When the Rockefeller Brothers Fund recently announced it would remove fossil fuels from its $860-million (U.S.) investment portfolio, it wasn’t just a PR stunt; it was a smart long-term financial move. Big funds like Rockefeller Brothers see what others have been trying to ignore: that fossil fuels are in decline for a host of economic, political and social reasons, as alternatives reach price parity, regulations increase and public subsidies shift.
Over the past few years, more than $50-billion has been committed to divest from fossil fuel investments. That may not seem like a lot for an industry that, according to the IMF, receives $2-trillion in government subsidies worldwide every year – but it’s a sign of what’s coming. Bank of England governor Mark Carney recently reiterated his warning that fossil fuel companies cannot continue on their current trajectory, if the world is to avoid catastrophic climate change, and called for investors to consider the long-term impacts of their decisions.
Mr. Carney has added his voice in support of the “carbon bubble” theory, which warns that fossil-fuel assets will be significantly devalued if a global deal to tackle climate change is reached. Such a deal seems closer every day, with the United States and China recently announcing a “historic” climate change agreement that will curb carbon emissions.
Left to the market, the fossil fuel industry could not survive in its current form. The industry only appears strong because of that $2-trillion in public subsidies – public funds awarded by short-sighted governments because of oil industry lobbyists. The success won’t last; the industry is on borrowed time.
Providing artificial stimulus to a declining industry is not just creating financial risks; it’s holding our economy back. Governments and markets should be signalling to entrepreneurs that it’s time for innovation. At a minimum, stimulus should be incrementally shifted to support clean technology and associated infrastructure changes. The recent crash in oil prices further demonstrates that Canada should be diversifying its economy. The status quo is untenable, and pumping money into fossil fuel companies will only lead the industry to become more complacent. The fossil fuel industry is being incented to stick their heads in the proverbial sand, unwilling to take the risks necessary for innovation. And they will continue recklessly to assert that fossil fuel reserves will never run out, they are the only economically viable energy option and that climate change is not influenced by their products.
Fossil fuels are not the future; they belong in the past. It is highly likely we will see higher taxes and fines applied to the industry, to offset the social and environmental costs of fossil fuels. As governments shift to future-friendly technologies, fossil fuels will become unattractive. Investment capital will pivot to fund cleaner, safer energy alternatives. These companies will provide investors a lower risk and more sustainable return in the long run. It’s not a question of “if,” but “when.” Today, the smart money is on resource efficiency, smarter production, clean transportation and a healthy environment.
While some major institutions have come around to the fact that future-friendly investments can be profitable and responsible, others have been remarkably short-sighted. Harvard University, the keepers of the largest academic endowment in the United States, have flat out rejected it, claiming their $32-billion stockpile is “not an instrument to impel social or political change.” Harvard is missing the point, but their student body isn’t: One of the most effective student-led divestment campaigns recently filed suit against the university for “mismanaging endowment funds and endangering future generations.” As the divestment movement grows and fossil fuel profitability declines, such institutions will find themselves not only on the wrong side of history, but on the wrong side of the market as well.
It’s becoming increasingly clear just how much damage climate change will inflict on our environment and society – and how much it’s going to cost us. Investors will do the math, and we will see capital flee from fossil fuels to cleaner, more efficient and profitable industries.
All of this will be obvious within the next decade. But many investors see it coming already. They are the ones moving out of fossil fuels today.
Joel Solomon is Chair of Renewal Funds, Canada’s largest social venture capital firm. He is a pioneer of triple bottom line investing.