by Olivia Hanks
The news that Royal Bank of Scotland has cut its investment in fossil fuels by 70% is only the latest in a string of decisions by high-profile investors to pull back from oil and coal. Norway’s sovereign wealth fund has divested from companies that derive more than 30% of their sales from coal; and, last month, the Rockefeller Family Fund announced that it would no longer invest in fossil fuels.
The fact that both Norway and the Rockefeller family derive their wealth from oil has not been lost on commentators. Whether or not you consider it hypocritical to invest ‘dirty’ wealth in ‘clean’ projects (if so, what should be done with it instead?), the low price of oil and coal has offered a perfect PR opportunity with no financial sacrifice.
But does it matter if the motives of any of these investors are primarily financial? The publicity has been good not only for them, but also for the fight against climate change, which still struggles to make the news. Every high-profile withdrawal from fossil fuel companies reduces investor confidence and deals another blow to the industry. We have been waiting 30 years for serious action on climate change — now, at last, corporate giants are coming onside as the crisis threatens their coffers.
We have been waiting 30 years for serious action on climate change
If we are to have any hope of mitigating climate change, we need to accept good decisions that may have come from bad places. If we wait for our whole economic system to change, and for companies to make investment decisions based on social and environmental good, it will be far too late.
Norway’s case is an unusual one: its sovereign wealth fund is ultimately owned by its citizens, and the divestment decision was taken by the country’s parliament. Pressure from the growing divestment movement may have played a role. However, in the case of RBS, it makes no sense to speak of its investment choices as in any way an ethical decision. Companies’ fiduciary duty to their shareholders requires them to act in the shareholders’ best interests. Since the Cowan v Scargill case in 1985, in the UK this has usually been interpreted as meaning best financial interests. Even later legislation, which clarifies that fiduciary duty does not rule out ethical investment (notably in the case of pension funds), still states that investment decisions must not be of “significant financial detriment”. In other words, socially responsible investment is a nice-to-have, only viable when it conveniently aligns with maximum financial returns.
Christian Felber addresses the toothlessness of current corporate social responsibility initiatives in his 2012 book Change Everything. ‘The moment such standards start to conflict with the main balance sheet – the financial one – they are suddenly of no use anymore.’ The Economy for the Common Good movement, of which Felber is the founder, seeks to bring about an alternative system where the success of a business is judged according to values that promote the common good, rather than on its profits.
socially responsible investment is a nice-to-have, only viable when it conveniently aligns with maximum financial returns
Until such a system exists, shareholder-owned companies will continue to be amoral. RBS invested in coal not because it loves giving people respiratory diseases, but because it was profitable to do so. Since no system change has since occurred in society, it would be illogical to claim that its investment decisions are now based on a concern for the environment — they are based on risk management and the falling price of fossil fuels.
The low price of oil is due to a number of supply-and-demand factors, including reduced demand in Europe — partly caused by the recession — and growth in production in Saudi Arabia and elsewhere, with recent industry talks failing to agree a cap on production. Low prices may stop oil exploration in some areas, but they can also increase demand — with oil prices at record lows, the US reported a rise in traffic deaths last year due to increased road travel. We cannot rely on the laws of supply and demand to fight climate change.
A scathing article on Move Your Money unpicks the details of the RBS decision, pointing out that the bank is in any case selling whatever it can due to its massive losses since the 2008 crash, and that fossil fuel companies still receive more than six times more than renewables in loans.
fossil fuel companies still receive more than six times more than renewables in loans.
Of course, government policy also affects share prices. If governments around the world really are waking up to the climate crisis at last, then investment in fossil fuels will rapidly get riskier — as is clearly now happening with coal, at least. The oil industry declared itself unconcerned in the short term after last December’s COP21 climate talks; the markets will only really react if and when individual countries take action in accordance with the Paris agreement.
To expect climate leadership from the world of finance is to miss the point. Financial institutions dance to the tune of share prices only. Leadership has to come from elsewhere: from governments, which can support certain activities through subsidies and other incentives; and from citizens, who can decide where they put their money. We need laws that require companies to put long-term and environmental consequences above short-term profit. Until then, the agenda will continue to be dictated by companies like BP, which was this week revealed to have leaned on the EU to drop plans for support for renewables and stricter controls on pollution.
Divestment from fossil fuels is always welcome news, whatever the reasons. But it would be hopelessly naïve to attribute it to an imaginary corporate conscience when the market still rules the roost.
 Felber, C. , Change Everything (tr. S. Nurmi) . London 2015, p29.
Featured image © Dean Chahim