A new report underscores the inadequacy of relying on fossil fuel divestment campaigns for meaningful decreases in our carbon emissions (a topic about which I have written previously).

The report from Bloomberg New Energy Finance (BNEF) (“Fossil fuel divestment: a $5 trillion challenge”), underscores two critical questions:

  1. How do large-scale investors see their positions in fossil fuel companies, and
  2. Under what conditions would those investors begin unwinding those positions in favor of investments in “greener” assets.

Investors of all stripes–from the largest institutional asset managers to your union’s pension fund to your local investment club– love fossil fuel companies.

As Bullard writes, investments in oil, natural gas, and coal companies all satisfy four investing requirements: scale, liquidity, growth, and yield. Worse still for fans of divestment, fossil fuel companies satisfy these requirements on a level that dwarfs the clean energy industry. At present, fossil fuel companies hold $4.9 trillion in total assets, while clean energy companies (broadly defined) hold just $2 trillion.

The fact is fossil fuel companies satisfy a robust and growing worldwide demand for the raw materials that power the rest of the global economy.

Unfortunately they do so in a way that carries a lot of environmental consequences; hence a growing campaign to put those companies out of business.

The (Lack of a) Business Case for Divesting

For divestment to succeed, investors need to believe that all of that money can, on a dollar-for-dollar basis, be invested elsewhere with equivalent returns.

BNEF says that is not likely to happen.

Despite the great strides clean energy has made in recent decades, it is still in its infancy, and the volatility of its constituent firms is too high to attract massive investment. Growth in green energy companies will likely continue to be slow-and-steady: equity companies will see their valuations rise as more generation capacity is rolled out, and the green bond market will expand incrementally as companies gain experience with capital-intensive renewable projects, to give two examples.

Policy Changes Could Speed the Case for Divesting

The report does offer some policy changes that could hasten the transition.

Perhaps most importantly, the federal government could reduce some of the attendant volatility in clean energy investment by creating greater clarity around the future regulatory environment. The new EPA rules on power plants are a start, but even they are likely not stringent enough to push the U.S. firmly onto a low-carbon pathway.  

Federal policy could also deploy tax policy more effectively. Many states have had success in improving clean energy technology with a combination of renewable energy standards and tax credits. Half-hearted federal attempts have met with limited success, but a stronger push could achieve some of the results we have seen in the states.

Until nation political will can catch up to the burgeoning ground-up movement, savvy investors are going to continue pouring a lot of money into the fossil fuel industry.