Why divest?

The Australian National University was the first prominent organization in Australia to announce its intention of selling its holdings in companies engaged in production or use of fossil fuels. Why divest? Primarily because science has long established that fossil fuels are the major contributor to global warming and warned that unless most recoverable fossil fuels remain in the ground, unused, dangerous climate change will ensue.

Those findings raise ethical questions about profiting from action so dangerous to the environment. Development of technology making it unnecessary to mine or use fossil fuels and public sector regulation supporting reduction of fossil fuel use also affect the value of fossil fuels and major advances are being made in both these areas.

Morality

Is it moral to earn income from shares in companies using thousands of lowly paid, poorly treated children who produce cheaper goods for a wider market, earning higher profits for shareholders and higher executive salaries?

Clearly, the answer is no. Wide publicity about such activity would prompt government action to abolish such exploitation. Importing countries would be persuaded to block imports from the offending producer, consumers would be encouraged to boycott them and the international market would express outrage at such employment practices.

Is it any more moral to earn income from shares in companies which mine and produce fossil fuels, knowing that combustion of those fuels will emit greenhouse gasses which will increase global warming, produce dangerous climate change and reduce crop yields, ultimately resulting in starvation and the death of millions?

One can always salve ones conscience with any number of convenient beliefs, without looking too closely at their validity and bank the money received from mining and production or use of fossil fuels. Thousands of shareholders do, so why not you?

The argument used by Directors and Management of companies involved in mining fossil fuels is … 'If we don't do it, our competitors will', or … 'we are only meeting market demand – end users pollute the atmosphere with greenhouse gases, not us'.

This is akin denying that production and sale of tobacco increases the incidence of fatal health problems and should be curbed, even if this reduces the value of tobacco companies. It puts into question the morality of owning shares in companies profiting from tobacco use.

The significant difference is that use of tobacco only affects tobacco users, while use of fossil fuels affects everyone and if continued without restriction, will have adverse, potentially fatal effects.

Value

Fossil fuel miners know that their value and profitability is based on the price they can obtain for their products and the value of recoverable fossil fuels they own which remain in the ground. Investors look at both the value of a mining company and the share yield. If the value indicates a long and profitable future and if the yield is competitive with that of other companies, the prospective investor provides funding or buys shares, hopes that their value will increase and waits to be repaid or receive a regular dividend.

A problem for fossil fuel miners and those who lend to or invest in them, is that they can not control the market price for their products. They may endeavour to do so through cartel like behavior (manipulating or varying supply and the market price of their products) or influencing government policies and regulation – both in the countries where mining takes place and in those where their product is used.

As we have recently seen with coal, oil, iron ore and other commodities, this is not an effective way of maintaining their market price or the value of assets owned by producing companies. Hardly surprising where an open market operates but now shareholders in fossil fuel mining companies are confronted with two new and growing threats to the value of their shareholding and the dividend yield they receive.

Technology

For the past two centuries, coal, gas and oil have been the mainstays for producing the energy needed to sustain economic growth and improved living standards for billions of people worldwide. Global population is growing rapidly as are their aspiration for improved living standards and access to the energy essential to achieving this.

To meet this demand, fossil fuels are being produced and burned in ever increasing quantities, a process which results in release of rising quantities of greenhouse gasses. Concentration of these gasses in the atmosphere are now at their highest level in at least 800,000 years.

They produce global warming which in turn causes climate change charcterised by more frequent and severe weather events threatening human habitat. The more pronounced this threat, the greater the need to reduce greenhouse gas emissions and the more financially rewarding development of technology and policy that will achieve this.

Technology has been and is continuing to be developed in ways which reduce greenhouse gas emissions by replacing fossil fuel burning with energy produced from emissions-free renewable sources and by using electricity more efficiently.

Increasingly, renewable energy is being produced more cheaply than energy generated from fossil fuels and this trend is increasing. Technology has been developed making it cheaper to build and operate renewable power stations far more cheaply than those burning fossil fuels. Advances are also being made on energy storage enabling renewable power stations to provide energy 24/7.

The financial rewards for achieving this are high, very high, motivating further advances in science and technology – advances with potential to bring about rapid, eventually total replacement of fossil fuels with renewable energy sources. As these advances are made, they place downward pressure on the market price of fossil fuels, on their production and on the value on un-mined deposits.

The speedier these advances are made, the greater that downward pressure on value of product and assets held by fossil fuel miners, the more uncertain their future.

Regulation

Rising cost of damage caused by climate change prompts governments to regulate fossil fuel use in favour of energy produced from renewable sources. This is particularly true of countries dependent on imported fossil fuels for their energy needs. Adopting renewable energy saves foreign exchange, and enables local energy production without the need for an expensive grid or power station.

As technological advances are made, making production and supply of renewable energy cheaper and more reliable, countries now importing fossil fuels, will increasingly use renewables. This is because renewable power stations are cheaper to build, have much lower operating and maintenance costs and their fuel supply is free. In other words, the market for fossil fuels will weaken and increasingly be replaced by use of cheaper renewable energy. This is already happening, even in countries which are fossil fuel exporters such as the USA.

The trend towards a shrinking market for fossil fuels places downward cost pressure on the mining, production and distribution of those fuels. This makes it less attractive to lending agencies to fund new mining and less profitable for miners, ultimately forcing all but the largest and most efficient out of production.

Governments of countries which are major producers and exporters of fossil fuels respond to these trends. They subsidise fossil fuel production by giving mining companies tax concessions, by helping to provide infrastructure and by

adopting supportive environmental and other policies. These enable companies to continue profitable operation but increases their dependence on public sector support, support which is vulnerable to election of a less supportive government.

In Australia, government support is given on the grounds that fossil fuel production is in the national interest because of its importance for export income, local employment, and revenue derived from income tax and royalties. This support is becoming increasingly expensive, vulnerable to change of government and public attitude to on-going support for an industry with failing capacity to compete, where use of its products causes increasing damage to the environment.

Pressure for change in government support for production of fossil fuels, particularly coal, comes from an electorate concerned about the effects of global warming, those affected by adverse climate events and international organizations. The latter include the World Bank, the United Nations and their agencies, all of which have declared they will no longer fund building of fossil fuelled power stations.

Summary

There is a moral dimension to funding or investing in companies engaged in production of greenhouse gasses which result in global warming and damaging climate change. We may not have known of it in the past but we certainly do now. The question needs to be asked, particularly by those who attach importance to morality … is it proper to continue with investment in companies engaged in environmentally damaging activity? Can, should orderly divestment be pursued with reinvestment in companies not engaged in such activity?

Investors who are climate change deniers, who simply reject the conclusions reached by climate science may feel they can ignore the morality question. But no prudent investor can ignore technological advances which make energy produced from renewable sources cheaper and more versatile than energy produced from fossil fuels.

Many major organizations – banks, superannuation and hedge funds, charities, universities, many semi-public funds, churches and individuals – have substantial loans to or shareholding in fossil fuel mining companies. Until recently, most have given little consideration about the justification for holding these investments. They were originally made for prudent financial reasons such as good yield, rising value of assets and solid prospects for growth with little risk.

Bob Dylan would remind us … 'The time they are a changin'. Many would argue that times have now changed irrevocably, that conditions prevailing when investment in fossil fuel producers were made no longer pertain, except perhaps in the very short term – and then only in companies with diverse holdings and activity.

In the short-term (next 5-10 years) use of fossil fuels will decline in response to growing international pressure to reduce fossil fuel use. Technological advances will increase competitiveness, use and efficient storage of renewable energy. The value and profitability of fossil fuel companies are likely to decline at an accelerating rate over this period.

In the longer-term (next 50 years) cessation of fossil fuel use and decarbonisation of the global economy will be promoted by international policy and action to limit climate change and its effects on the environment. Fossil fuel producers will decline in viability and cease to exist as their products are replaced by renewable energy sources.

No prudent investor, or financier, can ignore these trends.