1. What is fossil fuel divestment?
Divestment campaigns across the globe are using The Carbon Underground 200™ — the 200 largest public-company owners of coal, oil and gas reserves worldwide by Gt CO2 — as the definition for “fossil fuel companies” in their divestment ask. But some go further by:
- Excluding major owners of coal-fired power plants
- Substantially reducing exposure to industrial greenhouse gas emissions
- Excluding factory farming, palm oil producers and companies in any industry deemed to have a particularly negative connection with land use and biodiversity, toxic spills and releases, operational waste, and water management.
In addition to an exclusion strategy, some select or overweight the most sustainable companies in key industrial sectors like energy and utilities while avoiding those that are average or below average. This proactive approach is well aligned with the DivestInvest Pledge, which aims to reduce climate risk through personal investment choices. See also: Selection Criteria for Find A Fund
2. Why do my divestment — and investment — choices matter?
If investors — on a global scale — divert their capital from climate stressors like fossil fuels to more climate-resilient alternatives, the risks of abrupt and irreversible climate change will be reduced.
3. What is climate risk?
Climate Risk refers to various related forms of risk connected to a changing and unstable climate including physical or direct risks e.g. flooding, fires, extreme storms etc, regulatory and litigation risks, social and reputational risks, competitive and financial risks. In strictly financial terms, climate risk relates to carbon risk and stranded assets filling the carbon bubble (think: housing bubble and consequent market crisis). Among several resources out there to better understand climate risk, a few are CarbonTracker’s Key Terms, this NYT piece by Henry Paulson, and the Risky Business Project.
4. Does divestment from fossil fuels lower returns?
Divesting from fossil fuels impacts investment risk and return, and that impact depends on which companies are excluded and how these exclusions are managed across a portfolio, including identifying appropriate replacements. Multiple market analysts report that excluding fossil fuels matches or outperforms standard benchmarks, and investing in clean energy, energy efficiency and “climate solution” companies that help build a sustainable economy may further augment returns. A March 2015 Oxford report based on more than 200 academic studies, industry reports, newspaper articles and books highlights sustainability as one of the most significant trends in financial markets in decades. When comparing overall performance between investment strategies or mutual funds, remember that fees are deducted from net return calculations for strategies and mutual funds but not from benchmarks and indices.
5. What does it mean to invest fossil fuel free?
Investing fossil fuel free can mean different things, so it is important to ask questions about which companies a particular investment product holds. Sometimes it can mean that it is free of The Carbon Underground 200™ (CU200™ -free), other times it can mean that it excludes more than just those 200 companies. Read more in Make a Clean Break: Your Guide to Fossil Fuel Free Investing and our Fossil Fuel-Free Invest Brief.