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The years of 2020 and 2021 saw a wave of financial institutions and funds announcing plans to divest from coal and other fossil fuel investments. From global asset managers to university endowments to pensions and sovereign wealth funds, financial institutions are taking a more serious look at the fossil fuel components in their portfolios as pressure from the public for more progressive climate action mounts. Since 2012, the number of divestments from fossil fuels has risen sharply, reaching over 1300 institutions at a total value of USD14.65tr by September 2021, according to non-profit organization Fossil Free Global. Institutions in Europe, North America, and Oceania are leading the divestment wave, while other regions such as Asia have not yet gained similar momentum.
Divestment can be understood as the opposite of investment. It involves getting rid of and avoiding stocks, bonds, or any other holdings that are considered unethical or morally unjustified. The divestment movement emerged from university campuses in the US in 2011 and gained momentum with the involvement of institutional investors, cities, corporates, and prominent stakeholders. Negative screening, a common ESG investment strategy, can be considered a form of divestment, since it avoids investing in “sin stocks” such as tobacco, gambling, and weapon manufacturing. Increasingly, the fossil fuel industry has become a focus in divestment campaigns as demand for stronger climate action rises. The University of Oxford says that fossil fuel divestment has grown faster than any other previous divestment campaigns, including those against tobacco and apartheid in South Africa.
Which Institutions are Divesting from Fossil Fuels?
Global Asset Managers
In January 2020, BlackRock, the largest asset management firm in the world with USD9tr of assets under management (AUM) as of April 2021, announced its plan to cut companies that derive over 25% of profits from thermal coal from its actively managed portfolios. While BlackRock’s statement does not mark its complete exit from fossil fuel investments, the announcement from the world’s biggest asset management firm has sent a strong signal to companies that climate change and environmental performance will be considered more seriously in investment decisions.
In August 2020, Storebrand, a Nordic asset manager with USD91bn of AUM, became the first major investor to explicitly divest from oil producers and miners for lobbying against more stringent environmental standards. Storebrand offloaded USD27.2m worth of stakes in major oil producers ExxonMobil and Chevron, US electricity provider Southern Company, German chemicals group BASF, as well as miner Rio Tinto. The asset manager also divested from an additional 22 companies that received more than 5% of revenue from carbon-intensive coal or oil sands under its enhanced climate policy and sold holdings in companies that it deemed too slow in their exit from coal, such as Japan’s Mitsui, Kansai Electric Power, and Chubu Electric Power.
Overall, asset managers are using different criteria to determine what investments go against their environmental commitments and need to be cut off. Many asset managers, like BlackRock and French investor Amundi, set a maximum percentage on fossil fuel-related profits for companies under active management. Some funds, such as Australian infrastructure investor IFM Investors, exit projects that directly contributes to thermal coal, like funding for coal plants. Others like Storebrand cut off companies with track records of actively hindering the systemic shift away from fossil fuels, as well as reduce holdings in companies lagging in the low-carbon transition.
Endowments
Asset managers are not the only large financial actors in the divestment wave. As the birthplace of the divestment movement, universities also hold large sums in endowments with stakes in the fossil fuel industry. In March 2020, Brown University stated that it will halt investments in fossil fuel extraction companies. Fellow Ivy League institution Columbia University, with an endowment of USD11.26bn, followed with a divestment announcement in January 2021. The wave spreads across US and European universities as many more made pledges to remove fossil fuels from their endowments.
On September 9, 2021, Harvard University announced that it will not renew partnerships with private equity funds that have holdings in the fossil fuel industry after current obligations expire, effectively marking its divestment after decade-long pressure from student activists. Harvard University holds an endowment of USD41.9bn through the Harvard Management Company, the largest endowment in the world. The university’s president Lawrence Bacow stated that fossil fuel investments are no longer prudent given the need to decarbonize the economy and the fiduciary responsibility to make investment decisions that support Harvard’s teaching and research mission. Harvard’s divestment announcement marks a milestone in the campaign to rid fossil fuel investments from universities’ financial activities.
Pensions & Sovereign Wealth Funds
In December 2018, Ireland became the first country to officially withdraw its sovereign fund from fossil fuels. The country’s Fossil Fuel Divestment Bill, signed into law by the President of Ireland, commits the sovereign fund to divest its holdings of fossil fuel companies within five years and not make future investments in the industry. The Irish sovereign fund is worth EUR8.9bn (roughly USD10.5bn), with an estimated EUR318m invested in about 150 fossil fuel companies.
Following Ireland’s example, the Norwegian Sovereign Wealth Fund, the largest sovereign wealth fund in the world, dropped more than USD13bn of investments in fossil fuels in June 2019. In addition, it introduced the legal mandate to invest directly in renewable energy projects rather than listed energy companies. The country’s sovereign fund was also famously known as the Oil Fund, for it was established in 1990 to invest the surplus revenues of Norway’s petroleum sector. Therefore, the fund’s divestment from coal and oil producers was a landmark in sovereign funds’ pivot from traditional energy sources to clean energy.
On a smaller scale, cities are also moving to cut fossil fuels from its public pension funds. In September 2020, 12 major cities, including London, New York, Vancouver, and Berlin, signed a declaration that pledged divestment from fossil fuels. Soon after, New York City fulfilled the pledge in January 2021 by announcing an estimated USD4bn divestment from fossil fuels in the city’s public pension funds.
Part 2 of this article will look at the impact of divestment compared with engagement with fossil fuel companies.
Sources:
https://www.thecrimson.com/article/2021/9/10/divest-declares-victory/
https://ieefa.org/asset-managers-leaving-coal/
https://www.advratings.com/top-asset-management-firms
https://www.theguardian.com/environment/2013/oct/08/campaign-against-fossil-fuel-growing
https://www.ft.com/content/00af52b7-381c-4a5d-91f1-3b3d4ce04256
https://www.ft.com/content/c032f5a4-9801-47d3-abf7-d5d9826558cc
https://www.climateaction.org/news/12-major-cities-commit-to-divest-from-fossil-fuel-companies
https://www.spglobal.com/marketintelligence/en/news-insights/trending/2TEm7zwpBhGa2mb6FQFqPg2
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