Divesting won’t work to lower carbon footprint, but with changes it could: study

With a more wide-ranging approach, eschewing fossil fuel investments could help us transition to a low-carbon economy, say authors of UBC study 

Divesting large institutional investments from fossil fuels won’t do much to reduce the carbon footprints of universities, churches or foundations, but a more holistic approach could yield better results.

That’s the conclusion of researchers from the University of British Columbia who studied the goals and outcomes of the divestment movement.

Faculty at UBC are voting this week and next week on a proposal to divest the university’s $1.2 billion endowment fund from fossil fuel investments. If faculty members vote to divest, UBC’s board of governors would consider the issue.

Divestment campaigns have led to several universities and philanthropic investors, such as the Rockefeller Brothers Fund, committing to divest from fossil fuel investments.

The authors of the study, Justin Ritchie and Hadi Dowlatabadi, say that divestment is a significant political and social movement in pushing for the adoption of climate policies that would limit fossil fuel extraction and burning, thereby lowering greenhouse gas emissions that are contributing to global warming.

But divestment doesn’t deliver on its aims to keep fossil fuels in the ground or protect investors from the risk of a “carbon bubble” that could occur if climate policies or market conditions make fossil fuel extraction too expensive, according to the study.

“Divestment movements are socially significant but currently exert little influence on financing transition to sustainability,” said Dowlatabadi in a release.

“The current economy is heavily dependent on fossil energy, which is integrated into assets across multiple sectors including low carbon industries. This means that divestment may end up being ‘greenwash’ when money is taken away from fossil fuel companies and reinvested, for example, in banks, which typically fund such companies anyway. “

Studies have found that investing in a carbon-free portfolio returns similar financial returns as conventional investments.

But when Ritchie and Dowlatabadi modelled the effect of substituting fossil fuel investments with ones in renewable energy companies, they found it would result in a lower than expected reduction — just 3% — of the portfolio’s “carbon shadow.”

“While this effect is not negligible, this result is lower than expected given these company holdings represent the heaviest carbon emitters among the portfolio’s assets,” Ritchie and Dowlatabadi wrote.

If divestment grows in popularity, resulting in a lot more investment in renewable technologies, it could even cause a boom and bust cycle for renewables by suddenly inflating the stock prices of companies, the study’s authors warn.

Divestment would be more effective if the divested funds were redirected away from fossil fuels and their infrastructure towards low-carbon infrastructure, energy efficiency and the development of renewable energy resources.

Ritchie and Dowlatabadi are recommending that provincial and municipal governments create an “energy transition bank” to ease the transition of investors to the low-carbon economy and to support B.C.’s renewable energy companies. They also suggest an investment tax credit to attract more people to invest in renewables.

Institutions like universities should have clear timelines to divest and should have ways to measure the carbon intensity of portfolios.

The authors also suggest that divestment campaigns should think about launching a separate, parallel endowment that is fossil fuel free, and could launch crowdfunding campaigns to demonstrate support. They could also link investment returns to “broader campus sustainability goals.” 

"Don’t shy away from the symbolic elements of divestment," they advised.