Oil Price Crash Revives Fossil Fuel Divestment Campaigns
Climate activists say this is the moment for colleges and major institutions to dump their investments.
With a global economic shutdown pushing oil prices to record lows, climate activists across the world are taking a moment to say “I told you so” to the banks and governments that have dragged their feet on fossil fuel divestment.
“There might not be another moment where there is the political and economic window to take the drastic action on climate that is necessary,” said Connor Chung, the communications coordinator for Divest Harvard, a student activist organization. “We don’t have the luxury of trusting that we can nudge the industry into behavior or that the market will fix the problem by itself.”
Divestment organizers—climate activists who are pushing government and financial institutions to divest from the fossil fuel industry—have been using the pandemic’s ripple effects throughout the global economy, most notably through the oil and gas sector, to demonstrate just how dire the need to remove pension funds and other investments from the struggling sector really is.
Still, Chung and other activists realize they face an uphill battle. Nobody at Divest Harvard was impressed when their university released its divestment plan last month. The announcement, made on April 21 (the day before Earth Day), said the university would cancel out any man-made greenhouse gas emissions in its investment portfolio by 2050. Though the Harvard Corp., which runs the university’s endowment, insists it’s in line with the Paris climate agreement, activists argue that the commitment is woefully insufficient to stop the serious effects of climate change, especially at such a pivotal moment.
In a message to university faculty reported by the Crimson, Harvard University President Lawrence Bacow said the university would be working with fossil fuel companies rather than divesting, arguing that the university “cannot risk alienating and demonizing possible partners.”
Chung disagrees with that approach, arguing that it would be akin to “asking Pepsi to sell less soda.” Meanwhile, other endowments, like those of the University of California system and American University, have announced more aggressive plans to make their investments carbon neutral much sooner.
When American University’s Student Government passed a resolution in 2014 calling on the Board of Trustees to divest the school’s then-$425 million endowment from fossil fuels, the board eventually convened a task force to study the possibility of doing so. The school found that its endowment was not directly invested in any fossil fuel company stocks, like Chevron or ExxonMobil, but was indirectly exposed through investments in S&P 500 mutual funds, which roll up those companies and others in the oil and gas industry into the portfolio. At the time, divesting from those funds, which are incredibly cheap to manage, seemed too expensive if it meant switching over to fledgling fossil-free funds.
“That’s where the trustees came down and said, ‘That seems like a pretty steep price to pay at this stage for a portfolio,’” said Jeffrey Harris, a professor at American University’s Kogod School of Business. “It wasn’t a trade-off they wanted to make immediately.”
Over time, though, the cost of those fossil-free funds came down as more and more institutions began buying into them. American University finally removed its fossil fuel exposure completely in early March and made an announcement on Earth Day.
“We have been on this path for a while now,” Doug Kudravetz, the chief financial officer of American University, said in an email. “We want to use our voice to support climate initiatives, when we can do so in a way that also preserves our board’s fiduciary responsibility.”
Similar debates are occurring in locally or city-run investment funds. A resolution introduced in April to the New York City Council calling on New York financial institutions to divest from fossil fuels is sitting in legislative purgatory—but it’s far from forgotten. Though it’s likely to be signed into effect, lawmakers in the city are too busy dealing with one of the worst coronavirus outbreaks in the world to pass symbolic legislation. Even so, the climate activists who supported the call have continued their work remotely.
“The resolution is a shot across the [financial] industry’s bow,” said Pete Sikora, a senior advisor for New York Communities for Change. “If they want to retain New York City’s business in the long run, they should understand that elected officials and activists are not going to tolerate an industry that is destroying the city’s future.”
Resolution 1286 specifically calls on JPMorgan Chase, BlackRock, Liberty Mutual, and other banks and insurers “to stop lending to, investing in and insuring the fossil fuel industry.” Though it’s nonbinding, other more permanent actions taken by New York City, including divesting the city’s pension fund from the fossil fuel industry, indicate there’s some bite to it.
To be clear, while this oil crash is near unprecedented in its severity and outside of anyone’s predictions, it hasn’t caused a revolution in thinking: Those monitoring the energy sector have suspected for a decade that oil and gas companies were likely to underperform in a greener global economy. But the present oil shock has driven home the point climate activists have been trying to make for a decade—oil is risky business.
“Like with pandemics, scientists are warning us, desperately warning us, to get ready and stop a disaster,” Sikora said. “It’s up to corporations to make the changes necessary to avoid worldwide catastrophe.”
Moreover, fossil-free funds have turned out to be an even better investment than many investors expected. Since the financial crisis over a decade ago, the energy sector has fallen to its lowest share of the S&P 500 since the 1990s. Index funds without fossil fuel investments have outperformed those with fossil fuel companies in their portfolio over the past five years, according to the Institute for Energy Economics and Financial Analysis (IEEFA).
As headlines have screamed, the price for oil of late has dropped so low that for a time oil futures were trading at a negative price, meaning that it could theoretically cost more to store barrels of oil than the oil itself was actually worth. This is a slight mischaracterization, but the truth is that oil prices had already been trending down even before April’s stunning collapse.
Kathy Hipple has written about what she sees as the decline of the oil and gas industry at IEEFA since 2018. She has compared the fossil fuel industry to the Yellow Pages, writing that “a head-in-the-sand mindset persists across the declining fossil-fuel industry similar to the one I saw take root in the Yellow Pages business,” where she once served as a board member.
“It’s a declining industry, and it’s facing an existential crisis,” Hipple said in an interview with Foreign Policy. “At some point when industries face an existential crisis, they will cease to exist in their present form. There’s no bottom for their stock prices.”
Though Hipple notes that the oil and gas industry will still serve a function in the green energy transition, she argues that investment in fossil fuel companies has been overvalued for years. Now, as oil prices and new production crater, Hipple anticipates that investment won’t return to oil and gas in the same way it will return to other industries.
“You could throw a dart and find an industry that has performed better,” Hipple said. “I’m always amazed that the people who get paid a lot of money to manage money are not as proactive as they need to be.”
Hipple and Harris noted that for all the prognostication on Wall Street, investment is deeply influenced by human behavior. If more people, and investors especially, begin to demand the market account for climate risks, the markets could begin to reflect that.
“People are baking their bread now, but eventually … they’ll let someone else bake the bread,” Hipple said. “But the fact is the economy can grow without the growth in the fossil fuel sector. The fossil fuel sector is destined to shrink. It is shrinking.”