THE FINANCIAL CASE
“While the economy in which we invest will necessarily be entangled with fossil fuels for decades to come, removing public equity exposure to oil and gas companies is a meaningful step toward the university’s long-term goals,” endowment chief Andy Golden in a statement addressing Princeton’s divestment decision on September 29, 2022.
"In 2018, New York City Employees’ Retirement System (NYCERS), Board of Education Retirement System (BERS), and the Teachers’ Retirement System (TRS) announced their intention to divest from fossil fuel reserve owners and retained independent investment consultants who conducted investment analyses showing the risks posed by fossil fuel companies. Together, NYCERS, TRS, and BERS have completed the divestment of nearly $4 billion in public securities, one of the largest such actions in the world. As part of the Net Zero Implementation Plan, NYCERS and TRS are asking their private markets managers to exclude prospective upstream fossil fuel investments." New York City CFO Brad Lander in April, 2023.
On March 21st, 2022 Princeton revealed that it has $1.7 billion invested in fossil fuels which represented 4.5% of the endowment. On September 29th, 2022 the university announced that it was divesting from publicly held fossil fuel stocks, leaving $700 million still invested in private equity fossil fuel companies.
The fossil fuel industry has seriously underperformed the market for a decade.
Since 2011, the fossil fuel industry’s profits have shrunk and revenues have tumbled. Once a major driver of equity markets, oil companies comprised seven of the ten largest companies of the S&P 500 in the early 1980s. ExxonMobil was the last oil company to leave the top ten in 2019. Likewise, fossil fuels made up 28% of the value of the S&P 500 in 1980 and only 2.7% of the index at the end of 2021. The most recent upswing in oil prices was propelled by Russia’s invasion of Ukraine. The high prices brought banner profits for private companies and sustained Russia’s war effort in 2022. But by the second week of February 2023, oil and gas stocks fell to the bottom once again.
Volatile oil prices lead to stranded assets.
The industry’s fall from grace was largely caused by a price drop due to its own major innovation: hydraulic fracturing (fracking). Fracking increased the supply of cheap oil and gas, dropped prices and revenues, and challenged the production regime of OPEC+ oil producers. In response to fallen prices, the industry cancelled major new oilfield developments and wrote off massive amounts of oil reserves as no longer economic. A significant number of companies filed for bankruptcy. The lack of coordination between frackers and OPEC+ regarding how much oil to drill portends significant volatility in oil prices for years to come and increases the risk of stranding more of the industry’s assets.
High oil and gas prices harm developing economies and boost competing technologies.
Oil and gas prices would need to rise higher than the levels reached in 2021 and stay high for years to make up for the industry’s decade of underperformance. This would wreak havoc on the economic development plans of developing economies, inflicting inflation, trade deficits, currency imbalances, fiscal stress, and anemic economic growth. High oil and gas prices would also confer a competitive advantage on key competitors to fossil fuels, renewable energy and electric vehicles.
The risks facing the fossil fuel industry are daunting.
In addition to price risk, the oil industry faces transition risk from emerging and future policies limiting greenhouse gas emissions; physical risk to its facilities from sea level rise and extreme weather; and legal risk from a variety of lawsuits, including suits seeking compensation for misstating the value oil reserves to investors and for the costs borne by municipalities to adapt to climate change. Oil and gas companies have loaded up on unsustainable debt to continue paying dividends to investors, and face mounting cleanup costs for hundreds of thousands of active and inactive wells. Finally, insurance companies increasingly refuse to insure coal mining, coal fired power plants, and oil and gas production.
The fossil fuel industry is facing serious and intensifying market competition for the first time.
Renewable energy today costs less than fossil energy sources in many markets even without subsidies, and this advantage persists for many projects that incorporate battery storage. Renewable energy is even displacing natural gas-fired electricity from the grid. In the auto sector, the lion’s share of investment is going toward electric vehicles. Even sectors considered difficult to abate like aviation, steel, and shipping are seeing increased investment in developing alternative technologies.
Divestment has become the prudent choice for investors.
Sophisticated investors are now treating oil and gas companies as high-risk investments with no prospects for long-term growth, volatile revenues, shrunken profits, and a negative outlook. Thousands of investors controlling trillions of dollars have chosen divestment as the prudent financial choice. A study by a widely respected investor demonstrates that an institutional fund that divested from any particular sector would have only seen a negligible impact on investment returns over the long-term, but that the threat posed to fossil fuels by decarbonization merits divestment.
Significant financial institutions find few costs to divestment.
In considering divestment, New York City pension funds asked investment advisers for a plan to meet their investment targets with a fossil fuel-free portfolio. The advisers, including heavyweight asset manager BlackRock, identified few obstacles to doing so in a series of reports that were released publicly. The reports outline multiple divestment approaches and address conversion fees, which are expected to be low given the growing number of fossil-free investment products on the market.
IEEFA Energy Finance Conference October 2022
Private Equity’s Fossil Fuel Problem
The climate finance conundrum: Balancing net-zero ambitions and energy security
Green vs. blue hydrogen: Market, tech, and cost realities
Carbon Capture and Sequestration (CCS): History and Challenges Across the Energy Industry
What Happens When Banks Ditch Coal: The Impact Is 'More Than Anyone Thought' Harvard Business School April 2023
Voice Through Divestment European Corporate Governance Institute April 2023
New York City pensions to divest future private equity from fossil fuels IEEFA, April 2023
Princeton’s Endowment Investments Fall 1.5 Percent As U.S. Market Falters Princeton Alumni Weekly, October 2022
Science Based Targets -The Science Based Targets initiative (SBTi) drives ambitious climate action in the private sector by enabling companies to set science-based emissions reduction targets.
Partnership for Carbon Accounting Financials - An industry-led partnership to facilitate transparency and accountability of the financial industry to the Paris Agreement
Influence Map - An independent think tank producing data-driven analysis on how business and finance are impacting the climate crisis
"A common argument against divestment is that it jettisons voting power and that it has a small effect on stock prices. We argue that divestment is a form of voice that changes social preferences. We show that the Go Fossil Free divestment movement has had a disproportionate impact on share prices by changing the economic narrative. By stigmatising target companies, it has increased stranded asset risk. Divestment pledges that went viral have depressed share prices of all high carbon emitters, including those with no significant divestment. Peak virality coincides with an increase in the carbon premium and precedes netzero commitments from countries, regions, cities, and business. By altering the social and regulatory environment, divestment induces risk averse investors to decarbonise their portfolios, further reinforcing the narrative."