Why divest?

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.