The divestment argument

This content forms part of the DivestInvest guide.

2°C is the upper limit — But we have three times as much in reserves

In 2012, the International Energy Agency (IEA) stated: “No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2°C goal.”

In 2015, 197 countries agreed at the UN meeting on climate change (COP21) to limit global warming to between 1.5 and 2°C above pre-industrial levels.

To the casual observer, the Paris meeting went according to plan, but this remarkable outcome was never guaranteed. To the contrary – it was an
extraordinary, hard-fought and unprecedented act of global consensus, exceeding all expectations – even those of the most optimistic and ambitious.

How the challenge of climate change has achieved consensus among 197 countries – underpinned by serious accountability measures – says more about the singular importance of this issue than any other argument. Cooperation is now unilateral.

The Paris Agreement includes country targets that “ratchet” over time, with five-year reviews and pathways to proper transparency and accounting. To limit warming to the above goals, in aggregate, countries must achieve zero net emissions before 2050, which means no more CO2 can enter the atmosphere than what we are able to remove or sequester in soils, plants and oceans.

The IEA assessment includes oil, gas and coal combined. However, when considering coal on its own, the figure drops from one-third to less than one-fifth globally. For Australian coal, the Climate Council estimates less than 10 per cent of known reserves can ever be exploited in a 1.5°C to 2°C scenario.

What are the implications of the Paris agreement for investors?

The term “proven” fossil fuel reserves refers to the exploitable coal, oil and gas reserves held on the balance sheets of “fossil fuel companies” (described in Appendix 3) and governments in some cases. The expected future earnings from these reserves are factored into the companies’ current stock prices and financial valuations. If governments limit global warming to between 1.5°C and 2°C through regulation, pricing and incentives, most of these fossil fuel reserves will never be exploited and company valuations will be unrealised. This is where the term “stranded assets” originates.

Stranded assets

In this context, “stranded assets are fossil fuel energy and generation resources which, at some time prior to the end of their economic life, are no longer able to earn sufficient financial return because of regulatory and pricing changes associated with the transition to a zero carbon economy.”

Divestment gathers speed

Another Rockefeller fund announces divestment
The Guardian, 23 March 2016

Rockefeller Family Fund, a charity set up in 1967 by descendants of John D. Rockefeller, said on Wednesday that it would divest from all fossil fuel
holdings “as quickly as possible”. The fund, which was founded by Martha, John, Laurance, Nelson and David Rockefeller, singled out ExxonMobil for
particular attention describing the world’s largest oil company as “morally reprehensible”.

The RFF acknowledged that the family has made a lot of money from oil, “but history moves on, as it must. Needless to say, the Rockefeller family has
had a long and profitable history investing in the oil industry, including ExxonMobil”, it said. “These are not decisions, therefore, that have been taken lightly or without much consideration of their import.”

RFF is not the first Rockefeller family organisation to vow to divest from fossil fuels.