On Friday, millions of people around the world joined climate change protests. Earlier in the week, Bill Gates, the Microsoft co-founder and philanthropist, warned climate change campaigners that divesting, or refusing to hold, fossil fuel stocks, such as oil companies, was a waste of time. “Divestment, to date, probably has reduced about zero tonnes of emissions. It’s not like you’ve capital-starved [the] people making steel and gasoline.”
A number of prominent investors see divestment as an important tool in tackling climate change. Last year the Church of England voted in favour of selling holdings in fossil fuel companies that have not aligned their businesses with the Paris climate accord by 2023. A growing number of global asset managers, sovereign wealth funds and pension funds are pledging to divest.
350.org, a climate change activist group, which has signed up more than 1,000 investors who are committed to divesting fossil fuel holdings, responded to Mr Gates saying that the idea is not to shut companies off from capital, but to remove their “social licence to operate”, making it easier for governments to act by reducing the political influence of fossil fuel businesses.
There is little data on how much money has been moved out of fossil fuel-related stocks or what impact the campaign has had. But climate activism is clearly having an effect. Royal Dutch Shell cited divestment campaigns as a material risk in its latest annual report. BP chief executive Bob Dudley said last year that such efforts could threaten energy security and the global economy.
Mr Gates argues that investors, rather than dumping fossil fuel stocks, should back innovative solutions to climate change. Mr Gates is an investor in two such companies, the protein-replacement food companies Beyond Meat and Impossible Foods, and a sizeable backer of Breakthrough Energy Ventures.
The supply of capital for more environmentally friendly projects is increasing. Money managers are increasingly talking about climate change risks and opportunities. Environmental, social and governance (ESG) strategies are popular with investors, and, within them, climate change is the dominant theme. There is a growing list of climate change funds available to investors.
Recently the FT reported that the US fund manager AllianceBernstein is sending its investment staff to New York’s Columbia University to learn how to incorporate climate change into investment decisions. The main motivation is to protect investments against climate risks, rather than to drive the transition to a greener economy.
So-called green bonds are being used to raise capital for programmes, such as investing in renewable energy or increasing energy efficiency. According to the Institute of International Finance, green bond issuance has risen from almost nothing in 2012 to $127 billion between January and August of this year.
Renewables are making headway, much of it driven by innovation. Solar panels, for instance, are much cheaper, more efficient and commercially viable than they were just nine years ago. Since 2010, the benchmark price for solar has dropped by 84%, offshore wind by more than half and onshore wind by 49%, according to the World Economic Forum. It is a measure of the shift away from fossil fuels that in May of this year the UK went for over a week without using electricity generated from burning coal, the first time this has happened since the 1880s.
Yet the global economy, and human welfare, remain heavily dependent on fossil fuels. This is unlikely to change quickly. 90% of the global energy mix is from fossil fuels, and demand for energy is increasing. A recent report by energy consultancy Wood Mackenzie forecasts that fossil fuels could make up 85% of global energy output as late as 2040.
Divestment offers one approach, though a far bigger influence on the oil majors is the price of oil, which is up by almost 30% year-to-date. For every investor wanting to sell, there is another willing to buy as long as profitability continues. In an interview with the FT last week Julie Gorte of Impax Asset Management observed that renewables are an increasingly viable energy source for buildings and cars, but there are, as yet, no alternatives to fossil fuels for flying and container shipping: “As long as there is a market for fossil fuels, someone will invest in them”.
Moreover, while governments are signing up for ambitious long-term targets for carbon elimination the legal, regulatory and tax framework to deliver them is still evolving. Relating day-to-day decisions and choices to carbon reduction is complex and ever-changing. The obvious solution, a comprehensive system of carbon pricing, is not yet an overwhelming vote winner with the electorate.
Climate change has gone mainstream in politics, economics and finance. Central banks see it as posing major risks to the financial system. For corporates it is moving from a corporate social responsibility issue to a core business risk. The market for green investments is expanding quickly.
Financial markets echo changing human behaviour and preferences. These, in turn, are shaped by law, innovation – and, above all, attitudes. On climate change financial markets can’t do for us what we won’t do ourselves.
PS: Last week attacks on Saudi Arabia’s state oil company Saudi Aramco caused the suspension of 5.7 million barrels a day of output, more than half of Saudi Arabia’s oil supply and 5% of total global output. The attack highlighted how hostile actors can, at relatively low cost, use new weapons to disabling effect. The oil price rose by as much as 19% in the immediate aftermath, but it has since reversed most of those gains and currently stands at $67/bbl, 5% above the price before the strike. The price retreated sharply last week after Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman said oil supply was fully back online.
PPS: Last week we noted how Mario Draghi, the ECB’s outgoing president, had urged governments to bolster growth by easing fiscal policy. Many in northern Europe, particularly in the Netherlands and Germany, oppose such a move. Nonetheless, last week the Dutch government, which prides itself on its fiscal providence, announced a slight easing of fiscal policy, albeit one that will leave the Dutch budget in surplus. As global growth slows we expect other governments to resort to higher public spending or lower taxes in an attempt to support growth.