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Wednesday, December 3, 2014

Strategic CSR - Divestment

The article in the url below highlights the growing importance of a movement I had been following at a distance, but haven't previously paid much attention to—the divestment of fossil-fuel companies from university and college endowment portfolios (see:
"Such divestment is clearly advocated on moral grounds – to save the planet – but is increasingly premised on financial grounds as well – to avoid the risks associated with the carbon bubble and what these stranded assets or unburnable carbon will do to investment portfolios holding fossil-fuel company stocks."
In particular, the article draws on the recent IPCC report (see: that stresses a limit of keeping global temperature rises to 2 degrees Celsius (a "carbon budget"). The implication of such a budget is that "two-thirds of coal, oil and gas reserves would have to be left in the ground, at least until 2050" (a "carbon bubble"). As the author notes:
"If two-thirds of known reserves must stay in the ground, then this 'unburnable carbon' would not be monetized, becoming instead a stranded asset or liability that is not being priced into the current valuations of fossil-fuel companies."
In other words, either our carbon-intensive global economy will be allowed to continue extracting and burning traditional energy sources at great profit for energy companies (and great expense for the rest of us), or the valuations of these same companies are greatly inflated because they do not account for the possibility that two-thirds of known reserves cannot be monetized. Following the ideas in the article and extrapolating them to their natural conclusions does not appear to result in a situation where both outcomes can occur simultaneously. Either the planet or the fossil-fuel companies should be shorted today:
"Fossil-fuel companies, and an economy that subsidizes these (and other emitters) by letting them dump their carbon pollution into the atmosphere for free, would see significant disruptions if and when these externalities are accounted for."
This leads us back to the divestment movement. Given that "One can divest fossil fuels and still own a portfolio that remains very carbon intensive," the author advocates a very creative "Multi-pronged approach" that encompasses both engagement, protest, and incentives for carbon-based energy companies. Principally, he sees these three forces coming together in a "smart carbon tax":
"Not only would such a tax put a price on carbon so that clean energy can effectively compete, but it would also generate significant revenues, a portion of which could be assigned or recycled right back to the energy companies in the form of transition subsidies that enable them to convert over to sustainable energy. A Smart Carbon Tax would be designed so that a significant portion of proceeds is earmarked for investments in renewable energy, energy efficiency, resource efficiency more broadly, green infrastructure, and so forth. The fossil-fuel companies, as well as others, would be eligible to participate in this revenue stream from the Smart Carbon Tax. These transition subsidies could include expanded investment tax credits, low-interest loans, price supports, and so forth – and should obviously replace current fossil-fuel subsidies. But for such a plan to work, the amount transferred would have to be meaningful and may have to approach or approximate the profits the energy companies forego by leaving the fossil fuels in the ground."
An approach that incentivizes the involvement of the energy companies by not inflicting losses on them is essential. The fact that the divestment advocates are 'right' does not make them a solid bet given humanity's demonstrated capacity for self-destruction.
Take care
David Chandler & Bill Werther
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2014 the Year for a Smart Carbon Tax
By Joe Keefe
July 28, 2014
Green Money Journal