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September 29, 2020

Moody’s Confirms that Divestment Does Not Accomplish Much of Anything

Moody’s, one of the world’s most respected credit rating agencies, recently called divestment “not a significant factor” for oil and gas companies, despite many claims to the contrary by its proponents.

The agency recently commented on the limited impact of divestment in its Investors Service report, drawing a stark contrast with climate activists’ claims that divestment is the most effective tool to deprive the energy industry of capital.

“…Yet the financing of fossil fuel industries continued unabated during 2016-19, with 35 banks providing some $2.8 trillion in financing for fossil fuel activities over that period, including politically sensitive fracking activities. Divestment is not yet a significant factor for oil and gas companies.”

But why is Moody’s opinion so relevant for the fossil fuel divestment conversation? For starters, like other credit rating agencies, Moody’s calculates the credit risk of debtors – governments and companies-, predicting their financial health and capacity to pay debt. It oversees performance, financial and operational indicators of the monitored entities, providing a panoramic perspective to industries and overall governments.

Thus, its overall perspective of the industry is vital for investors and other asset managers responsible for operating endowments and other public funds although Moody’s warns that the fossil fuel industry is at a crossroads under the current conditions.

In this regard, according to the renowned credit agency, divestment does not have remotely the amount of impact that activists like to say it does.  Take the typical talking point that $14 trillion has been divested.  We know that the amount of stocks actually sold is probably less than one percent of that figure. But even if we went along with activists outsized claims of the success of the divestment movement, Moody’s still finds it ineffectual.

“Divestment pledges are growing steadily, with declining investment in oil and gas from state and local governments and universities representing some $14 trillion in assets, largely through pension funds, but many of these investors have never represented significant sources of capital for oil and gas companies.”

What’s more, Moody’s acknowledged the limited impact of divestment efforts when it comes to the industry’s involvement in capital markets.

“Meanwhile, divestment alone would not halt oil and gas financing, since companies continue to seek out large-scale investors for financing needs. Oil demand will continue for many decades, regardless of when it peaks, and companies will still seek capital, even if their financing costs rise.”

So the analysis from Moody’s confirms what we’ve known all along.  Divestment does not accomplish the things activists say it does, other than stigmatizing an industry and generating headlines.  Claims about stock prices, lower demand and cutting off funding sources are lofty, but not being observed. Instead, the pro-divestment crowd is investing untold time, resources and energy in a campaign that, at the end of the day, only results in empty gestures.

That’s why some of the most prominent universities—including Harvard, Yale, Princeton and Stanford—have refused to divest due to its political nature and ineffectiveness to address climate change.

Moody’s remarks bring back some much-needed perspective and to the debate around fossil fuel divestment.