How Effective is Divestment as a Tool for Change?
The direct impact of divestment is probably limited. The amount of money invested in fossil fuels by univestities and pension funds is not significant. However, in the case of lead investors divesting, even if the total amount of money is insignificant, this can cause shifts in market norms. This is especially a possibility for coal investments.
Indirect Impacts are far more significant and far reaching.
- Stigmatisation: divestment is a proven tool in changing public opinion and public discourse. The apartheid divestment campaign is well recognised in increasing visibility of the apartheid struggle and garnering support for the movement. Fossil Fuel divestment can have the same effect, particularly in raising awareness of the multi trillion dollar carbon bubble caused by the potential for stranded assets.
- Lobbying Power: By helping to expose the reckless and destructive actions of the fossil fuel industry, the divestment movement helps increase pressure on governments to introduce effective greenhouse gas legislation. It can also help to dissuade governments awarding new drilling contracts to companies and begin to consider leaving fossil fuels in the ground.
- Permanent Compression in Trading Multiples (share price to earnings ratio): If we compare the fossil fuel companies Rosneft and Exonn, Rosneft produces more barrels oil per day but due stigma of weaker corporate governance, investors calculate less probality of Rosneft converting oil reserves into positive cash flows, resulting in a lower share price. The divestment campaign can have a similar effect in increasing uncertainty around fossil fuel companies’ ability to exploit proven reserves, with the increasing public pressure for climate action and the threat of restrictive legislation.