Campaigns offer few short term rewards says report, but do affect long-term viability of oil, gas and coal
Fossil fuel companies need to diversify if they are to continue trading profitably, a report from the University of Oxford warns.
The authors say the increasing number of fossil fuel divestment campaigns threaten the long-term viability of some major producers, stigmatising companies in the eyes of the public.
“There are likely to be greater direct effects on coal valuations,” the study says. “Coal companies represent a small fraction of the market capitalisation of fossil fuel companies.
“Coal stocks are also less liquid. Divestment announcements are thus more likely to impact coal stock prices since alternative investors cannot be as easily matched as in the oil & gas sector”
Divestment campaigns hit the value of high carbon assets by raising public awareness and influencing government officials, reports the study.
UK and US Universities currently hold fossil fuel assets worth US $10,147m, while pension funds are estimated to hold 2-5% of their assets in fossil fuel related public equities
The IPCC report last week highlighted the importance of divesting in fossil fuels if global temperatures are to remain at current levels.
David Nussbaum, chief executive at WWF-UK, said divestment in fossil fuels is a natural step in the financial sector with a renewable energy that is booming and gaining public and investor confidence.
“Prudent investors want to be ahead of pack, not following the herd, so they will be preparing for a world where we leave fossil fuels in the ground – avoiding assets that cannot be realised safely in a carbon-constrained world,” said Nussbaum.
“If they do nothing, the risk is that policy changes and pressures such as the divestment campaign will mean investments could depreciate in value and might become stranded.”
Indirectly, by triggering a process of stigmatisation, the divestment campaign is likely to make the operating and legislative environment more challenging.
Previous instances of divestment campaigns against tobacco companies suggest that investors sympathetic to the campaign’s cause are likely to put together strongly worded resolutions during annual meetings, and even if voted down stir debate within a business with which management needs to be prepared to engage.
Investors, more than ever, are also keenly aware of whether managers do what they say when it comes to addressing the social responsibilities of a company.
Greater uncertainty over future cash flows can permanently depress the financial worth of fossil fuel companies. The divestment campaign could pose considerable reputational risk to fossil fuel companies even if its immediate direct effects are likely to be limited.
The report says that in order for fossil fuel companies to continue attracting investment they need to engage with campaigners.
Nussbaum said: “It’s not as if we don’t have solutions. We need to switch from investing in damaging fossil fuels and increase intelligent investment in sustainable renewable energy.
“Renewable energy isn’t just the best choice, it’s ultimately our only option, because the way the world produces and uses energy today is not sustainable, and has to change.”