Environmental Finance Research Papers - Academia.edu (original) (raw)

If countries around the world implemented climate policies consistent with the science of limiting global average surface temperature warming to 2 ̊C, the current business models of conventional energy companies would face deep structural changes. In particular, such policies would render large volumes of known coal, oil and gas reserves ‘unburnable’, lest the inevitable greenhouse gas (ghg) emissions they produced when burned would push warming above the 2 ̊ ceiling target. while such climate policy has been slow to materialize, grassroot campaigners have started asking institutions and individuals to divest their financial holdings in fossil fuel companies. Though many have dismissed the strategy, since 2012 investors around the globe managing nearly $50 billion (US) in combined assets have committed to divest or are starting to review their options for removing their holdings in fossil fuel companies. If divestment campaigns were successful in moving large volumes of holdings out of fossil fuel companies, would climate change be effec- tively addressed?
This paper first evaluates three core assumptions of fossil fuel divestment campaigns: firstly, that divestment can protect investors from ‘unburnable carbon risk’ or a ‘carbon bubble’ whereby stocks lose value due to fossil fuel reserves becoming too expensive to extract because of climate policies or market conditions. Secondly, that divesting from publicly listed energy companies will keep fossil fuels in the ground. And thirdly that ‘green’ energy stocks can be substituted for fossil fuel companies in the portfolios of institutional investors. These assumptions are shown to be unfounded, or effects shown to be small.
The University of british Columbia’s (UbC) endowment is evaluated in the context of the ongo- ing campus divestment campaign. we estimate the greenhouse gas emissions exposure – or “carbon shadow” of UbC’s endowment returns and evaluate several paths for reducing that expo- sure. Overall, we find that substituting renewable energy companies for all oil and gas company equities in UbC’s endowment (which represent approximately 10 percent of the portfolio) would likely reduce its ghg exposure or “carbon shadow” by around 3 per cent. 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 and that renewable energy companies are generally viewed as low or zero carbon investment opportunities.
Though divestment will likely have limited quantitative success in directly reducing ghg emis- sions or a fund’s immediate exposure to unburnable carbon, it may gain momentum as a symbolic gesture that could change social expectations for investment practices. Divestment would be effective when funds are reinvested away from fossil fuel and its associated infrastructure into investments that actively seek to create a low carbon economy. without a concerted effort, we suggest that the most likely recipient of divested funds will be banks and financial institutions as they output a low amount of carbon per dollar of investor earnings. In this case, at least a portion of the divested funds would be reinvested in projects that perpetuate fossil fuel use, through less direct means.
As more institutions consider and commit to divestment, there is a window for effective policy to create a safe home for investors who are seeking such funds. with this potential shift in mind, we offer the following recommendations to bC provincial & municipal policy makers, institutions considering divestment, and divestment campaigns themselves:

Provincial & municipal policy makers
1. Establish a public finance entity: Consider creating an ‘energy transition bank’, similar to the Clean Energy finance and Investment Authority in Connecticut or existing programs in Massachusetts and Ontario. Such a bank could offer bonds and other financial tools to projects that seek to create a low carbon economy. This institution could also support the development of bC’s green tech sector.
2. Review tax incentives: A low-carbon-transition investment tax credit could attract private capital to domestic investments in a low carbon economy along the lines of energy, transportation and housing, similar to the 1996 Small business Venture Capital Act, which provides 30 per cent cash-back refundable tax credits when investing in a qualifying value- added sector of the bC economy.
3. Assess risk: Review bC’s exposure to unburnable carbon risk. Support public fund managers in their potential decisions to invest in a low carbon transition. This may include revised language on risk consideration.
Universities and other institutions
1. Begin an open conversation: Commitments to divestment or action on carbon risk can be
issued along a timeline set by the institution as part of a thorough review.
2. Review: Review sustainability goals and harmonize with other objectives. Revise the mandate of fund managers on how they screen investments to meet environmental, social and governance targets in order to report a portfolio’s carbon intensity and exposure to unburnable carbon. Re-evaluating benchmarks, such as those analyzed by leading financial studies on potential carbon bubble risks, can place current returns in a new context. Consider establishing positions on green funds or bonds.
3. Research: Engage and leverage on-campus expertise, such as that in business schools,
to assess and research strategies for dealing with unburnable carbon risk. Issuing a detailed accounting of the specific services and initiatives supported by investment revenues could help to place earnings from fossil energy investments in context.
Divestment campaigns
1. Propose a parallel endowment: Consider working with the university to launch a separate low-carbon or fossil free endowment fund, creating the opportunity for comparing returns. Students could engage in alternative portfolio construction. Returns would be favorable in energy bear markets.
2. Contribute: launch crowdfunding campaigns that allows students, faculty and/or staff to donate toward a fossil-free endowment to demonstrate support. These funds could be withheld from the target university or institution until further action had been taken.
3. Plan: Advance dialogue by developing a tangible timeline of divestment components, such as how to proceed after a statement that discloses oil, gas and coal investments would be received. Explore how investment returns fit into broader campus sustainability goals. Don’t shy away from emphasizing that at the current moment, divestment would primarily be a symbolic action.