Individual and institutional investors around the world are increasingly pledging to divest themselves of fossil fuel companies, according to a new report from Washington, D.C.-based impact investing firm Arabella Advisors released on Monday.
Thus far, 688 institutions and 58,399 individuals across 76 countries representing US$5 trillion in assets have committed to some sort of divestment from fossil fuel firms, the report states, representing a doubling in the value of assets pledged in the past 15 months.
“Pension funds and insurance companies now represent the largest sectors committing to divestment, reflecting increased financial and fiduciary risks of holding fossil fuels in a world committed to stay below 2° Celsius warming,” the report states.
Initially, the movement to divest fossil fuel holdings began with universities, foundations and faith-based organizations, the report says, but as “large private and institutional asset holders recognize the reputational, financial, and legal risks of remaining invested in fossil fuels, divestment has spread to new sectors, including large insurers, pension funds, and banking institutions.”
Moreover, the report suggests that although the initial motivation for divestment was moral, followed by economic concerns, it’s now becoming a fiduciary issue. The prospect that a significant proportion of existing fossil fuel reserves will lose their value before the end of their economic life, “has brought divestment into discussions of fiduciary duty, potentially igniting a new wave of divestment,” the report says.
“The emerging view that fiduciary duty may actively compel divestment of fossil fuels has the potential to pressure financial managers and institutions that once argued their fiduciary roles acted as a barrier to consideration of climate risk,” the report says.
For example, the report quotes Toronto securities lawyer and scholar, Ed Waitzer, who says: “Trustees are increasingly expected to look beyond portfolio performance to the intentional management of systemic risks and rewards, reflecting the longer-term interests of their beneficiaries. Over time, this will likely become an enforceable obligation.”
The report also points to the signing of the Paris Climate Agreement in December 2015 as a key boost to the economic arguments underpinning divestment.
“While the election of Donald Trump, who campaigned on a pledge to withdraw from the Paris Agreement, calls into question the U.S.’s ongoing commitment to reduce emissions, it does not affect the broader structural changes moving the energy sector away from fossil fuels,” the report says.
“Any setback to official U.S. climate policy elevates the importance of divestment as an organizing and financial tool to speed the clean energy transition,” the report adds. “Absent effective federal policy to curb emissions, advocates and investors can use their assets and their voice to continue pushing the energy sector beyond fossil fuels.”
At the same time, clean energy investment is steadily growing, the report notes, reaching US$329 billion in 2015.
“Institutions and individuals that have pledged to both divest and invest in clean energy and climate solutions collectively hold US$1.3 trillion in assets,” the report says. “Several of these institutions are using their assets to help fill gaps in private sector finance, focusing on poor and vulnerable communities that risk being left behind in the energy transition.”
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