Is now the time to divest fossil fuel stocks?
As activists and industry disagree, analysts look to the future
When the Australian National University (ANU) announced late last year that it was selling its shares from seven fossil fuel companies, the decision was explained as a principled stance to help reduce greenhouse gas emissions.
ANU divested A$16 million worth of shares in seven resources companies, including oil and gas producer Santos, Iluka Resources and Oil Search, which represented less than 2% of the university's A$1.1 billion portfolio.
The sale was part of the global divestment movement, which encourages institutional investors such as colleges and universities, governments, foundations and religious groups to rid their portfolios of investments in coal, oil and natural gas interests.?
Activists, such as those at 350.org, argue that by selling their shares in companies that produce fossil fuels, investors can help drive change.
Yet the decision to divest is not always as clear as it first seems, according to a study co-authored by Baljit K. Sidhu, a professor of accounting at UNSW Business School, along with colleagues from the University of Queensland (UQ) Business School, such as professor of finance Tom Smith and senior lecturer Martina Linnenluecke.
The authors have looked more closely at the decision to divest by ANU and conclude that it "may not have been driven principally by concerns for the environment".
While the university sold out of some fossil fuel companies, it retained its shareholdings in others, namely BHP Billiton, Rio Tinto, Woodside Petroleum and Wesfarmers.
In their paper – Divestment from Fossil Fuel Companies: Confluence between Policy and Strategic Viewpoints – the academics find that the seven companies ANU sold out of had underperformed the market in the year leading up to the sale. In fact, some of the divested companies had seemingly good ESG ratings, where organisations are ranked according to their environmental, economic, social and corporate governance performance.
"ANU was actually divesting companies that weren't doing as well as the ones that were retained in the university's portfolio. It was an economic argument, it wasn't a 'high road' motivation," says Sidhu.
"They dressed it up as a 'high road' argument, but the data doesn't support their reasoning."
'What we’re seeing is the beginning of the transition, whether the coal industry likes it or not. This isn’t just a greenie thing'MARK DIESENDORF
There are sound investment reasons for divesting fossil fuel stocks, according to Mark Diesendorf, an associate professor and deputy director of the Institute of Environmental Studies at UNSW.
"There now seems to be quite a strong case that companies heavily investing in the ownership of fossil fuel reserves are making a bet that those reserves will be extracted and sold at a price greater than the cost of production. The reality right now is that coal prices have declined by at least 50% in the past five years with no sign the decline will stop," says Diesendorf.
"What we're seeing is the beginning of the transition, whether the coal industry likes it or not. This isn't just a greenie thing. There's a growing consciousness that there's a growing risk from investing in fossil fuels."
It's a view that resonates with analyst Tim Buckley, who says that those in Australia who deny the "inevitable" transition to renewable power sources such as solar "set the country up for continuing investments in assets that will be totally stranded by trends that are happening overseas".
"I come at it from a purely financial angle, that if a transition is occurring there are going to be losers and there are going to be winners," Buckley says. "The longer you deny the fall, it's inevitable the harder the fall will be."
Buckley spent a decade as head of equity research at US investment bank Citigroup in Sydney before becoming director of energy finance studies, Australasia, at the Institute of Energy Economics and Financial Analysis – an independent US non-profit organisation that studies what it considers to be the inevitable transition of global energy markets to renewable sources.
"The risk of stranded assets is critical for the Australian and the global equity markets and is the financial logic behind the argument for divestiture," he says. And those fund managers who deny the change is occurring are breaching their fiduciary duty to their investors by focusing on the short term and denying that the long-term outlook is relevant.
Technology in the electricity market is evolving rapidly. The cost of solar panels, for example, has dropped 80% to 90% during the past five or six years and there have been break-through advances in their efficiency, notably at the Australian Centre for Advanced Photovoltaics at UNSW.
"What was a cottage industry and a hypothetical even five years ago is a fundamental reality today," says Buckley.
The Minerals Council of Australia, which represents the country's miners, rejects the financial arguments for divestment. It accuses activists of trying to "dress up ideological opinion as sound, long-term financial advice".
"Many of the claims around the future of coal and oil and gas reserves are simply misleading," says Sid Marris, director of industry policy at the council.
"They are often simplistic, static snapshots of the world's geology, falsely presuming that every known reserve is equally likely to be developed regardless of price or practicality. And they deliberately ignore developments in technology which will reduce the emission over time.
"These analyses also have little regard to the way resources companies actually develop deposits and identify opportunities over the near term. Companies are valued by what they are doing, not simply by the stock of resources they have identified and investors are fully aware of this," Marris says.
Just as those who say alternate sources of energy should be sought to ensure security of energy supply, the Minerals Council argues that fossil fuels are an important part of the mix to maintain energy security and to reduce energy poverty in developing regions.
Pros and cons
The prime motivation of the fossil-fuel divestment movement is to drive change.
It emerged in 2011 from an unsuccessful campaign at Swarthmore College in the US, when a student group asked the college to halt new investments in the fossil fuel industry and to divest its stocks in the top 200 fossil fuel companies with the largest reserves. The university refused to sell its stocks, saying the "cost of divestment would far outweigh any potential benefit".
The movement has since grown to more than 560 campaigns globally and extends beyond academic institutions to also target cities, states, foundations and other institutions. Its power for change comes from the message it sends when investors sell out.
Baljit and her co-authors note that this comes with advantages and disadvantages:
"What they're doing is giving the strategic decision-makers more confidence in making a decision. No politician wants to make a decision that's too far away from the public," says Smith.
But on the flipside, when an investor sells out because they don't agree with a company's policy on fossil fuels, they're replaced by a shareholder who is in favour.
"They might actually be making it worse," says Smith. "It means that you don't have a voice in the company. You don't get to vote on what they do because you've given up your shares."