A few weeks ago, Dutch pension giant ABP decided to divest from fossil fuels. But is this actually going to help the climate? With Arjen van der Heide and Philipp Golka (both Leiden University), I address this question in our new article for S&D. Here’s the English summary:
The positive view on divestment is that it lowers stock prices and may reduce fossil extraction by reducing available capital and public shaming. It is also expected to free up capital for green investments. Moreover, divestment may reduce pension exposure to stranded assets. It may trigger other funds to divest, too.
But, so we argue, divestment is a double-edged sword: the threat of investors “exiting” may actually strengthen their positions in engagement with polluters. Yet, as as more sustainable investors divest, engagement opportunities decrease and less concerned investors may take over. Such a shift in fossil fuel firms’ shareholder basis towards less sustainable investors is problematic: financialization scholarship has shown investors’ large success in pressuring firms to maximize shareholder value. This may result in more fossil fuel extraction.
This is an actual threat, because many fossil fuel producers are owned by governments that are highly dependent on fossil fuel revenues. And big parts of fossil fuel extraction are not financed via equities, but via bank lending that shows hardly any signs of slowing down. This means that not only may the scope of divestment be too small to deliver meaningful change—by closing the door on engagement, it may also increase the voice of fossil-hungry investors who may pressure for more fossil fuel extraction.
While its effectiveness is up for debate, divestment decisions are hailed as successes for the climate movement and often garner significant media attention. But this may obfuscate our view of the problems of current climate finance, and how it can be improved. Even as ABP is a front-runner in sustainability, only a fraction of its assets are currently invested into green projects. Globally, the situation is most likely even worse, yet there is hardly any transparency regarding investors’ carbon impact.
The recent drop in (EU) green assets after the introduction of the EU Sustainable Finance Disclosure Regulation has shown that investors still have too much labeling flexibility. We therefore need portfolio-level transparency on scope 1-3 emissions as a first step to make finance 1.5°-compliant. Green finance has long been a tool for policymakers hoping to “leverage” public resources. But financial markets alone won’t transform our economies. Besides much stronger regulation, we need much more direct public investment into the green transition.
Read more here.