By Carolina Lopez, Sara Hilliard, Yesenia Magaña-Rocha, and Araceli Cuentas
“Divestment is the opposite of an investment—it simply means getting rid of stocks, bonds, or investment funds that are unethical or morally ambiguous’”
The Science and Social Impact of Climate Change
The U.S. Environmental Protection Agency (EPA) reports that “Earth’s average temperature has risen by 1.4°F over the past century and is projected to rise another 11.5°F over the next hundred years.” Such a rise in temperature would surpass the level of warming even the most conservative scientists have deemed as safe to continue to support life as we know it. The costs of global warming, including social, environmental and economical, are already high.
The effects of too much atmospheric carbon dioxide (CO2) and other chemical particulates in the air are countless: ocean acidification, melting arctic ice, water shortages and droughts, floods, loss of biodiversity, coastline erosion and increases in the occurrence and intensity of heat waves, and the disappearance of entire countries, such as the Maldives, due to sea level rise.
Economic Impacts of Fossil Fuels
Extraction of the major fossil fuels generated approximately $340 billion in revenues in 2011. However, oil imports alone cost the U.S. economy approximately $330 billion per year. Fossil fuels’ main asset is the energy provided. However, despite the current importance of fossil fuels to the national and global economy, many long-term risks are associated with their continued use. Natural disasters and severe weather conditions resulted in $160 billion in losses for 2012. Research shows that such disasters exemplify the type of events we can expect to face more often in the future in a world of dramatic climatic change.
Other impacts of fossil fuels are the toxic, non-climate-related emissions, including noxious forms of particulate matter (PM) and sulfur dioxide (SO2), as well as direct contamination of groundwater and land. Harvard University’s Center for Health and the Global Environment estimates such impacts cost $295 billion per year due to coal extraction and use in the United States. The added costs associated with petroleum only exacerbate such negative impacts. For example, a recent study at California State University Fullerton shows that Southern California, alone, loses $28 billion per year due to air pollution in the area.
A divestment from fossil fuels over the next few decades would have a tremendously positive effect on human health and our ecosystem services, as well as help dramatically slow climate change. As governments across the world begin to recognize externalities as part of the cost of these fuels, and as substitute technologies become more readily available and easily affordable, shifts in energy sources should occur.
Negative Impact of Investing in Fossil Fuels
To have a 50% chance of maintaining a climate in which life as we know it has evolved, scientists agree that temperatures must not rise above 2 degrees Celsius. In 2012, the Carbon Tracker Initiative, a nonpartisan think tank based in London, illustrated that the amount of carbon the 200 leading fossil fuel companies hold in their proven reserves is at five times the limit scientists have determined is safe to burn in order to prevent 2 degrees of warming. That is, to avoid the 2 degree mark and avert runaway climate change, human beings can burn only 565 gigatons of carbon, while current reserves are at roughly 2,860 gigatons.
A Carbon Tracker Initiative report, Unburnable Carbon 2013: Wasted Capital and Stranded Assets, estimates that if 565 gigatons of carbon burned is the acknowledged safe limit, then “65–80% of listed companies’ current reserves cannot be burned unmitigated.” The listed fossil fuel companies do not intend to meet this mark, but rather continue extracting and burning reserves as usual, as made apparent by their most recent annual capital expenditure figures. In 2012 alone, oil, gas and coal companies spent $674 billion exploring and developing new reserves. Holding investments in companies that actively trade commodities locked into the ground by law drives the stock values above their true valuation. This is the “carbon bubble.”
The International Energy Agency (IEA), in its 2013 special report entitled Redrawing the Energy Climate Map, details that when invested in developments taking place after 2035, legislation will block planned oil and gas fields explored after 2035, leaving billions of dollars spent on exploration as wasted capital. In its 2012 World Outlook, the IEA found that in order to reach the 2 degree Celsius mark, only one-third of all fossil fuel reserves can burn.
According to research by HSBC Global, if any policy actions are taken regarding climate change, the returns on fossil fuel investments might decrease while risks increase, leading up to a 40%–60% loss of current market capitalization. Many institutions warn against trading carbon futures because they are not likely to remain highly profitable over time given the tendency of markets to price such assets far beyond their value to society and the real economy.
In 2009, the UN Environmental Program Finance Initiative (UNEPFI) released a study that argued “it is the legal responsibility of fiduciaries to integrate environmental, social and governance criteria into investment decisions.” It becomes evident that substantial financial risk exists in holding investments in an industry where the business model is based entirely on assets rendered unrecoverable. The Carbon Tracker Initiative advises the following to investors: “Reduce holdings in carbon-intensive companies and use re-balanced, carbon-adjusted indices as performance benchmarks; redistribute funds to alternative opportunities aligned with climate stability.”
Sustainable asset reallocation in this case involves moving investments away from the top 200 fossil fuel companies to fossil-free portfolios. With asset reallocation, endowments would see either no change in returns or an increase in returns. A study from Aperio Group, a financial consulting agency, found that with divestment comes minimal risk and no appreciable effect on returns when comparing the Russell 3000 index fund and the same fund excluding the top 200 fossil fuel companies.
One study released by Impax Asset Management used the MSCI World Index Fund and created four different portfolios: the Fossil Free Portfolio, the Fossil Free Plus Alternative Energy (Passive) Portfolio, the Fossil Free Plus Alternative Energy (Active) Portfolio and the Fossil Free Plus Environmental Opportunities (Active) Portfolio. The study found that having implemented any one of the aforementioned portfolios would have increased returns with minimum tracking error. The returns on the annualized portfolios were 1.8% for the normal MSCI World Fund compared to 2.3%, 1.9%, 2.2% and 2.3%, respectively, for the four fossil-free portfolios. Furthermore, Bloomberg New Energy predicts that annual investment across all renewable energy generation will increase threefold over the next 15 years to $630 billion.
Governments are beginning to move forward on climate change initiatives. For instance, Ireland, Australia and British Columbia have implemented carbon taxes, and rapidly developing nations such as China are in the process of developing appropriate market-based solutions to mitigate emissions. Recent regulatory proposals from the Obama administration have developed strategic plans to place additional regulations on the industry, which will further reduce the profitability of fossil fuel investments and increase returns on alternative portfolios.
Proposed California Legislation Coming in January 2015
On Dec. 15, 2014, Senate President Pro Tem Kevin de León announced he would propose legislation in January 2015 requiring California’s massive pension funds—the California Public Employees Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS)—to divest their holdings in coal: “Climate change is the top priority of the California state senate. Coal is a dirty fossil fuel…And I think our values should shift in California…We’re working out all the [divestment] details. We’re talking about a way that’s smart and intelligent, not a way that hurts investment strategies.” Currently, CalSTRS has assets of about $187 billion and CalPERS’ $291.8 billion portfolio includes holdings in approximately 30 coal-producing companies with a combined value of $167 million.
Current and projected climate conditions made worse by extraction and use of fossil fuels require bold action, and many organizations and college campuses are taking action. You can support the movement for a “Fossil Free Fresno State” by signing an online petition at http:// campaigns.gofossilfree.org/petitions/ fossil-free-fresno-state.
Carolina Lopez (Business/Psychology; firstname.lastname@example.org), Sara Hilliard (Psychology; email@example.com. edu), Yesenia Magaña-Rocha (Business Administration-Entrepreneurship; yesy_m@mail. fresnostate.edu) and Araceli Cuentas (Sociology; firstname.lastname@example.org) are students at Fresno State. *An earlier version of this article was prepared by Jeremy Ritter, Michelle Rodriguez, Ripon Mann and Amanda Marks.