Author: Yassin Alaya, LSE 2nd Year Economics.

In 2015, LSE committed to divest its financial endowment from coal and tar sands. This commitment was a result of pressure being exerted by LSE Divest, who occupied a room at the university for 6 weeks in 2015.

LSE Divest forms part of the global Fossil Free movement which emerged in the USA and has already prompted public and private institutions like governments, pension funds, universities, non-profit and for-profit organisations alike as well as 50,000 individuals to withdraw a considerable $3.4 billion from “investments (direct ownership, shares, commingled mutual funds containing shares, corporate bonds) in fossil fuel companies (coal, oil, natural gas)”. Notable institutions have participated, such as the University of Cambridge (coal and tar sands only), the City of San Francisco (full commitment) and the insurance company Allianz (partial commitment).

The divestment movement has based its argument on calculations showing that about 80% of fossil resources must stay in the ground if the world is to limit global warming to a 2°C target.[1] If governments, for their part, are to implement the restrictions required to satisfy their promise of keeping the rise in temperature below 2°C, this would imply the write-off of the biggest part of the working capital used in the extraction of fossil fuels.

This in turn means that stocks of oil, coal and gas companies are rendered worthless. Fossil Free therefore argues that it is in any investor´s interest to divest from fossil fuels. However, this warning rests naturally on the assumption that governments are actually going to enforce what they committed to do, which is quite optimistic.

Opponents of the divestment movement argue that simply selling off coal, oil and gas stocks is unlikely to have any positive impact on extraction. Instead, they argue, the investor loses the ability to influence companies’ behavior by exercising shareholder pressure, since they are no longer shareholders.

However, a look into history reveals that the strategy of divestment has proven very successful in the past: when financial institutions from all over the world withdrew their capital from businesses operating in South Africa in the 80s, this broke the back of the white-supremacist regime and hence helped to bring an end to apartheid in South Africa.

Reasons why divestment works in spite of the fact that selling stocks only affects those who own fossil fuel companies and cannot reduce their equity is that firstly, these companies are certainly not merely financed by equity but also by corporate bonds. A diminishing demand for bonds undoubtedly hurts a company since it has to offer higher returns in order to attract the same amount of capital. Secondly, divesting investors also make it harder for a company to issue new shares i.e. to enlarge its equity. This comes into play especially at the point where an increasing number of ethical investors puts enough moral pressure on all other investors.

[1] According to the IPCC (Intergovernmental Panel on Climate Change), global warming of more than 2°C would entail severe consequences for the world´s ecosystem and its capacity to accommodate an ever-growing world population.