Ireland currently has an €8 billon national investment fund with an estimated €300 million invested in fossil fuels. Under the bill, the government will be required to sell its investments in fossil fuels. How significant is this in terms of Ireland’s stocks and shares in non-renewable energy?
The new bill is the result of civil society and multi-party support for the idea that the investments in fossil fuels are in conflict with Ireland’s commitment to the 2015 Paris Agreement on climate change.
In terms of impact, the amount we are talking of is a drop in the ocean compared with the amount that is invested in fossil fuels globally. For example, upstream and thermal power generation was estimated to be about $706 billion in 2016 alone.
I’m not sure if this is the start of more comprehensive action to phase out fossil fuels in Ireland. For example, an Irish company is pursuing oil and gas exploration off the Cork coastline, which is backed by Chinese investment, following the suggested potential of 300 million barrels of oil. However, to continue exploration would be in contradiction with the bill so it will be interesting to see if this bill is a part of a wider strategic alignment or if it is just an easy-win for the Irish government without having to do too much.
Nevertheless, the bill sends a strong message particularly if it is aligned with a strategy to reinvest that money from oil and gas into research into clean energy.
How important could this bill be for Ireland to fulfil its obligations under the Paris Agreement given that it was recently ranked as one of the worst European countries for meeting its greenhouse gas emissions reduction targets?
The bill still needs to be approved by the upper house of the Irish parliament but improving the country’s position in relation to the Paris Agreement will be a significant ‘push’ factor.
It’s not clear how much withdrawal of the fund’s investments will affect Ireland’s national greenhouse gas emissions – we’d have to know what high carbon projects within the country depend on its investment – but it could be seen as a commitment to example-setting.
Ireland is behind on meeting its 2020 emissions reduction targets under the EU framework and so it is reviewing its current policies on clean air and considering raising its carbon tax. Like other European countries, Ireland still relies heavily on oil for transport – but also coal and peat for home heating – so there would need to be changes there in order to put the country on track.
Interestingly, a third of Ireland’s emissions come from agriculture – mainly the meat and dairy industry – and with diets changing in Ireland’s main export markets there is a longer term question about how to diversify. Pressure may come much sooner if the UK exits the EU single market as well.
In terms of whether this kind of action from national governments is helpful for international efforts to keeping global warming to under 2°C, the money doesn’t matter too much to the fossil fuel companies as there is likely to be another, less ethical, investor ready to buy up the shares. But divestment does a couple of things. Firstly, it sends a strong message, particularly in terms of an entity’s integrity. If their shareholders support a world where we limit global warming to less than 2°C, then investment in high carbon fuels is a contradiction, so it adds to the weight an entity puts behind any efforts to promote a cleaner world.
Secondly, it has an effect on the image of the fossil fuel industry, which is interesting in the long-term because lots of these state and city funds are looking 30, 40, 50 years ahead, and by divesting, they are essentially saying that fossil fuels are not the future. That sends a strong signal to the rest of the world.
This is especially crucial in terms of where the next generation will put their efforts, which is probably the most significant way in which divestment might harm the fossil fuel industry, rather than the withdrawal of these bits and pieces of investment here and there. Divestment is tied to a push from the younger generation who feel that investing in fossil fuels is against their long-term interests, so if they feel that fossil fuels are not the future, they won’t commit to working in this area. So I would say Ireland’s bill is important much more because of the moral and ethical message that it’s sending out.
The global divestment movement has persuaded over 800 institutions, and almost 60,000 individuals worth over $5 trillion, to pull their investments from the fossil fuel sector. The Norwegian central bank, for example, has proposed selling off its $35 billion oil and gas stocks, which would diversify the world’s largest state pension fund, and the Church of England has also voted to withdraw its funds from fossil fuel companies too. How important are these milestones for the global divestment movement?
It’s not clear how much has actually been divested, as it will take several years to see the effects, but the Norway story is significant. There has been a lot of discussion in Norway over the $1 trillion state pension fund which is managed by Norges Bank, where about $35 billion is invested in coal, oil and gas companies. As you say, last year they proposed withdrawing this which could be a critical turning point. It will be interesting to see, however, to what extent this is done because most of the money going into that state pension fund is coming from oil and gas from Norway’s majority state-owned company Statoil.
But Norway has already divested from companies heavily involved in coal and several major weapons manufacturers, such as BAE Systems, on the basis of its role in producing nuclear weapons. It also has a record of responding to the concerns of MPs and calls from civil society on human rights and environmental issues. The Irish bill, therefore, re-opens the question of what Norway will do and whether other democratic countries will follow its lead.
The Church of England conducted a major review of its ethical investment policy regarding fossil fuels which I contributed to. I don’t believe it decided to withdraw investment from this area completely but rather to use its influence as a shareholder to encourage companies towards action such as carbon disclosure. The Church is also involved in the Transition Pathways Initiative which works with investors in the City to encourage investment in line with a low carbon economy.
One trend to watch is how religious authorities are starting to weigh in on climate change. Last October, 40 Catholic organizations announced they would divest from fossil fuels and it was a Catholic organization that was a leading voice in bringing the divestment bill to the Irish parliament. I think we will soon see Jewish and Muslim funds developing positions on this too.
We just published a report looking at what decarbonization of energy systems globally means for developing countries who want to sell their hydrocarbon fuels. It shows that the investment outlook is very uncertain because commercial investors still want to invest in oil and gas in the short to medium term but they also want to be able to pull out quickly.
Meanwhile, multilateral development banks, like the World Bank, the ADB and AfDB, as well as donor country agencies which can offer longer term security, are all committed to the target of limiting global warming to under 2°C and have been reducing their support for the fossil fuel sector and increasing green investments such as those for renewable energy projects. The World Bank for example announced last December that it would end finance to upstream oil and gas by 2019.
Last year, richer countries also agreed a roadmap for mobilizing $100 billion a year in climate finance which would help both with mitigation and adaptation in poorer countries. The idea is to use public funds to help reduce the risk for the private sector in making these kinds of investments.
But the picture doesn’t really square. Other state entities continue to fund fossil fuel power which include export credit banks and development finance banks in both Western and emerging Asian economies. So we don’t see alignment in public finance, let alone in the private sector, in terms of what kind of world they are promoting.
Our report argues for more alignment between these investors otherwise they will end up funding conflicting development models in less developed countries thereby depriving them of the chances to compete in a lower carbon world.
Looking ahead, could we see the drive for divesting from fossil fuels inhibited at all by fossil fuel companies and pro-fossil fuel national lobbies, such as those in Poland and Germany?
There are different issues in different places. Coal is different to oil and gas because there is less capital available and it’s a different type of industry. Coal is much more linked to jobs in local communities as we can see with what happened in the UK with pit closures in the 1980s. So phase out has to be dealt with sensitively in that it has to provide alternative jobs and invest in the local communities that are losing their main industry.
So far the responses of international oil companies have varied. While these are a powerful lobbying force, I think they have largely accepted that the tide has turned irrevocably. The question, however, is about timeframes: climate modelling suggests we need to achieve zero carbon by 2050 and I find that oil company strategists are thinking more in terms of the end of the century.
Companies, as we have discussed, are also coming under pressure from major commercial banks who they rely on for investment over whether their models are robust in a 2°C world. So this idea of how dependent on high carbon industries our whole global financial system is has risen up the international agenda.
In 2015, the G20 asked the financial stability board to establish a taskforce on ‘climate-related financial disclosures’ to better understand how the risks of a 2°C world would play out in terms of pricing as well as in terms of the physical risks which include infrastructure damage from actual climate change. Now there is a framework which has a least 150 financial firms, with over $80 trillion of assets, signed up to disclosing their carbon risks. These actions are pushing fossil fuel companies to explain how they are preparing to be competitive in the energy transition.
We’ve also seen changes in the narratives, and approaches, of major companies in terms of thinking about how they can diversify their portfolios and prepare their business models for the energy transition. Indeed, companies are beginning to respond in different ways. Exxon will probably choose to focus on its core business, to demonstrate their technical superiority and competitiveness through the oil and gas value chain, while BP and Shell will try to broaden their range of business activities and think about how to get more for fewer emissions from each molecule. Some companies are thinking about investing in clean energy and others will divest from risky projects in high-cost environments like the Arctic and low-capacity countries where there is conflict.
The problem for the major oil companies is that there’s no other business like it. It’s a high-capital industry – you spend, you get a concession, you get oil, you sell it, and with relatively little labour and operating cost to you, you’ll be bringing in high revenue – an agreed portion of which you will give to the country you’re operating in. It’s an industry that benefits from high risk, high reward situations.
It’s hard to change that model and it’s not possible to achieve those kinds of windfalls from renewable energy for example. But it has relied on a growing demand for its products and that cannot continue.