Fossil fuel divestment is the selling of assets related to the extraction and emission of fossil fuels, and it is often accompanied by the redirection of funds into clean energy investment. This practice has been growing in popularity as socially responsible investing has risen in importance, with companies shifting focus towards Environmental, Social and Corporate Governance (ESG).
Despite the common practice of diversification to reduce portfolio risk, when applied to the impact of divestment in fossil fuels, studies have shown there is little effect. The Faculty of Economics & Business at the University of Groningen concluded that between 1973 and 2015, although the fossil fuel industry had the highest mean return over the period when risk was considered, the returns on fossil fuel stocks were not significantly different from those of other stocks. A more recent investigation, by Imperial College Business School over the 5 and 10 years before 2020, showed renewable power portfolios to outperform fossil fuel portfolios in all geographies with the volatility of renewable to be similar or lower than fossil fuel.
Recent followers of this trend, catalysed by the COP26 UN climate conference, have been 72 faith-based institutions, including 37 from the UK, who announced a joint divestment from fossil fuels totalling over 4.2 billion USD in financial assets. According to the Global Fossil Fuel Divestment Commitments Database, faith-based institutions make up 35.4% of divesting institutions, with educational institutions following at 14.8%. Universities have been under increasing pressure from organisations, such as the student campaign group People & Planet, to improve their sustainability measures. Since 2014, over half of all UK universities have pledged to either fully or partially divest from fossil fuels, representing more than 15 billion GBP. Recent commitments include the University of Cambridge’s aim to ‘greenify’ its 3.5 billion GBP endowment through divesting in fossil fuels and redirecting these funds towards renewable energy investments.
Not all educational institutions have taken the same stance and followed suit. The Universities Superannuation Scheme (USS), a UK university pension scheme that manages 79 billion GBP, has a different approach towards ESG. In June 2021 the scheme announced its divestments from tobacco manufacturing, thermal coal mining, and all companies that have connections to the Explosive and Landmine industries. At first glance, this could be perceived as an ESG measure, however, the statement from the USS explains the move as being because the industries in question are ‘deemed financially unsuitable for the pension scheme over the long term’. No changes were made to the investments in oil and gas companies, or their 10% ownership of Heathrow Airport, and in October 2021 the USS revealed its agreement to invest nearly 400 million GBP in BP for a 49% stake in the sale and leaseback of property estate. Despite pressure from academic staff strikes, the USS has also been closely working with Royal Dutch Shell, with 500 million GBP invested in the oil and gas supermajor, according to a 2020 DivestUSS report. The USS takes the stance that it ‘cannot exclude companies in [their] portfolio based solely on ethical or moral grounds’ and believes that engaging with companies and encouraging them to make positive changes is the best way to address ESG issues. In 2018, Shell released a joint statement with its institutional investors, including the USS, on behalf of Action 100+. The report detailed Shell’s commitment to have net-zero emissions by 2050 or sooner, alongside other environment-related goals.
The USS’s outlook is not a unique one. Ahead of his panel at COP26, Hendrik du Toit, the CEO of asset management business Ninety One, said that investors ‘myopically focusing on “portfolio purity”’ are simply ‘creating discrete so-called clean portfolios’. He fears that divestment may drive down the share price of a fossil fuel company, which would leave it ripe for a takeover by a non-European oil company or wealth fund, potentially leading to any existing ESG commitments dropped for prioritisation of profits.
Over time it will be interesting to see whether more institutions decide to follow the views that the likes of the USS and Hendrik du Toit hold, by engaging with fossil fuel companies to hold them accountable to their sustainability pledges. Alternatively, whether they continue with the checklist approach of removing all associations to any socially questionable industries.
By Alice Lane
Sector Head: Philipp Jiang