Two weeks ago, climate activists celebrated the news that former Exxon CEO Lee Raymond would not be returning as Lead Independent Director of JPMorgan Chase’s Board of Directors next term. Lee Raymond has long been vilified by the environmental movement as one of the key architects of climate denialism throughout his long career in oil and gas. Although it’s unclear to me whether this change is substantive or decorative (as he still retains his board position and other board leadership roles, no doubt in great part due to his 33 years of tenure on the board), activist groups such as the Stop the Money Pipeline Coalition, touted the victory as a result of “pressur[ing] Wall Street Institutions to stop financing fossil fuels.”
This episode highlights the antinomy between the twin tactics of shareholder activism and divestment campaigns. It seems to me that the “demotion” of Lee Raymond is more likely due to shareholder activism than divestment, although it’s hard to say what the real causes were. The Wall Street Journal, Reuters, and the FT all emphasized the central role of the New York City pension funds, holder of 2.4 million shares, which had launched a campaign to urge other shareholders to vote against Lee Raymond at the upcoming annual shareholder’s meeting. Credit was also given to Majority Action, a shareholder activism group, which submitted a presentation arguing against Lee Raymond at the upcoming annual shareholder’s meeting.
Let’s suppose that it was shareholder activism that led to this outcome. This mechanism runs directly counter to Stop the Money Pipeline Coalition’s divestment goals. It is precisely because NYC pensions funds and others held shares of JPMorgan Chase that they were able to exert some influence over the company, something that wouldn’t have happened if activists have their way. In theory, shareholders have a direct, legitimate, institutionalized process through which they can influence the company, even as a minority. Divestment involves abdicating those channels of influence in favor of a vague, financial pressure that only seems to really work once the vast majority of financial capital participates. Because until then, any money divested from fossil fuel companies can easily be replaced by new investment from other neutral investors. Indeed, there are “vice funds” which invest exclusively in companies involved in “sins” such as alcohol, tobacco, and gambling (but not fossil fuels as far as I can tell). Such funds would likely see divestment as an opportunity to earn greater returns.
What, then, is the real impact of divestment campaigns? Do they actually make a difference? I am no expert on this issue, but I did find an excellent 2013 report on the impact of fossil fuel divestment from Oxford University. The first major conclusion is that divestment campaigns are unlikely to have any direct financial impact on fossil fuel companies due to the limited size of outflows and the likely response from neutral investors who would be happy to pick up new shares at a discount. In general, a company’s market capitalization reflects its long-term cash flow, which is unaffected by divestment.
Size of Divestment
Let’s get a sense of the numbers. A 2014 Bloomberg report stated that the market value of the 1,744 publicly listed oil, gas, and coal companies were collectively worth $4.88 trillion. The Fossil Free movement currently reports divestment commitments from institutions managing a total of $14.14 trillion. But that number is not representative of actual divestment.
First, it represents the total value of all investments managed by those institutions, not the value of fossil fuel investments. The Oxford report states that endowments and pension funds invest about 2-5% in fossil fuel related equities and about half of that in fossil fuel related debt. For instance, US university endowments have 2% of assets committed to fossil fuel equities, whereas the CalPERS, the California state pension fund, in 2012 had 5.2% in fossil fuel equities. So if we take an average of 3.5%, then those $14.14 trillion of commitments translates into $495 billion, or just over 10% of the total market value of the fossil fuel industry. That’s certainly quite an achievement, but probably still not big enough to make a big dent.
Second, the actual amount of money divested is lower than the $495 billion we just calculated, because many institutions are only partially divesting. Several institutions are only divested from companies involved in coal or tar sands, often considered to be the most environmentally harmful. The Bloomberg report stated that coal firms make up less than 5% of the total fossil fuel industry, meaning that divestment only from coal is only a tiny step toward full divestment. However, it seems that only 96 of the 1198 institutions tracked by Fossil Free are committing to coal or tar sands only, suggesting that the vast majority of institutions are going further.
It’s also worth noting that most of these institutions have only committed to divestment, but may not have actually gone through with them yet. Fossil Free distinguishes between institutions that have made a binding commitment to divestment and those that actual have zero investments. Only 58 are currently categorized as totally fossil free, whereas another 920 institutions are classified as having made a binding commitment toward full divestment. Granted, it is likely that many of these institutions are already fully divested, but just have not announced it.
Indirect Effects of Divestment
In any case, the Oxford report states that the real impact of divestment campaigns comes from indirect social and political effects. The bottom line is that anything that can affect expectations around future cash flows would have a durable effect on equity prices and interest rates for fossil fuel companies. Divestment would have little effect on this, unless so much of the market becomes antagonistic to fossil fuel companies that their cost of capital increases. (The Oxford reports note that this is more likely to happen for coal companies and companies in countries with lower availability of debt financing.)
The first mechanism of indirect impact is stigmatization, whereby customers, employees, suppliers, and others opt not to do business with a firm for non-economic reasons. While I can see how this mechanism functions for consumer-facing companies and even B2B or B2G companies, I have a hard time envisioning how this would function for oil and gas companies, who seem so many layers removed from most people’s decision-making but also deeply woven into our lives and thus difficult to excise. Perhaps another challenge is that oil and gas are commodities, which aren’t subject to the risks or benefits of a brand (with the exception of gas stations). The Oxford report is not much help, as its examples of stigmatization, such as Motorola’s divestment from its defense business and Revlon’s divestment from its South Africa operations, are for consumer-facing businesses. The report does note that the Exxon Valdez and Deepwater Horizon oil spills triggered some changes, but I don’t think that these are the right examples to use for stigmatization, as they were the result of acute disasters followed by investigations and litigation, rather than the accumulation of stigmatization through sustained campaigning.
The second mechanism of indirect impact is through the threat of restrictive legislation, such as a carbon tax or tightened regulations. The Oxford report points out that such legislation does not even need to be enacted to have an impact, as the mere increased probability of such legislation is enough to reduce expectations about future oil and gas revenues, or at least increase their uncertainty. The report states that past divestment campaigns have often been successful in lobbying for restrictive legislation. While there’s no doubt that divestment can only help the cause for restrictive legislation, it’s unclear how effective they were compared to other parallel campaigns. For instance, the only concrete example given in the Oxford report is the Public Health Cigarette Smoking Act of 1970, which is frequently attributed to the 1964 Surgeon General report on the health effects of tobacco. Health research played a clear role, but it’s unclear what role divestment campaigns in particular played in generating the political pressure to legislation.
I would add a third mechanism of indirect impact left undiscussed in the Oxford report. Fossil fuel campaigns may have been one of the more effective vehicles for getting people involved in climate issues and climate activism. It might be one of the main ways that many college students in particular learn about climate impacts and start thinking about climate solutions. Divestment campaigns benefit from a simple narrative (“stop funding destruction”) and political battlegrounds located at universities. Endowments and pension funds are good political targets, because they are large enough to generate the excitement of an audacious goal, not as politicized as legislative politics, and they have the spirit of serving a group of people, even if there may not always be a formal mechanism for democratic influence. Because the impacts of climate change are so diffuse and probabilistic, it can be quite hard to generate political energy and activism. Divestment campaigns might be one of the most effective ways to frame the climate crisis in a way that gets people energized to fight rather than feel overwhelmed. Political narratives need an enemy, and fossil fuel corporations and their financiers can play that role, even as we are also complicit in our fossil fueled lifestyles.
All this suggests that if you are an individual in control of personal or institutional funds, simply divesting from fossil fuels won’t make any difference unless you tell other people. Ironically, as a institutional fund manager, you might have a larger impact by dragging out the divestment process in a way that allows the divestment movement to grow and achieve milestones at regular intervals so that they feel empowered and encouraged. Giving into divestment too quickly could collapse your local divestment campaign, which may be serving as a crucial organization that provides political training and experience to its members and climate communication to the broader community. Perhaps we should start a covert campaign to get institutional fund managers to divest, but slowly!