Sentiment is one of the most powerful forces in economics. When there is a rapid and significant shift in the way something is perceived, it can have material, and sometimes lasting, impacts.
A recent example is how the Argentinian peso lost almost a third of its value against in the dollar in just three days last month after the results of a presidential primary election. Nothing in the country actually changed in those 72 hours, but investors’ fears about the possible election of a populist leader into office saw heavy selling of Argentinian assets.
There is a similarly significant shift happening in the perception of the fossil fuels industry. This week 350.org, an international movement seeking to replace fossil fuels, noted that asset owners across the globe representing $11 trillion have committed to divesting from companies that operate in this space.
What is noteworthy is that this divestment movement only began in 2011. That is when students at Swarthmore College campus in Pennsylvania called on their university endowment to pull their investments from coal. In just eight years, 350.org reports, over 1 110 institutions with $11 trillion under management have decided to withdraw their money from investments in these companies.
The change in sentiment has become so significant that in July the secretary-general of the Organisation of the Petroleum Exporting Countries (Opec), Mohammed Barkindo, called climate change campaigners “perhaps the greatest threat to our industry going forward”.
He added that it was “beginning to … dictate policies and corporate decisions, including investment in the industry”.
Regardless of their view of the climate change movement, this is something that investors cannot ignore. That is because all shareholders will be affected by the impact the divestment campaign is having.
A study earlier this year from the University of Waterloo in Canada concluded that:
“Divestment announcements can have both short-term impacts (through one-day intervals that capture causal effect) as well as longer-term impacts (through 10-day intervals that capture longer-term perceptions). Longer-term impacts are more prevalent in later events, suggesting a shift in investor perception as divestment announcements gained legitimacy.”
And it’s growing
In addition, the scale that the divestment campaign has achieved is encouraging continued activism. At the Financing The Future conference held in Cape Town this week, speakers argued for even more pressure to be placed on asset owners to pull investments from fossil fuels.
“If it’s wrong to wreck the climate, it is wrong to profit from that wreckage,” said reverend Henrik Grape, coordinator of the World Council of Churches working group on climate change. “There is no excuse for asset managers not to change.”
What was additionally significant is that the climate crisis is increasingly being framed in different language.
“The challenge that we have is to change the narrative,” noted Kumi Naidoo, secretary-general of Amnesty International. “We should stop saying we have to save the planet because actually the planet does not need saving. If we continue on the path we are going, we will be gone, but the planet will still be here.
“When we are talking about climate change, it is in fact about human survival.”
In other words, climate change is being positioned as far more than an environmental issue. It is becoming a human rights issue.
Earlier this week the Global Commission on Adaptation released a report noting that severe impacts of climate change are now inevitable. It estimated that an additional 100 million people could be driven into poverty by 2030 and five billion people could be short of water unless precautions are taken.
The significance of this reframing of the argument is that if it is seen as a broad human rights concern rather than simply an environmental one, it will attract even more, and more vociferous, support. The impetus is therefore only likely to increase.
Investors cannot ignore the impact this will have on fossil fuel assets.
Companies in this industry will also face additional sustainability challenges. For example, US insurance company Chubb announced in July that it will no longer sell insurance policies to companies that make more than 30% of their revenue from coal mining.
At the same time, investors have to be aware of the shift to alternative industries and the potential for returns in sectors such as renewable energy. As Dr Ellen Dorsey, executive director of the Wallace Global Fund, notes:
“We need to be building a just and equitable new energy economy. It’s not enough to divest from fossil fuels. We must advocate for a new energy economy.”