Tuesday, October 13, 2015

The Fossil Fuel Divestment Movement is having an Impact on Investors Businesses and Power Companies

The fossil fuel divestment movement is gaining serious traction and resonating widely. Divestment is at the forefront of efforts to manage climate impacts, and due to concerns about growing financial and reputational risks, investors, businesses and power companies are being forced to take notice.

While many initially dismissed divestment from fossil fuels as purely symbolic there is growing reason to believe that it is powering meaningful change. To date we have seen a total of 2.6 trillion divested from fossil fuels and the movement continues to grow. In the last year alone there has been a 50 fold increase in divestment activity.

Driven in part by concerns about divestment, there are widespread calls for clear policies from government that will outline how we are going to transition away from fossil fuels towards a low carbon economy.

The movement away from fossil fuels, underscored by divestment, has added to investor concerns about the value of their holdings. There are well warranted concerns about long-term financial risks associated with fossil fuels.

We have already seen a massive slide in the stock values of fossil fuel companies. Predictions that the price of oil will remain low for the foreseeable future add to these concerns. It is now widely recognized that investments in coal, oil and gas are unlikely to provide the kind of returns that they offered previously. Investors are most concerned about the prospects of stranded assets which means that fossil fuel investments would be rendered valueless.

The fear stems from the realization that as we move away from hydrocarbons and act to combat climate change fossil fuel companies and associated industries will be worth much less than their book value today.

Businesses are also concerned about divestment. Being beholden to fossil fuels is a risk that is being acknowledged as a serious and credible threat. This is due to concerns about new regulatory regimes that would make fossil fuels more expensive. There are also concerns about the public relations impact of being seen as too heavily reliant on dirty energy.

Concerns are born out of the risks associated with assets and activities that contribute to the climate crisis as well as the climate change itself.  In response to divestment and and the anticipation of new regulatory regimes, businesses are increasingly moving away from fossil fuels and embracing renewable energy.

Even power companies are concerned about the divestment movement and they are calling on governments to provide clarity on how we are going to transition away from fossil fuels. On October 11, 2015, the CEOs and chairmen of the Global Sustainable Electricity Partnership (GSEP) sent a letter to governments urging them to provide a clear pathway outlining the move away from fossil fuels and towards low-carbon energy.

GSEP is comprised of 11 companies: American Electric Power and State Grid Corp. of China, Électricité de France , Eletrobras, ENEL, EuroSibEnergo, Hydro-Québec, Iberdrola, Kansai Electric Power Company, RusHydro and RWE.

Martine Prevost, executive director of GSEP, told Reuters the companies were concerned by campaigns by some investors, including pension funds, to divest from fossil fuels. "They are worried by that, it is a challenge," she said.

The divestment movement is leading the charge to address the climate crisis and this is but the first salvo. As we head towards a global climate agreement at COP21, we should expect that fossil fuel subsidies will eventually be removed and the true costs of carbon will be ultimately be factored into the price of hydrocarbons. In addition clean energy alternatives like renewables are increasingly price competitive. These factors will seriously undermine the viability of fossil fuels.

The writing is on the wall, the end is neigh for fossil fuels and history will record that the divestment movement played a critical role in hastening the demise of dirty energy.

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