Skip to main content

Joel Gehman (@joelgehman) is assistant professor of strategic management and organization and Southam faculty fellow at the Alberta School of Business. Michael Lounsbury is associate dean of research, professor of strategic management and organization and Thornton A. Graham chair at the Alberta School of Business.

Recently, Norway's $1.25-trillion sovereign wealth fund revealed that over the last three years it had divested from 115 companies engaged in coal mining, oil sands production, coal-fired electricity generation, and cement production, among others. According to Fossil Free, it was "likely the biggest divestment decision to date." Closer to home, the University of British Columbia faculty last week voted 62 per cent in favour in a referendum asking its board to divest some $100-million in fossil fuel assets from the university's $1.2-billion endowment. Certainly the fossil fuel divestment movement provides a potential legitimacy threat to Alberta oil sands firms' social license to operate.

In the face of this growing momentum, a number of commentators have criticized the fossil free divestment movement. In one op-ed Martha Hall Findlay and Jean Charest offered two main points.

Story continues below advertisement

First, while agreeing that greenhouse gas emissions are a problem, the authors claimed: "The problem lies with the demand – it's not the fault of those meeting the demand." In other words: follow the money. Although we believe this depiction overly simplifies a complex problem, does the divestment movement violate its prescription? Clearly not. Even if a society limited itself to demand-side solutions, by definition, reducing demand for fossil fuel assets would qualify.

Second, the article claimed: "But investment decisions for university endowments must be based on one thing: which investments will bring the best financial returns." In other words, maximize portfolio returns. Although we doubt all university endowments share a single investment strategy, is there evidence that divestment harms returns? Again, the answer is no. A comparison of the MSCI ACWI IMI index, which covers some 99 per cent of the global equity universe, with an index that excluded 247 fossil fuel reserve-owning companies found a return differential of 1.2 per cent in favor of the "ex Carbon list," as well as a potential reduction in overall portfolio risk.

Clearly, a society that agreed with Hall Findlay and Charest's twin prescriptions – follow the money and maximize portfolio returns – would not agree with their conclusions. Using their criteria it turns out that divestment is actually a "good idea." By simply excluding fossil fuels from their portfolios, universities can meet or beat the market while reducing overall risk.

Although divestment may seem like a no-brainer, as scholars, we are curious: does the movement have any chance of succeeding? Past evidence is mixed. For instance, Nelson Mandela credited the University of California's 1986 divestment of $3.1-billion as significant in abolishing white-minority rule in South Africa. Other campaigns have targeted child labor, land mine, and cigarettes. Recently, investors with more than $45-trillion in assets have signed the UN Principles for Responsible Investing, committing to incorporate environmental, social, and corporate governance (ESG) issues into investment analysis.

One big ESG issue for these investors is carbon. By any reasonable calculation the world has more carbon than it can afford to burn. According to the International Energy Agency's World Energy Outlook 2012, "No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2C goal, unless carbon capture and storage (CCS) technology is widely deployed." Using this same logic, Deutsche Bank concluded: "Peak carbon rather than peak oil becomes the primary driver of oil prices."

For the companies and economies implicated, these issues connected to the fossil fuel divestment movement pose clear strategic challenges. For instance, if not all carbon is burnable, which carbon gets priority? One possibility is de-commodification, in which qualifications such as "ethical oil" and "dirty oil" may be consequential. Similarly, while some analysts have claimed that divestment is merely symbolic, as Keystone XL and the tailings pond ducks make clear, when symbols take hold they can have potent effects. For both Alberta and Canada, it may be useful to more seriously consider the role of diversification in balancing carbon-based development and growth with carbon-free leadership in clean technology and related entrepreneurial initiatives.

Report an error
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter