The Implications of Failing to Divest

The International Energy Agency predicts that if fossil fuel emissions continue at the current rate, we will reach the limit of ‘unburnable carbon’ in only 16 years (Carbon Tracker).

Carbon Tracker also warns that ‘using only the reserves listed on the world’s stock markets in the next 40 years would be enough to take us beyond the 2°C threshold’. This analysis doesn’t include the discovery or burning of new fossil fuel reserves in this period. The fossil fuel sector still accounts for 12% of global stock markets in the UK.

The financial case for divestment

Institutions who continue to invest in fossil fuels also risk entering the ‘carbon bubble.’ This carbon bubble results from the overvaluation of stocks in fossil fuel companies; if international emission targets are met, 60-80% of these fossil fuel reserves will become unusable, and investments therefore become worthless, leaving investors with stranded assets. Share Action report that strengthening climate policy could contribute to 10% of risk to investment portfolios, with the economic cost expected to amount to $8 trillion worldwide by 2030.

A very recent study even found that the predicted rapid reduction in demand for fossil fuels could see global economic losses of $1-4 trillion by 2035 according to a new report.

IMPAX asset management found that investor portfolios actually perform better in the absence of fossil fuels. They found that ‘removing the fossil fuel sector in its entirety and replacing it with renewable energy’ would raise the average returns from 1.8 to 2.3%.

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Date of Publication: 14.06.2018