Divestment
What is it and why should I care?
A primary source of the fossil fuel industry’s great economic and political power comes from the benefit of governmental, institutional and private subsidies and investments, particularly from the financial sector. Institutions such as universities, pension funds, local authorities, and banks are investing in coal, gas, and/or oil companies [1] but also in other industries that are environmentally and socially unsustainable, such as the tobacco or the fast fashion industry [2]. However, issues like combating climate change and ensuring ethical, responsible and transparent operations are becoming ever more relevant for today’s society. In that regard, investments into fossil fuel companies are both financially and ethically unacceptable.
What is deemed ‘(un)sustainable’ and ‘(un)ethical’ can differ between individuals, and therefore, we need to clarify their definitions. We define ‘sustainable’ and ‘ethical’ finance as the transparent and accountable management of money that provides long-term benefits for society and the environment, and puts environmental, social and governance considerations as a priority in their financial agenda [3], [4]. For banks, this could mean the management of money that does not invest in projects supporting deforestation, child labour, fossil fuels, corruption and more.
Scientific research shows that in order to limit global warming to 1.5°C and prevent a climate catastrophe, the extraction of fossil fuels must be phased-out [5]. The “Unburnable Carbon” report claims that five times the current global carbon budget for fossil fuel reserves have been secured. This indicates that only 20% of the current fossil fuel reserves could be burned until 2050 [6]. Reaching only 20% will pose a significant challenge due to the close interconnection between the global economy and the fossil fuel sector.
Financially, unethical investments, especially in fossil fuel projects, have the potential to become worthless if international treaties on climate change are met. Such treaties include the global carbon budget set by The Intergovernmental Panel on Climate Change, in order to limit global warming to 1.5°C, as previously mentioned. The carbon budget is, in essence, the total amount of greenhouse gases that are permitted to be released into the atmosphere without surpassing the global target [5]. Since 80% of the fossil fuel reserves would become unusable with this global goal, the majority of the current investments into the fossil fuel industry would lose their financial value, and become “stranded assets”. The result is a so-called “carbon bubble”, which has the potential, due to the over-valuation of shares, to burst and create a devastating economic crisis [5].
As shown throughout periods of crises, when recessions are unplanned it jeopardies national economies on which millions of jobs are dependable [7]. It is, therefore, advisable that nations direct their investments towards more sustainable areas, which are shown to be less affected by natural disasters or punishments from these [8].