Felix's mailbag: Can shareholders persuade oil companies to burn less carbon?

Last week, I published an essay about “why divesting from fossil-fuel companies is a matter of basic ethics.” Malcolm Atkinson, a professor at the University of Edinburgh, wrote to me with a  couple of questions:

Dear Felix

I greatly enjoyed your well-researched and well-argued article. It skilfully explained the balance between earning funds for good works by charitable foundations and the risks of losing those funds by divesting investment in companies extracting fossil fuels.
However, I think you understated the case for stopping investment in fossil fuel extraction.
The effects of good work are localised in time and place.
The effects of burning fossil fuels have global impact which will devastate billions of lives, and it will take thousands of years for the Earth’s climate and oceans to recover.
Weren’t you far too gentle in your balanced approach?

If we agree, then doing everything we can to rapidly halt the use of fossil fuels for energy is clearly critical.
You mentioned the use of argument to boards as a potentially useful “weak tea”.
When divestment isn’t happening, perhaps because of an intermediary, how can we use argument effectively?

Malcolm

Malcom raises some important points, so I’m sharing my reply:

Thanks, Malcolm!

One of the points I tried to make in my piece was that the practical effects of foundations divesting from fossil fuel companies are likely to be de minimis. You’re absolutely right, of course, about the enormity of the effects of burning fossil fuels. But divestment, on its own, doesn’t alter any of those effects. The fuel will still be extracted and burned; the only change will be the identity of the shareholders who benefit.

Importantly, there’s a world of difference between investing in the stocks of fossil fuel companies, on the one hand, and investing in fossil fuel extraction, on the other. The former is done on the stock market, by traders who are constantly buying and selling fungible shares in companies. The latter is done by the companies themselves, and is an activity which bears almost no relation to their share price. Even if divestment hurt the companies’ share prices, which it probably wouldn’t, it still wouldn’t stop them from investing in fossil fuel extraction.

The divestment campaign is one part of a broader effort by activists who see the need to keep most of the planet’s fossil fuels in the ground. It’s a idealistic political campaign, and I argued in my piece that divestment is an ethical thing to do. But if you’re looking at practical effects, then the localized positive effects of the work being done by the Gates Foundation and the Wellcome Trust are the only thing they really have any control over: they can and do make the world a better place. Neither the Gates Foundation nor the Wellcome Trust are likely to be able to slow the pace of global warming, whether they divest from fossil-fuel companies or not. Global warming is a terrible thing, but it’s not their fault; my point was just that there’s no good reason for them to seek to profit from it by investing in fossil fuel companies.

That said, you ask a good question. For those of us who don’t or can’t divest from fossil fuel companies, is there a way to engage with those firms to try to persuade them to extract fewer fossil fuels?

The answer there, I’m afraid, is that such engagement is very difficult, at least at the shareholder level. Governments can and should regulate carbon extraction, and the great thing about democracy is that campaigns like the Guardian’s can and should have an effect on governments. But shareholder arguments are different: they tend to have positive results only when they persuade the company that a certain course of action would be beneficial to its share price.

It’s not impossible to imagine such an argument. If we’re living in an age of Peak Oil, where finite oil reserves are dwindling and are becoming increasingly expensive to extract, then it might well make sense to keep oil reserves in the ground, at least for the time being, on the grounds that they will surely be worth much more in the future.

That said, campaigners can’t really have their cake and eat it. Oil which is never going to be extracted has no value at all, and if some kind of a ban on extraction is going to appear in the future, then it’s fiscally rational for companies to extract as much as they can before such a ban arrives. For that reason, then, the most productive engagement, from the activists’  point of view, is surely going to be with the world’s governments, rather than directly with the fossil fuel companies.