Fossil-free divestment starting to bite

Blair Palese, 350.org

A recent article in the Australian Financial Review suggested that the fossil fuel divestment message is falling on deaf ears in Australia, the backyard of the coal industry, despite significant wins internationally.

A survey, commissioned by the Minerals Council of Australia, the peak advocacy body representing mining companies such as BHP, Rio Tinto and Whitehaven Coal, showed that after only one year of campaigning by 350.org and other organisations in Australia, 33 per cent of Australians were aware of the fossil fuel divestment movement and 21 per cent are considering divestment.

The report authors conclude from these statistics that “coal’s investment profile is being shaped exclusively by its prevailing market conditions – an unprecedented drop in price internationally – rather than the challenge to its standing by environmentalists”.

In other words, investors are choosing to dump coal investments because of concerns regarding its viability as an investment, rather than because activists ask them to.

First, these statistics show fairly impressive gains for a divestment campaign that has only been in operation for 12 months in a country where significant resistance is to be expected.

Second, aside from being an attempt at an industry own-goal, this analysis shows a complete lack of understanding of how divestment campaigns work.

According to a study on the fossil fuel divestment movement produced by Oxford University’s Smith School of Enterprise and the Environment, the key mechanism by which divestment campaigns work is by attaching a social stigma to a particular industry or body. The resulting stigma will result in restrictive legislation and increased reputational risk for investors. The impact of the stigmatisation process on the industry will far outweigh any direct impact on equity or debt that the movement may trigger.

Although a small number of investors may base their decisions around ethical or moral values (usually institutional investors such as churches, universities and funds with an ethical investment tilt), the vast majority will make a rational decision based on the risk versus potential returns offered. Reputational risks play an increasingly important role in this risk assessment. The divestment movement drives up the reputational risks through industry stigmatisation, forcing investors to re-evaluate the risk to return ratio.

In the case of Australian coal, the drive to increase risk has been complemented by low coal prices and the industry’s own structural decline, the result being a high risk: low return ratio that investors are becoming increasingly keen to avoid.

One key example in Australia is the Galilee Basin mega-mine complex, which incorporates nine proposed new coal mines, a 500-kilometre rail link and the controversial Abbot Point port expansion, which threatens our Great Barrier Reef.

When Pru Bennett, Asia Pacific director of corporate governance and responsible investment at BlackRock Inc. – the world’s largest fund manager – visited Australia, she warned against investing in projects that threaten the reef, saying the reputational risks associated with the environmental destruction were simply not worth the potential return on investment.

This thinking was recently echoed by HSBC and Deutsche Bank, which, last week, issued statements ruling out investment in the Abbot Point coal port, following in the steps of Lend Lease and Anglo American, which also withdrew from the controversial project earlier this year. With each of these announcements, the stigma surrounding Abbot Point grows and any new potential investor faces an increased reputational risk.

The Galilee projects, which would double Australia’s current exports of coal, relies on demand from the Indian and Chinese markets. However, significant doubts have surfaced regarding the continuation of China’s demand and India’s ability to afford the coal at the prices needed to make these, and other new Australian coal projects, economically viable.

The terms associated with take or pay freight contracts (locking in payment for freight shipping infrastructure regardless of whether its in use or not) mean that producers may be forced to accept lower prices in order to shift their stock, meaning that potential investors are seeing the prospect of high risks for below profit returns.

The divestment movement in Australia has added an additional dimension to its campaign by empowering consumers to move their money to fossil free products, pressuring their banks and superannuation funds to move away from coal and gas projects for fear of losing customers. The Australian banks divestment campaign, initiated by Market Forces and 350.org, has, since October 2013, seen over $200 million moved out of the big four banks to banks that do not invest in fossil fuels.

A recent survey conducted by Lonergan shows that 64 per cent of consumers would choose a bank or superannuation fund that does not invest in fossil fuels over one that does.

In the last three months, fund managers, such as Hunter Hall, UniSuper and most recently AMP, have seen the consumer appetite for fossil fuel free investments and have launched products that screen out fossil fuel exposed assets.

Similarly, the market for “green bonds”, which prioritises lending to addressing environmental issues such as renewable energy and energy efficiency alternatives, is booming with Standard and Poor’s estimating the market is set to reach $20 billion in 2014, doubling in size since last year.

This reflects the missive from the latest IPCC reports that investment in low-carbon electricity has to grow by $147 billion a year over the coming decades if we are to have a chance of staying below the internationally agreed two degree temperature rise of climate change.

The final and most obvious proof that the divestment campaign is winning is the reaction of the coal industry itself. If the movement is having as little effect as the Minerals Council of Australia’s study suggests, then why are they bringing in the public relations big guns and spending over $100 million on a campaign to defend its own viability?

If the divestment message is really falling on deaf ears, why is the MCA commissioning market research to reassure itself it has nothing to worry about?

A wise man once said: “First they ignore you, then they laugh at you and then they fight you, and then you win.”

If those words ring true, it looks like the Australian divestment campaign is making some progress.

Blair Palese is the chief executive of 350.org Australia.

This article was first published in The Fifth Estate.