Superannuation funds and other managed investments control significant holdings in many companies, large and small. Currently, most funds have featured a high proportion of stocks in resources firms and other businesses with significant exposure to the fossil fuel industry, in line with the relative weightings of major market indices. Some estimates suggest this exposure is over 50%, compared with only about 2% invested in the renewables and energy efficiency sector.
Now imagine fossil fuel stocks fell out of favour with institutional investors. Portfolios worth trillions of dollars would be rebalanced in favour of clean tech and other non polluting industries. The share prices of fossil fuel exposed firms would plummet and it would become increasingly difficult or expensive for them to raise capital to fund new projects.
Couple this with the threat of regulation preventing resources firms from extracting much of their reserves of coal, oil, tar and so on that are still in the ground and it paints a bleak picture for the extractive sector and major downstream users of fossil fuels, whose cost base would rise dramatically.
But how realistic is this scenario? Increasingly, given the growing chorus of respected business and political leaders (in addition to the traditional activists) who are throwing their weight behind the so-called divestment movement.
Take former Australian Liberal Party leader and co founder of Macquarie Bank, John Hewson. His latest venture, the Asset Owners Disclosure Project, asks global institutional investors about their exposure to fossil fuels, rates fund managers according to their divestment actions, and names and shames the recalcitrant. After two years of surveys they are having an impact with a number of large funds announcing plans to divest from fossil fuels.
On the debt finance side of the equation, green groups are targeting major banks that lend to miners, urging customers to switch their accounts to institutions that don’t.
It’s a long road ahead though. Currently in Australia even the so-called ethical and socially responsible investment (SRI) funds continuing to have some level of fossil fuel exposure. But momentum and pressure is building rapidly.
What does this mean for your organisation? Depending on how fossil fuel exposed it (or its supply chain) is, then in the short to medium term reputational and regulatory risk and rising costs could become significant headaches. Talk to Adaptive Capability today about safe guarding your business’ future.