Ethics Analysis: Fossil Fuel Divestment

By Myles Friedman

As issues go, fossil fuel divestment is front and center for investors. If world leaders fail to enact effective environmental policies to slow down the effects of climate change, an estimated 200 million people will become climate migrants. The long-held belief that action by individuals, not corporations, is the solution to stopping climate change is proven false by the current COVID-19 pandemic. In a time when people across the world are driving less, going out less, and using less energy, the reduction of global carbon emissions is not enough to end climate change and create a sustainable future for the world.

To effectively slow down the effects of climate change we must end our reliance on fossil fuels and move towards more sustainable forms of energy. Investment funds have a ethical obligation to divest from harmful fossil fuel companies and reinvest in companies producing sustainable energy. Divestment in itself is not a powerful enough tool to force fossil fuel companies to end harmful business practices and build towards sustainable energy. Investment firms must also reinvest that money into companies involved in clean energy technology. This investment helps socially responsible companies in the renewable energy space, moving the world closer to a clean-energy solution to climate change.

Why Fossil Fuels?

To move towards an effective solution to climate change we must find a way to counter fossil fuels, the largest cause of carbon dioxide emissions in the world. In 2017, carbon dioxide emissions from burning fossil fuels for energy were equal to 76% of total U.S. anthropogenic greenhouse gas emissions and about 93% of total U.S. anthropogenic CO² emissions (eia.org). When talking about fossil fuels and climate change, we usually only mention the three largest sources of carbon dioxide emissions: coal, natural gas, and oil. Of the three, coal is the dirtiest fossil fuel. It is the single largest source of global temperature rise, accounting for 0.3 °C of the 1 °C increase in global average temperatures. Oil, when burned, releases a third of the world’s carbon dioxide emissions. In recent years there has been a shift in the fossil fuel industry towards natural gas which has been promoted as a cleaner alternative to coal and oil, yet it still accounts for a fifth of the world’s carbon dioxide emissions (clientearth.org). 

While often difficult to see the long-term effects of climate change, such as rising sea levels or frequent drought, there are many short-term effects from extracting, transporting, and burning these fossil fuels highly visible to the public. Since 1969, there have been a reported 44 oil spills, each over 10,000 barrels, affecting U.S. waters (NOAA Office of Response and Restoration). These oil spills, often loudly reported in the media, have devastating effects on the immediate wildlife that can ripple throughout the ecosystem. Fracking, the process used to extract natural gas from the earth’s surface, has many documented incidents of cross-contamination of the local water supply in the areas from which they extract. This contamination is harmful to both people and wildlife using that water supply. The contamination also destroys the local farms that rely on the water for irrigation. Coal burning’s most visible effects are exhibited by those who live in the surrounding areas of factories and plants that rely on coal for energy. Coal burning releases a plethora of toxic fumes such as mercury, sulfur dioxide, and nitrogen oxides that can cause long term health problems such as asthma, cancer, heart and lung problems, and neurological impairments (ucsusa.org).

It is imperative action be taken now to prevent the worst effects of climate change from occurring. According to a report by the United Nations Intergovernmental Panel on Climate Change, to prevent global temperatures from rising 1.5 °C, a major goal of the Paris climate agreement, countries must cut their anthropogenic carbon dioxide emissions to net zero by 2050. To reach that goal, carbon emissions need to drop drastically by at the latest 2030. This deadline gives us a 10-year timeframe to enact effective climate policy to prevent the worst effects of global warming (UN.org). As the leading cause of carbon dioxide emissions, fossil fuels are the obvious choice to start in our attempt to limit anthropogenic CO² emissions. If we are unable to tackle the fossil fuel industry and severely cut its carbon dioxide emissions, the earth stands little chance.

Fossil Fuel Corporations

There is a small set of fossil fuel companies that account for the majority of all greenhouse gas emissions released since 1988. According to a 2017 report published by the Carbon Disclosure Project (CDP), 71% of the entire world’s industrial greenhouse gas emissions comes from only 100 fossil fuel companies. This number can also be concentrated further. 51% of the entire world’s industrial greenhouse gas emissions come from only the top 25 emissions producing entities. Notably, this number includes both the emissions released when extracting the fossil fuels and the emissions released when the fossil fuels are subsequently used by their customers. Of the 100 companies in the list, 32% is public investor owned, 9% is private investor-owned, and 59% is state-owned. The highest emitting companies since 1988 that are investor-owned include Shell, BP, and ExxonMobil. The highest state-owned companies include Saudi Aramco, National Iranian Oil, and Coal India. Chinese coal, which has been the number one culprit of greenhouse gas emissions since 1988, is represented by a few key state-owned coal producers.

These fossil fuel corporations are not century old tycoons whose contribution to climate change began a hundred years ago. Since 1988, these companies’ contribution to global warming has been just as significant as the previous 237 years of emissions. According to the CDP report, 833 GtCO2e (gigatons of equivalent carbon dioxide) were emitted in just 28 years since 1988, compared with 820 GtCO2e in the 237 years between the birth of the industrial revolution and 1988. We have doubled the amount of CO² emitted into our atmosphere in the past 28 years, but this was not an unforeseen consequence of our energy usage. 

Fossil fuel companies have known of and understood the consequences of burning fossil fuels long before it was public knowledge. In 1979, ExxonMobil funded internal research to show how the effects of global warming would affect fuel usage. Exxon, like so many other fossil fuel companies, knew the devasting effects of fossil fuel usage (scientificamerican.org). Not only did it choose to ignore the consequences, but these companies actively spent millions on disinformation campaigns and anti-regulatory lobbying (theguardian.com). This research occurred more than 10 years before these companies consciously increased their carbon outputs for profits. The consequences of fossil fuel companies’ activities are disproportionately felt by the world’s poorest individuals. The impoverished often live on land most susceptible to the effects of climate change such as flooding, drought, and volatile rain patterns (eos.org). 

Fossil Fuel Divestment: The Toronto Principle

The failure of our leaders to implement effective climate policy has led activists to pursue one of the most popular forms of activism: divestment. Groups like Fossil Free ANU, 350.org, and a variety of faith-based organizations have rallied young and old people alike to protest the use of fossil fuels and demand a multitude of institutions divest from fossil fuel entities. Fossil fuel divestment attempts to reduce carbon emissions by accelerating the adoption of renewable energy through the stigmatization of fossil fuel companies. The majority of fossil fuel divestment campaigns are demanding that institutions freeze investments in new fossil fuel companies, divest from direct ownership that include fossil fuel public equities and corporate bonds, and end their fossil fuel sponsorships (gofossilfree.org). 

A popular framework entitled the “Toronto Principle” has emerged that helps define the types of fossil fuel companies institutions should divest from. In 2015, a committee at the University of Toronto released a report on the issue of fossil fuel divestment and helped define a framework that helps institutions, such as universities, decide divest guidelines. In order to set a clear standard for what the goal of divestment should be, the committee aligned the principles set forth with the goals of the Paris climate agreement. The committee came to a set of conclusions regarding divestment as well as recommended a strategy of “targeted divestment” from fossil fuel companies that meet certain criteria. The committee acknowledges that “all companies in the fossil fuel industry engage in activities that, to some degree, are socially injurious by their very nature.” They also acknowledged that “certain activities, though socially injurious, nevertheless offer society indispensable benefits that currently cannot reasonably be gained in any other way.” They lastly acknowledged “some fossil fuels companies, notwithstanding social benefits as described in #2, engage in egregious behavior and contribute inordinately to social injury. These are the fossil fuels companies whose actions blatantly disregard the international effort to limit the rise in average global temperatures to not more than one and a half degrees Celsius above pre-industrial averages by 2050 [the “1.5-degree threshold”]”. 

With everything taken into consideration, the Toronto committee came forward with this specific method for evaluating whether a given fossil fuel company’s actions blatantly misaligns with the goals set out in the Paris climate agreement. Institutions should divest from:

1. Firms that derive more than 10% of their revenue from non-conventional or aggressive extraction.
2. Firms that knowingly disseminate disinformation concerning climate change science or firms that deliberately distort science or public policy more generally in an effort to thwart or delay changes in behavior or regulation.
3. Firms that derive more than 10% of their revenue from coal extraction for power generation or Canadian and American power generation firms that derive more than 10% of their revenue from coal-fired plants.

Despite some of the nuances in language that may cause some uncertainty, such as what exactly is considered “non-conventional or aggressive extraction”, the defined principles set out to significantly slow down the effects of climate change by aligning with the goals of the Paris climate agreement. The principles are assertive in their nature, but such boldness is necessary to achieve the Paris agreement goals. The principles are also flexible, allowing universities and other institutions to not divest from firms who are actively working to achieve the goals set out in these principles.

With the Toronto Principle, institutions have the framework to begin divesting from fossil fuel companies. It is not a framework that calls for absolute divestment, which gives institutions the flexibility to divest and diversify their portfolios without having to take the financial hit of an all-out and immediate divestment. Most activists would say the Toronto Principle does not go far enough, but as a balanced approach to a complicated issue, it is a good start towards building to a better future. 

Viability of Divestment

As much as fossil fuel companies are to blame for global warming, divestment may not be a viable strategy for actually decreasing emissions. The primary targets of the fossil fuel divestment movement are international oil companies (IOCs). These are private corporations based in Western countries, listed publicly on stock exchanges. Among the largest IOCs are Chevron, ExxonMobil, and BP, the same companies listed on the Carbon Disclosure Project report. While these IOCs are high carbon dioxide producers, they only produce around 10% of the world’s oil. The other 90% is produced by national oil companies (NOCs). NOCs are state-owned oil companies – such as Saudi Aramco, National Iranian Oil, and China National Petroleum Corporation – and these companies are not backed by private investors for the most part. Thus, divestment movements have little to no effect in pressuring those companies to reduce their emissions outputs as they are not financially backed by public shareholders.

The issue with the divestment movement in this case is that it is potentially ineffective in actually reducing the global demand for fossil fuels. If we reduce the power of IOC’s, which are generally more progressive towards investing in clean energy solutions, and increase the market power of NOC’s, it is very likely CO² emissions could actually rise in the future. Transferring the supply and power of fossil fuels to companies that have no incentives to reduce their carbon emissions could actually hurt our chances to achieve the goals of the Paris climate agreement.

Yet, this argument wholly underestimates the power and influence of IOCs and Western fossil fuel companies in general. Arguably, the divestment movement cannot solve issues of climate change on its own. The only way to actually reduce demand for fossil fuels globally is to create regulatory environmental policies such as eliminating fossil fuel subsidies and implementing a carbon tax. But to deny the notion that IOCs, some of the most powerful corporations on earth, will ultimately have no power in helping slow down climate change is ludicrous. IOCs serve their shareholders, and if powerful investment firms, universities, and other institutions divest they will have reason to change their business models to reduce their carbon dioxide output and invest in sustainable energy technology.

Pro-divestment activists do not believe their campaigns will end climate change or even affect company share price. Effective divestment campaigns stigmatize the things they fight against. Divestment raises awareness of climate change and demonstrates the urgency of the issue. By divestment, influential investment funds and institutions contribute significantly to raising this awareness on a broader scale, with the hope an increased awareness will bring about effective climate policy. It is unhelpful for investment firms to continue fossil fuel investments because of the mistaken proposition that divestment is a useless tool. On the contrary divestment is a powerful means to combat climate change.

Re-Invest in Clean Energy

Divestment in itself is not a potent enough tool to stop the effects of climate change. Although an effective start, the method does not have the ability to reduce carbon dioxide emissions to a reasonable level that aligns with the goals in the Paris climate agreement. It is also not likely to force those divested fossil fuel companies to upend their business models and become green energy companies. With the urgency of the climate crisis, those dollars divested from fossil fuels must be reinvested into companies working towards clean energy solutions. Investment in green energy legitimizes those businesses and makes the industry viable and profitable in the long run. 

As the fossil fuel industry becomes obsolete, the renewable energy industry will necessarily grow. This makes renewable energy, from a financial standpoint, a prime investment opportunity. A 2020 study done by the Imperial College of London found renewable energy investments deliver significantly better returns than fossil fuels in the U.S., U.K., and Europe. The study found that renewable energy investments in Germany and France yielded returns of 178.2% compared to -20.7% for fossil fuels over a five-year period. In the U.K. over the same period, renewable energy investments yielded 75.4% compared to 8.8% for fossil fuels, and in the U.S., renewable energy yielded 200.3% compared to 97.2% for fossil fuels. The study also found renewable energy stocks to be less volatile compared to fossil fuels. 

The belief that fossil fuels are more profitable than green energy is no longer true. From a financial perspective, there is no reason for investment firms to choose to invest in fossil fuels over green energy. Clearly, the narrative about green energy as an investment opportunity has changed.  Eliminating fossil fuels as investment choices requires alternative opportunities. Hence, the necessity for green energy investment. 

The mobilization of capital for clean-energy companies is vital if there is to be a real chance at a clean-energy solution to climate change. Groups like the Institutional Investors Group on Climate Change (IIGCC) are more essential in this movement to shift capital towards clean energy initiatives. The IIGCC provides a forum for some of the largest pension funds and asset managers to collaborate on climate change initiatives such as public policies, investment strategies, and corporate behaviors that address the long-term risks of climate change and activities to speed up the shift to a low-carbon economy. Members of the IIGCC represents around €33 trillion in assets under management (iigcc.org). 

Similarly, Climate Action 100+ is a five-year initiative led by investors to drive clean energy transition and achieve the goals of the Paris climate agreement. Companies that sign onto the initiative pledge to create strong governance frameworks that articulate board accountability and oversight of climate change risks and opportunities. These companies pledge to take action to reduce greenhouse gas emissions consistent with the goals of the Paris climate agreement. Lastly Climate Action 100+ members provide enhanced corporate disclosure that enable investors to assess the robustness of their business plans against a range of climate change scenarios. In all Climate Action 100+ is backed by more than 360 investors with more than $34 trillion in assets under management (climateaction100.org). 

The Case for Divestment

The moral case for divestment from fossil fuels may be summarized as follows:

1a. Activities of fossil fuel companies cause climate change.

1b. Climate change is a destructive force that results in harm to the earth and her inhabitants.

1c. Institutions should not invest in entities/activities that cause destructive forces.

1d. Institutions should not invest in fossil fuel companies.

Climate change threatens to displace 200 million people due to shoreline erosion, flooding, and agriculture disruption. The threats of extended droughts and volatile precipitation patterns will destroy vital food supply chains and cause immense famines in some of the poorest parts of the world. The drastic effects of climate change are devastating and should be prevented.

Institutions, as moral agents, have a moral obligation to not cause or contribute to harming others. Therefore, institutions have a moral obligation to not invest in practices destructive to our climate. 

Undeniably, since the industrial revolution, fossil fuels have benefitted the world in terms of economic and human development. For instance, China has lifted hundreds of millions of people out of poverty, mostly through industrialization of the country fueled by the burning of coal. It is unreasonable to suppose renewable energy sources could have had the same effects as coal, especially to a developing nation such as China in the 1980s and 1990s. 

However, applying a consequentialist analysis that accounts for the long term, the case for divestment is clear. The short run benefits of burning fossil are outweighed by the long run costs. It is unethical to privilege the well-being of present generations over the well-being of future ones. Divestment has good consequences that outweigh the bad. A key benefit is the delegitimization and stigmatization of fossil fuels. Divestment as a financial disincentive may well be ineffective in reducing emissions outputs, but the effects of stigmatization of fossil fuels should not be underestimated. If an overwhelming number of citizens and corporations stand against the use of fossil fuels, reluctant politicians will be forced to pay attention and enact policies that reduce carbon emissions.

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