Divestment also means asking banks and institutions to commit to not investing in new fossil fuel infrastructure, not just selling stock in existing oil and gas companies. Making it more difficult for new fossil fuel infrastructure projects to access capital absolutely has an impact.
Fossil fuel divestment has ‘zero’ climate impact, says Bill Gates
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Re: Fossil fuel divestment has ‘zero’ climate impact, says Bill Gates
#12Earlier quoted context omitted.
Or it reduces the stock price of those firms giving better returns to those who are not so morally-driven in their investing decisions.
Not sure I understand. If large-scale divestment of fossil fuel investments lowers their stock prices, how will that give the non-morally-driven investors higher returns? (Assuming we both agree that "morally-driven" investors will tend to invest in renewables.)
Because investors will be able to own a piece of that company for less. The company hasn't changed, its ability to offer dividends hasn't changed, its longer term prospects haven't changed (due to divestment.)
Really, the only impact this might have is a slight reduction in the ability to those companies to raise capital by selling stock (and I don't think that is incredibly common in the oil industry).
Re: Fossil fuel divestment has ‘zero’ climate impact, says Bill Gates
#13Earlier quoted context omitted.
Not sure I understand. If large-scale divestment of fossil fuel investments lowers their stock prices, how will that give the non-morally-driven investors higher returns? (Assuming we both agree that "morally-driven" investors will tend to invest in renewables.)
this explains it pretty well. https://www.aqr.com/Insights/Perspectives/Virtue-is-its-Own-...
It's a bit wordy, but the relevant argument is here:
> everything still gets owned by someone. So, clearly the group without such qualms, call them the sinners, have to own more than they otherwise would of the sin stocks. How does a market get anyone, perhaps particularly a sinner, to own more of something? Well it pays them! In this case through a higher expected return on the segment in question.
Re: Fossil fuel divestment has ‘zero’ climate impact, says Bill Gates
#14By divesting, the cost of capital for these firms increases which makes the marginal projects no longer economically feasible. By then putting money into cleantech, like Gates suggests, we reduce the cost of capital for these firms which is obviously a good thing. His actual quote is that it has probably had zero impact to date which may be true but is largely irrelevant to the proposition that we should divest and i…
If prices are based roughly on economic value, then how would divestment by a portion of the market affect capital access? You'd need virtually all capital to have an impact.
Otherwise amoral investors could swoop in and capture the profits.
I could see divestment in early stage funding being more impactful when things are less liquid.
Re: Fossil fuel divestment has ‘zero’ climate impact, says Bill Gates
#15By divesting, the cost of capital for these firms increases which makes the marginal projects no longer economically feasible. By then putting money into cleantech, like Gates suggests, we reduce the cost of capital for these firms which is obviously a good thing. His actual quote is that it has probably had zero impact to date which may be true but is largely irrelevant to the proposition that we should divest and i…
If prices are based roughly on economic value, then how would divestment by a portion of the market affect capital access? You'd need virtually all capital to have an impact. Otherwise amoral investors could swoop in and capture the profits. I could see divestment in early stage funding being more impactful when things are less liquid.
Prices are set by supply and demand. Divestment reduces demand. Probably, the falling prices also increase demand, but fundamentally, if fewer people want something the price should drop.
Re: Fossil fuel divestment has ‘zero’ climate impact, says Bill Gates
#16Eliminating or reducing government subsidies for oil and coal companies probably would have a climate impact. Even if divestment has “zero impact” as Gates suggests (which I doubt, but ok), it would have a symbolic importance and possibly spur others on to change their approach.
And to that point, it reduces the number of influential rich people with an incentive to lobby against climate action.
Re: Fossil fuel divestment has ‘zero’ climate impact, says Bill Gates
#17Earlier quoted context omitted.
Or it reduces the stock price of those firms giving better returns to those who are not so morally-driven in their investing decisions.
Not sure I understand. If large-scale divestment of fossil fuel investments lowers their stock prices, how will that give the non-morally-driven investors higher returns? (Assuming we both agree that "morally-driven" investors will tend to invest in renewables.)
Consider the case of an investor, Alice, willing to invest in fossil fuel stocks, who is currently sitting on $100 cash and looking for a profitable investment.
Last year the fossil fuel company X was trading at $10 / share, largely based on a valuation from discounted cash flows that would be returned to the investor (forecast dividends), giving a net present value of buying and holding the stock of $10 / share assuming that investors require a 10% discount rate when calculating NPV.
Suppose this year there is no change in the fundamentals of the company -- the business is exactly the same -- but nearly all investors are not willing to hold shares in X for moral/ethical reasons, so many former investors have sold, and there is reduced demand to buy.
So now the quoted market price of one share of X is $1 / share, but the fundamental valuation of X based on forecast future dividends is still $10 / share, still using the same discount rate.
Alice can now spend $100 to buy and hold 100 shares in X, which she values as being worth $1000 in net present value due to forecast returns from dividends by holding the stock and never selling it.
Suppose Bob is another investor who is willing to invest in fossil fuel stocks, but had invested his $100 into 10 shares of company X at last year's price of $10 / share. This year the quoted market price of Bob's 10 shares is $10 . Bob will incur a 90% loss in capital if he sells at the current market price. But if he refuses to sell and holds, he will still achieve a fair return from dividends of holding the stock. If Bob has spare cash he can, like Alice, buy additional shares of X at the new low price.
Further tangents:
Re: Fossil fuel divestment has ‘zero’ climate impact, says Bill Gates
#18Fossil fuel divestment is basically subsidy for those who don't care. Divestment causes stock price drop and it increases ROI for those who invest into the company.
Re: Fossil fuel divestment has ‘zero’ climate impact, says Bill Gates
#19Earlier quoted context omitted.
If prices are based roughly on economic value, then how would divestment by a portion of the market affect capital access? You'd need virtually all capital to have an impact. Otherwise amoral investors could swoop in and capture the profits. I could see divestment in early stage funding being more impactful when things are less liquid.
Prices are set by supply and demand. Divestment reduces demand. Probably, the falling prices also increase demand, but fundamentally, if fewer people want something the price should drop.
Does this work in liquid markets though? Demand could obviously drive up price beyond fundamental value in a bubble, or below fundamental value in a panic.
But in the ordinary course of things, we would expect the price of a security to match its value in the long run.
If you are a rational, amoral investor, and you see a security worth $100, you would be prepared to pay up to $100 for it, and to buy it in as large a quantity as you could if it was selling for less. Assuming there is more than one such investor in the market, we would expect them to bid roughly to the expected value of the stock.
I suspect this was the reasoning underlying Mr. Gates' comments. As long as customers buy the oil then the security has value for investors.
Re: Fossil fuel divestment has ‘zero’ climate impact, says Bill Gates
#20Divestment also results in less shareholder oversight of emission heavy companies because environmentally conscious investors are selling their shares to investors with less scruples.
This isn't just theoretical.
According to Fossil Free, asset managers with about 10 trillion under management have committed to divesting.
If you assume 10% of that is tracking something like the S&P 500, then these investors have sold about 80 million shares of Chevron.
In 2018, shareholders introduced a proposal asking Chevron to limit its methane emissions. That proposal failed with 46% of the vote.
80 million shares would have been enough to swing the vote to 54% in favor.
I quit my job a couple of months ago to fix this problem. You can learn more at greengovernance.org or by emailing me at (hn username)@greengovernance.org
(typed this from my phone on a plane but I will add citations later when I get to my computer)