a movement, it should also be kept in mind that possible successes can occur in different ways. This means it would be unrealistic to measure success in terms of how many billions investors have withdrawn from companies. In the long run, intention signalling is more important.

The primary focus is to socially delegitimise coal mining and the promotion of oil and gas. Here we can take the strategies that contributed to apartheid South Africa and the tobacco industry losing their legitimacy as examples. When it comes to fossil fuel divestment, though, this is of course far more difficult. It was relatively easy to tackle South Africa. People can stop using tobacco with a little effort. But oil, gas, and coal are the drivers of the global economy.

Therefore, clear lines must be drawn. Climatologist Richard Heede argues to this end that an overwhelming proportion of global carbon emissions can be traced back to the activities of just 90 companies. But these businesses can only operate until their social license is taken away.

The idea that the economy is fundamentally embedded in social structures can be traced back to Karl Polanyi. Society decides which types of economic activity are acceptable and which are not. For example, the fact that oil company Exxon Mobile knowingly lied to its investors about the risks of climate change shows that fossil fuel companies are increasingly losing their legitimacy in modern society and are turning to illegal means to try to curb this trend. Now not only is the New York State Prosecutor investigating fossil fuel giants, but also the US Securities and Exchange Commission.

Just as with South Africa, therefore, this is fundamentally a political question: is the fossil industry still legitimate in our society? Or is it simply being kept on life support? Depending on how you calculate it, the industry enjoys subsidies to the tune of between $500 million and $5.4 billion. This is many, many times more than the sum spent promoting renewables. On top of this, over a billion dollars in private investments go to the fossil fuel industry annually. These grants should be stigmatised from an economic perspective and from a moral one. This is starting to work on bigger and bigger scales.

Green Finance – sustainable investments are the other side of the coin

Pulling large amounts of capital out of the fossil fuel industry directly raises the question of how else the capital should be invested. Of course, it’s possible to invest in renewable energy, clean mobility, or innovative, environmentally-friendly products. But that is less trivial than it may first sound.

According to the latest 2014 edition of the World Energy Investment Outlook from the International Energy Agency, around $50 billion US would need to be invested by 2035 just to reach the 2-degree global warming target.  So, the potential does exist. But players on the financial markets still seem to find it difficult to ‘green’ their investments. Though more investment is now being made in renewables than in fossil fuels, the process continues to be far too slow.

This can’t simply be down to a lack of will. Because now, for example, asset managers in most countries are legally bound to maximise shareholder profit. This often limits investment strategies that are focused on long-term environmental and social standards instead of short-term profiteering. A crucial first step towards making the financial markets sustainable is therefore to make the necessary changes to the legal bases for fiduciary duties.

A further very basic obstacle lies in the transparency and comparability of company data. Around the world today a tangle of some 400 varying reporting standards are in place, which make it almost impossible for institutional investors to identify truly ‘green’ investment opportunities. We therefore need a unified, globally-recognised reporting standard that does not limit itself to financial data but also considers non-financial indicators such as CO2 intensity. This information isn’t only needed for investors who want to make conscious, environmentally-friendly investments, but for everyone; the risks of climate change are also financial risks, with ‘carbon bubble’ being the buzzword.

Individuals already have a range of opportunities to invest their money in an environmentally and socially sound way – from their savings account to their household debt to their pension plans. Institutional investors also have points of reference, such as a range of MSCI indices, which evaluate ESG (Environmental, Social, Governance) criteria.

Yet sustainable investment remains a niche sector. This can only change if the sector itself engages, alongside appropriate policy frameworks. The UNEP, among others, have been looking at this issue for several years with a working group entitled “Design of a Sustainable Financial System”. At the start of this year, the G20’s Green Finance Study Group also began its work. Clearly, the issue has reached the highest international levels. It is even more important that it stays on the agenda and is discussed in depth during the German presidency of the G20 in 2017.

Has it reached institutionalised policy?

How does it look at the political level? Firstly, and fortunately, the divestment movement is exactly that – a movement. It brings together students, workers, pensioners, and some businesspeople. But it is far less afraid of coming into contact with institutionalised policy than many other movements.  This is its great strength, as it means its demands and connections become real political actions far more quickly than would otherwise likely be the case. Politicians and politics are often not seen primarily as opponents, but as potential allies.

This bears fruit: on a local level, groups working on the ground with local politicians achieve concrete results. In many countries in Europe, national parliaments have already examined divestment and the carbon bubble.

Steps are also being taken on a European level, as green investment has found its way into a piece of EU legislation for the first time: now in the EU, professional pension providers will have to disclose whether, and in what way, their investments are sustainably managed. This isn’t compulsory (yet), but it’s still an important step towards greater transparency and the opportunity to put pressure on insurers.

The issue of the carbon bubble has already been on the agenda of an informal meeting of the EU Economic and Finance Ministers in April 2016. There was a clear direction of travel in the discussions: in the future, CO2 risks should be made more transparent and be taken into account when calculating prices; this strengthens the incentive to move away from CO2 risks. The Finance Ministers also signalled that they expect the Commission to make greater efforts in the area of green finance.

The publication of a study by the European Systemic Risk Board, one of the European Central Bank’s advisory boards, has certainly contributed to this. It contained a clear message that if the transition to an environmentally sound economic and financial system is further delayed and then an abrupt U-turn is made, there is a risk of a “hard landing”, which will pose serious stability risks both for the financial system and for society as a whole. One important expert recommendation to this end is to implement CO2 stress tests for financial institutions to be able to manage climate risks in a proportionate way. Clearly, the divestment movement has reached institutionalised politics; though the foundations have now been laid, there remains much to be done.

On the role of Green Parties in Europe

The aspects of withdrawn investments mentioned above may sound like a lot, but compared to the magnitude of global financial markets it is only a small part.  Green Parties in Europe have a duty to continue exerting pressure and creating political incentives to move finances away from fossil fuels. In many places, this task has already begun on a local and regional level.

When it comes to divestment, work on a sub-national level is crucial, as investments from municipalities, their companies, or state or regional pension funds are an important tool for limiting investments in fossil fuels.  On a national and European level, too, Green parliamentarians in and from many European countries have long been pushing for legal roadmaps to a sustainable financial system.

Of course, the Greens are not – and cannot be – alone in achieving progress in divestment. Cooperation with civil society is often key, be it with local fossil free groups, key actors in civil society, or international NGOs.

It also requires a majority in the political sphere. Common cause can often be found with other parties, which is how the European Parliament’s Carbon Group comprising MEPs from various political groups has been working on how a green financial system can be achieved for several years. This way of collaborating and building alliances is undoubtedly a part of success in this area, ensuring that it has had a considerable impact in a relatively short space of time.

In many parts of Europe the Greens have been a part of this important movement. The European Green Party’s Fossil Free 2016 campaign will highlight this further. But in the interests of honesty, it is also important to note that in parts of Europe, particularly in Southern and Eastern Europe, the divestment movement has made next to no headway. In part, this can be explained by structural differences such as the countries’ lower proportion of fully funded pensions, or less investment made by towns and cities.

However, levers can also be found here to use divestment to make the fight against climate change seem concrete; for instance, through national banks or public companies that generally have access to financial assets. Even if they are few in number, the political signal their divestment sends out is at least as important as the financial one. Even in states where climate and environmental policy has been too far down the agenda, a divestment campaign can be part of boosting the importance of the issue.

Crucial alliances: Uniting our efforts

The divestment movement is a relatively new but very slick dynamic player in the fight against climate change. By setting out clear aims and opponents, in many parts of the world the climate movement is gaining a new dynamic, particularly among younger people. The two-pronged strategy of the divestment movement means that there are unusual alliances created with people from the world of politics and finance. It is only these united efforts that will allow the necessary political framework to be established to really green the financial markets, which is crucial in the fight against climate change. The divestment movement, therefore, is becoming an increasingly important player and important ally – especially for European Green Parties.

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The Divestment Movement: a Climate Policy Game Changer?

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