February 23, 2021

Many Paths to Support Sustainability, Divestment is Not One

The energy transition will be an extended process, one that requires the expertise and experience of a wide variety of industries. The companies that already work to power homes, cars, planes, and industry are a critical part of a path forward. However, today’s divestment discussion all too often leaves them out of the conversation.

Let’s take for example tech mogul and philanthropist Bill Gates, who after previous opposition to divestment recently sold direct holdings in oil and gas companies in 2019. Gates has long acknowledged it’s hard to dismiss an industry “worth roughly $5 trillion a year and the basis for the modern economy” from the energy transition. Unsurprisingly, Gates’ provided important context for his decision, highlighting that sustainability includes energy companies:

“Getting to zero [emissions] doesn’t mean we are going to stop doing the things we are doing—flying, driving, making cement and steel, or raising livestock.”

The view put forward by Gates and many others highlights the array of alternatives beyond divestment that can provide tangible investments in sustainability and ESG.

Engagement over divestment

As financiers continue to invest in ESG, many have also acknowledged the role oil and gas companies will play in the low-carbon transition. Bloomberg financial writer Nathaniel Bullard lays out his view on the value in continuing to invest in these companies:

“Now it’s clear the focus should be less on divestment from the fossil fuel sector and more on reallocation to companies that are planning to create value from the low-carbon transition. That doesn’t necessarily exclude the energy sector.”

Others, like BlackRock, are firm believers that engagement should be the first response:

“Much of BlackRock’s $8.7 trillion in assets are in passive funds that track indices. That’s one reason why BlackRock steers clear of using the threat of divestment for companies whose climate policies are lagging. Instead, it focuses on engaging with the company first and uses shareholder votes as a last resort.”

In addition, respected voices within the financial services sector have called out divestment a short-sighted strategy. Financiers’ steady opposition to divestment is mostly due to the tactic’s inefficiency in bolstering change while dismissing the possibility of high direct and associated costs with divestment.

Moody’s, the world’s top credit rating agency, argued that divestment was “not a significant factor” for fossil fuel companies’ finances. Commenting on the movement in a white paper, the CATO Institute echoed similar remarks about divestment being pointless, arguing the value of stocks and bonds have already incorporated potential risks, hence, divestment has no power at all.

Focusing on Actions over Empty Gestures

Updating asset evaluation metrics based on ESG criteria has also picked up quickly among endowment and pension funds. Back in December 2020, New York State Comptroller Thomas DiNapoli announced a net-zero emissions plan across its investments by 2040. While the net-zero model has been adopted widely across industries, including Harvard University, the novelty of DiNapoli’s approach was around the asset review process.

Instead of embracing divestment, DiNapoli committed to review and establish a baseline criterion by which to judge investments in certain sectors. Simply put, companies will be assessed depending on their efforts and progress, not a blanket political choice.

Ultimately, and unlike divestment proponents that refuse to find a middle ground, DiNapoli has always welcomed engagement and collaboration:

“The risks of climate change, greenhouse gas emissions, controlling them and reducing them is not a question of selling stocks on fossil fuel companies. Every, every entity, organization, corporate sector, we all must be part of that conversation.”

Industry Fueling Opportunity

In the past decade, traditional oil and gas companies were ahead of the curve, planning for a low-carbon world and investing in research for alternative energy technologies. Often, these partnerships include industry-funded research projects focused on environmental and alternative energy research.

Faculty members at Stanford have defended research partnerships built with the oil and gas industry. In Geophysics Professor Dustin Schroeder’s words: “funding from fossil fuels supports a lot of environmental and alternative energy research on campus”.

Likewise, Lynn Loo, Director of Princeton’s Andlinger Center for Energy and the Environment, has defended the university’s partnership with fossil fuel companies. Loo urges the need to reach net-zero emissions as quickly as possible, and that this cannot be done without partnering with the oil and gas sector. In the case of carbon sequestration, Loo argues, “Exploring the most viable methods for “carbon capture and storage” necessarily involves oil and gas companies.”

Loo also highlighted how the Center’s partnerships with fossil fuels have allowed them to develop crucial research in energy efficiency, electrification, renewables, hydrogen and bioenergy.

Bottom line: It’s time to focus on investments, not divestment. Loren Cohen, Professor of Business Administration at Harvard Business School, points out that fossil fuel companies “are investing about three times more than the average firm in climate change mitigation technology.”

Is that really something to divestment from?