They pollute the planet. They are turning global warming into a catastrophe. And they are taking humanity to the brink of extinction. In the view of at least some of the more extreme climate change activists, the giant energy companies, along with any major corporation that uses fossil fuels, are destroying what remains of the world, and the only responsible thing for investors to do is to get out — fast.
So, should you join the stampede to divest in oil stocks? Almost every week brings news of a major fund moving out of anything to do with fossil fuels. Early this month, Cambridge University agreed to set out plans for divesting its multi-billion endowment funds from oil, gas and coal firms. Last month, the pension fund for MPs succumbed to pressure to make its investment managers take account of climate change when buying equities. It might not be long before every pension fund faces the same demand.
The movement to force divestment from fossil fuels started on American campuses in 2010 and has snowballed since then. By last year, the campaigning group Go Fossil Free estimated that more than 1,000 investment institutions and 58,000 individuals had taken their money out of the traditional energy industry, in total representing $8 trillion in assets. That gets you noticed on Wall Street or in the City of London.
Even the Bank of England Governor has flagged it, teaming up with the Governor of the Banque de France last month to warn of the financial risks from climate change, and arguing that financial institutions should take account of the risks it poses, and build sustainability into the management of their portfolios. (Though after getting the impact of leaving the EU so wrong, many might be tempted to dismiss a warning from Mark Carney as more fear-mongering.)
In many ways the divestment movement is making a perfectly reasonable point. As we saw in the UK last month with the Extinction Rebellion protests across London, and with the rise of 16-year-old activist Greta Thunberg, fighting climate change is turning into a popular, mass movement, and ending our dependence on fossil fuels is a cause many are signed up to. Money talks, and if you drain the industry of funds, it may change a lot more quickly. The trouble is, there are two main reasons why things are not going to work out the way the divestment campaigners expect.
First, shifting away from fossil fuels is going to take expensive investment in research and development — unless people are happy to take a massive reduction in their living standards (which, a few activists aside, seems very unlikely). Who has the expertise and the money to pay for all that? The companies already in the industry. Shell has a budget of up to $2 billion a year to spend on clean energies and plans to double that in the next few years. Most of the other major energy companies are ramping up their investment in alternatives.
Or take the auto industry. It is pumping tens of billions into developing electric cars, and making huge amounts of progress. The average range for an electric car in the US rose by 10 per cent last year, from 114 miles to 125 miles (in 2011 it was less than 80) and the latest models do more than 300. Across a range of industries, either producing or consuming energy, it is the existing giants that have the cash to develop alternatives. Sure, pressure them to do more. But to do that, you need to own the shares and start asking tough questions of the management. If all the people who care about climate change have taken themselves off the shareholder register, why should the board bother to listen to them?
As for whether divestment will help make you richer, or at least preserve your wealth, you should be careful to study precedent. Thirty years ago, there was pressure on investors to pull out of tobacco companies and arms manufacturers, on the same grounds that their products killed people (and with less room for debate — no one seriously questions the links between smoking and cancer, or indeed the potentially negative impact of a missile on your health). Many funds went on to withdraw from those sectors.
And what happened? It turned out the shares did very well. When AJ Bell recently calculated the returns made by the 30 companies that had survived in the FTSE since the index was created 35 years ago, the best-performer turned out to be the tobacco giant BAT. A mere £100 put into the company then is worth £33,000 now, compared with £13,000 for the next best performer, Unilever. Arms manufacturers also did perfectly well. Divesting away from ‘sin stocks’ may have made you feel virtuous, but it was bad for the value of portfolio. The same is likely to be true of divesting out of fossil fuels.
There is nothing wrong with working to reduce pollution, make the environment cleaner, and slow down the pace of global warning. But that will be achieved most effectively by encouraging energy companies to invest in greener technology and auto companies to make cheaper and more powerful electric cars. Divestment in fossil fuel companies is a grand gesture. But it doesn’t do anything to fix the problem — it might even make it worse. And it is very likely to make you poorer.