The fossil fuel divestment movement has attracted a lot of attention and support. Institutions with over $12 trillion of assets have pledged to divest some or all of their fossil-fuel related holdings (coal, oil, or natural gas). Student-led groups and the environmental organization 350.org have helped secure this level of commitment in less than 10 years.
Divestment as a form of protest is not new. Similar campaigns against tobacco, alcohol, and nuclear power stretch back decades. Advocacy to end Apartheid in South Africa and genocide in the Darfur region of Sudan also used divestment as a tactic.
One of the principal aims of the fossil-fuel divestment effort is to delegitimize the industry and make it more difficult for governments to avoid policies promoting the transition to a low carbon economy. Another goal is to deprive companies of the financing they need to continue extracting hydrocarbons from the ground. History may provide some guidance as to whether we can expect divestment to achieve these primary objectives.
Evaluating the success of past divestment campaigns is challenging (Apfel 2015). The contribution of divestment to political and social policy shifts is uncertain as it is never used in isolation. Divestment is just one of many advocacy tools, and advocacy is only one of many factors that determine political and social outcomes. Media accounts draw parallels between the fossil-fuel divestment movement and the divestment campaign to end Apartheid as proof that “divestment works.” But what about the role of post-cold war international politics and civil unrest in South Africa? Divestment might have helped, but proclaiming its efficacy — despite being single tactic in a broader effort — appears unwarranted.
The ability of divestment campaigns to “starve” companies of capital is easier to assess. On this front, previous campaigns appear to have failed. There is no consensus in the literature as to whether investment returns differ between “ethical” and “conventional” portfolios (Halcoussis and Lowenberg 2019). Given the close relationship between investment returns and financing costs over longer time horizons, it is difficult to conclude that risk-adjusted financing costs have been materially altered by divestment movements.
The inability of moral actors to deprive entire industries of capital becomes clearer when you look at economic output. The history of tobacco is a case in point. If the tobacco divestment campaigns of the 1980s and 1990s had successfully driven up the industry’s cost of capital, the global market supply of tobacco products would be expected to decline and there would be far fewer smokers. In fact, the World Health Organization (WHO) estimates the number of male tobacco users worldwide didn’t peak until 2018. And while global tobacco use is declining, the pace of change is slow as population growth partially offsets the prevalence of smoking. The number of tobacco users has fallen just 5% over the past 20 years, according to WHO data.
Source: World Health Organization, WHO Global Report on Trends in Prevalence of Tobacco Use 2000-2025, Third Edition.
If the analysis ends here, we may conclude that divestment is still unequivocally positive — it fails to punish companies directly, but potentially serves as a galvanizing force for policy change along with other tactics (even if we can’t measure its relative contribution). Unfortunately, divestment also has consequences.
Perversely, executives may be encouraged to welcome divestment threats from their shareholders. Some find that divestment announcements depress share prices in the near term (Davies and Van Wesep 2018, Dordi and Weber 2019). However, executives of companies targeted by divestment may actually benefit from such campaigns since longer-term impacts on share prices are indeterminate (Davies and Van Wesep 2018). In the short run, stock-based grants need to include more shares to compensate for the lower share price, but in the long run the executive gains once the divestment discount disappears.
There are several other criticisms of divestment efforts. Among these is the view that divestment is purely symbolic — it has no direct impact on the targeted business. Importantly, it may create a false sense of accomplishment and divert attention away from more meaningful action (Braungardt et al. 2019).
But the most harmful effect of divestment may be that it precludes successful engagement with companies. Where reform is possible, engagement with company management is likely to be more successful than divestment (Gorman 2017). Shareholders have legal power in the form of their vote for or against directors, and soft power in the form of shareholder resolutions. Former shareholders have no voice in the boardroom.
Unfortunately, many divestment proponents have drawn the conclusion that reform of the fossil fuel industry is impossible. No, an oil and gas producer is not going to cap its wells, and a tobacco company is not going to stop making cigarettes. However, continued pressure from investors through initiatives like Climate Action 100+ is already yielding benefits. Royal Dutch Shell credited engagement with institutional investors supported by Climate Action 100+ in announcing its plans to set short- and long-term carbon reduction targets, align those targets with its executive pay packages, and review its association with industry lobbyists.
It’s the billions in annual corporate lobbying and campaign contributions that investors should target most. Without corporate interference, more robust climate change policy might already be in place. Fossil fuel companies can provide valuable input on practical carbon emissions goal setting and should be heard — but misinformation campaigns and efforts to throttle all climate change legislation should not be tolerated by shareholders.
Supranational policy action may be necessary to address climate change within the timeframe needed to avert long-term disaster. And engaged investors can play a critical role in removing the corporate obstruction to change. From this standpoint, divestment is not only ineffective, it is counterproductive.
An analogy with the fight against tobacco use should frighten anyone that appreciates the urgency of responding to climate change. The first major studies establishing a link between smoking and mortality were published in the mid 1950s. The U.S. surgeon general didn’t issue a report warning of the impact of smoking on health until 1964. The World Health Organization’s Framework Convention on Tobacco Control didn’t come along until 2003. The number of male tobacco users didn’t peak until 2018. And there are still more than 1.3 billion people in the world using tobacco today. It’s been pretty clear for almost 70 years that tobacco use kills you, but it took nearly 50 years to coordinate a global response, and it will take decades (at least) more to dramatically reduce smoking from current levels.
If it takes humanity a century or more to eradicate a substance with little redeeming value, how long will it take us to eliminate the use of fuels that are so integral to daily life? We need to take advantage of every effective tool at our disposal. But divestment is not one of them.