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Liquid Assets

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24 February, 2020

The University of Manchester and insurer Axa have joined the growing list of businesses and organisations that are planning to drop investments in fossil fuels, bringing us a step closer to a greener future.

But is this move all that it is promised to be? An article suggests that fossil fuel divestment may actually increase carbon emissions. When companies subject to shareholder scrutiny and pressure move out of fossil fuels, this can create an opportunity for less well regulated and “dangerously under-scrutinised” national oil companies that face much less pressure to focus on environmental issues in certain regimes to step in and ramp up production.  And the same can happen at an investment level – when investors sell their investments in extractive companies, these can be bought by other investors who may be less likely to push for positive change.

This suggestion gives us pause for thought but should not be an excuse for investors to ignore calls for divestment. For one, the article sets out a hypothetical scenario, and the divestment movement has created some important positive results. But more importantly for investors, the financial risk of relying on fossil fuels will only increase, as will the social cost as activists continue to challenge oil companies’ licence to operate. And there is an alternative: thoughtful and measured divestment that uses investor engagement and leverage to send a strong message and make sure that risks are managed, alongside investment in the businesses delivering clean energy.

The fact that taking responsibility is voluntary, shows that there is a clear need for the system to change, so that the environmental costs of fossil fuel consumption to be internalised through compulsory carbon taxation – a key focus of COP25 next week in Madrid. But for now, we welcome responsible and careful divestment strategies.

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