Oil and Gas 101: THE DIVESTMENT CHALLENGE
What is the Fossil Fuel Divestment Movement?
The fossil fuel divestment movement is an attempt to convince groups such as wealthy individuals, universities and major pension funds to divest themselves of financial assets in companies involved in fossil fuel extraction. It is being promoted by some environmental NGOs as a means to combat climate change.
In Canada, 19 universities currently have a student-led divestment campaign. To date, only Concordia University has begun divestment of about $5 million from their portfolio.
Some universities will be voting on divestment motions in upcoming months, and others have already rejected the idea, citing the benefit to students and all Canadians created by the energy industry.
THE ECONOMIC IMPACT OF DIVESTMENT: UNIVERSITY OF CHICAGO STUDY
A study performed by Daniel Fischel (2015) of the University of Chicago Law School compared two hypothetical investment portfolios over a 50-year period: one that included energy-related stocks and one that did not.
The University of Chicago study found divested portfolios performed more poorly. Meanwhile, there was no evidence of financial impact on companies targeted by divestment.
RESPONDING TO DIVESTMENT PROPONENTS
When engaging divestment proponents, Suncor senior sustainability specialist, Peter MacConnachie, says it’s important to discuss both the economic and the motivational sides of the issue. “I often ask students, what are you trying to achieve? When they say ‘Stop climate change,’ – which, at the end of the day, means changing atmospheric CO2 levels – I point out that this approach, divestment, simply isn’t going to do it.”
Beyond the sheer size of fluidity of capital markets, making it unlikely for divestment proponents to achieve tangible bottom-line success, MacConnachie points out a number of factors divestment proponents typically overlook (see Four Reasons sidebar). These include the fact that 80 per cent of the world’s oil and gas reserves are controlled by state-owned enterprises with no publicly traded shares.
“Even if divestment proponents were somehow wildly successful, all that would happen is that all the OPEC nations would say, ‘Thanks,’ and take up more market share,” says MacConnachie. Oil production, consumption and the resultant GHG emissions would be unaffected.
MacConnachie, who works closely with Suncor’s Investor Relations team suggests divestment proponents would be better served directly engaging with oil companies to continually improve GHG performance, rather than effectively removing themselves from the conversation through divestment.
FOUR REASONS DIVESTMENT DOESN’T WORK:
Many companies in the oil and gas industry are driving innovation in the very areas highlighted by some divestment groups as the reason not to invest in them.
2. STATE OWNERSHIP:
Eighty per cent of the world’s oil supply is controlled by government-owned oil companies who don’t rely on publicly traded shares, and of then don’t face the same requirements for transparency and environmental performance that public corporations do.
3. GROWING DEMAND:
The international Energy Agency estimates that global energy demand will grow 32 per cent by 2040. Fossil fuels are expected to continue supplying the majority of the world’s energy needs.
4. COMBUSTION AND CONSUMPTION
Production accounts for only 20 to 30 per cent of the GHG emissions associated with fossil fuels. It’s the combustion of fossil fuels (through vehicles or production of goods and services) that creates 70 to 80 per cent of those emissions --- and those emissions are created through consumer demand. Divestment ignores this reality.