Divestment Hurt Apartheid. Can It Save the Planet?

Can you strike a blow against climate change by getting rid of your oil company stocks -- and can you do it without losing money? The proposal by Norway’s $1 trillion sovereign wealth fund to sell its oil and natural gas holdings has led many institutional investors to reconsider the financial side of the question. The leaders of what’s called the climate divestment movement, however, have focused on the environmental benefits. Their movement has been picking up steam. But whether, when and in what way divestment would reshape the energy market is a complicated question.

1. What’s the climate divestment movement about?

It was started in 2012 by the activist group 350.org, whose name is a reference to what some scientists consider the maximum safe level of atmospheric carbon in parts per million. Its goal is to "keep carbon in the ground," in part by weakening the oil, gas and coal industries. Adopting a tactic from the fight in the 1970s and 80s to force South Africa to give up apartheid, it urges universities to divest themselves of stocks from the 100 largest coal companies and 100 largest oil and gas firms.

2. How has that gone?

The group says that so far more than 850 institutions, from pension funds to family foundations, mostly in North America and Europe, have made some level of commitment to divesting, although it’s unable to say how much of their $6 trillion in combined total assets has actually left the sector. In addition, it says that more than 58,000 individuals have divested about $5.2 billion.

3. Has that had an impact?

Not in economic terms. Coal companies are staggering, but that’s mostly the result of the plummeting cost of natural gas. Many oil and gas companies have seen their shares rise over the past year as demand for their products has increased and crude prices enjoyed a rebound. But groups like 350.org say that’s missing the point. Symbolic rejection can help "revoke the social license of the fossil fuel industry,” as its website says. Low oil prices may be working the other way, however: A poll by Gallup showed that at the end of last year, only 14 percent of Americans felt very negatively toward the sector, falling from a peak of 49 percent in 2006.

Do We Hate Oil Companies? Check the Price at the Pump

Despite the divestment movement, the industry's standing rose after oil prices fell in 2008

Data: U.S. Gallup survey; graphic by Bloomberg QuickTake

4. Is there an economic argument for divesting?

Sort of. Oil companies themselves see demand for their products peaking, but not until sometime between 2025 and 2050, and then slowly declining.

No Rapid Fall

Even projections that see strong growth for renewable energy don't foresee oil use declining for years; figures are for million ton oil equivalents

Data: IEA "sustainable development" scenario; graphic by QuickTake

5. Why is the Norway fund thinking of divesting?

The sovereign wealth fund says it wants to shield Norway against a "permanent drop in oil and gas prices,” although it’s steered clear of talk of peak demand. The thinking is that given the country’s overall exposure to oil -- including its ownership in Statoil, Norway’s biggest company -- it didn’t make sense to also tie up other financial assets in the petroleum sector. Norway as a whole is also seeking to reduce its reliance on the sector. Statoil followed up by saying it hopes to change its name to Equinor, to start erasing all association with the term “oil.”

6. What are the arguments not to divest?

For most investors, having money in an oil company is almost unavoidable. Behemoths such as Exxon Mobil Corp. and Royal Dutch Shell Plc are included on every major equity index -- core investments, like it or not, for the mutual funds that almost everyone’s pensions or 401Ks are invested in. Then there are the dividends. Oil companies distribute money to shareholders with a fervor matched by few others. If you bought a share of Shell during World War II, you would have received a flat or increasing dividend payment every quarter without exception. Those dividend payments have endured through price collapses, the Arab oil embargo, wars, nationalization of assets, government sanctions, worries that supplies would run out and more. Only government bonds offer that kind of stability. And the yield of a Shell share is about 6 percent, while a 10-year U.K. will earn you 1.4 percent.

Safe Bets

Oil company dividends have been nearly as safe as government bonds, but with higher returns

Data: Bloomberg; graphic by QuickTake

7. So does divesting mean taking a financial hit?

It’s a question of the time frame. The absolute return of oil companies hasn’t outperformed the broader index since 2014 because of an oversupply of crude that caused prices to slump. Exiting now could mean passing up those fat dividends and possibly rising share prices, while waiting longer risks losses if government action or the rapid spread of renewable power and electric cars cuts demand sooner than anticipated.

8. If everyone divested tomorrow, what would happen?

First of all, the sheer size of oil holdings means it would be hard for everyone to sell at once -- the Norwegian selloff will be done over years. Even if could happen, it probably wouldn’t cut demand for fossil fuels sharply right away. Renewable energy sources like wind and solar are growing rapidly but from a tiny base. In one scenario modeled by Shell, meeting goals set in the Paris climate accord without fossil fuels would require new energy sources to increase fifty-fold and the reforesting of an area the size of Brazil, among other measures. And fossil fuels would still be an essential element for a wide range of products such as plastics, pharmaceuticals and road surfacing.

9. Is there another approach?

While New York City announced in January a goal of divesting fossil fuel companies from its pension holdings, New York State is not following suit. Its pension fund is part of a group that sees oil companies, with their vast balance sheets and highly technically skilled workforce, as potentially part of the climate solution. They’ve decided not to divest but to engage companies from within, as shareholders. Those efforts have had some success, like a recent push to get Exxon to better disclose its climate risks.

The Reference Shelf

An explanation from 350.org about the push for divestment.
A report from the University of Toronto on divestment’s rationale.
Carbon Tracker, the group that coined the term "stranded assets," estimates $1.6 trillion is at risk by investing in oil, gas companies.
The view from Norges Bank about oil and gas stocks.
A BNEF study on the competition to oil and gas from renewables.
A U.S. congressional report on the financial performance of oil companies amid volatility.