“Do not light a fire that you cannot yourself put out” – Irish Proverb [11]
This is the second part of a blog series. Find part 1 here, introducing the idea of net-zero investments.
The ongoing fossil fuel divestment movement is arguably one of the most successful divestment campaigns in history and has resulted in trillions of dollars of investments being moved away from companies who extract fossil fuels.
The main focus of this campaign is companies who own fossil fuel reserves, mine coal and engage in hydrocarbon exploration or extraction [1]. The campaign seeks to undermine them by encouraging organisations not to invest in them and removing their access to capital [2].
FACTS ABOUT THE FOSSIL FUEL DIVESTMENT MOVEMENT [3,4]
- Appeared in the early 2010s on US College Campuses
- Go Fossil Free: Divest from Fossil Fuels! campaign launched in 2012
- Involves over 1,200 investment institutions*
- Covering over $14 trillion of investments*
* as of June 2020
However, the campaign has so far been limited to the companies above, and has not yet targeted companies who are heavy users of fossil fuels or manufacture products that use fossil fuels. For example, aerospace, automotive, cement, electricity generation, and heating industries – all of which could not currently function without fossil fuels.
The fossil fuel divestment movement has been ‘about putting out the fire’ or ‘stopping the rot’, by trying to force companies to keep their fossil fuel reserves in the ground. And that should continue. Moving on from that, however, if we are to truly accelerate the move towards climate-friendly investments then we need to take other energy intensive industries into account as well. Enter the next phase, net-zero investments…
Net-Zero: Building a Sustainable Climate
There have been many developments with regard to climate action since the beginning of the fossil fuel divestment movement. One of the major step forwards was the 2015 Paris Climate Agreement, which set out to:
“strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.” [5]
Unfortunately it is arguable that little international progress has occurred since Paris, however, the Agreement, along with the associated press coverage, thrust the concept of net-zero by 2050 into the limelight. That is, by 2050 there needs to be no increase in the concentration of CO2 in the atmosphere and the annual CO2 emitted and CO2 absorbed must at least balance (ideally absorption would be larger than emissions).
The concept of becoming net-zero countries/economies/companies by 2050 was a communications success, some of the reasons for which we explored in part 1. Initially NGOs started to push the idea, then some companies started getting in on the act, keen to advocate their commitment to comply with the Paris Agreement and become net-zero by 2050 or before [6].
Then entire countries started to sign into law commitments to be net-zero by 2050 [7]. At one point the UK and France were in a race to become the first major economy to set legally binding net-zero targets. Recently even some large fossil fuel companies have drawn some skeptical looks and signaled that they will become net-zero by 2050 [8,9,10].
Obviously this is not a done deal: firstly, a large contingent of fossil fuel producing companies and nations have not signed up to the Paris Agreement or indicated net-zero goals; secondly, these are only commitments and organisations are not legally bound by these; and thirdly net-zero by 2050 is a gross oversimplification, fossil fuel use needs to be drastically reduced from now on, not continue at normal levels to then abruptly stop in 2050.
But despite this an increasing number of organisations have shown us that they are moving to commit to a net-zero future and investments need to follow suit.
Net-Zero Investments and Ethical Choices
If your fund has already divested from fossil fuel companies, can you truly claim you are fossil free? Are you still not benefiting from fossil fuels? For example, if a fund has divested from coal but still owns shares in a steel manufacturer* who uses coal/coke or natural gas to manufacture steel then they could be said to still indirectly invest in fossil fuels. Or if a fund has divested from oil and gas but owns shares in a company who manufactures internal combustion engine parts. In both these cases fossil fuels are integral for the steel or automotive supplier (in their current form) to exist and turn a profit.
*here we are referring to steel companies who do not own coal reserves.
This argument can obviously be taken to the nth degree: oil and gas company → speciality plastics manufacturer → medical manufacturer → healthcare provider. In this scenario healthcare providers would also be disallowed from a truly divested fund since they use plastics which are made from fossil fuels. In fact there would likely be almost no companies to invest in at all since every company will be involved in the use of fossil fuels in one way or another. So where is the middle ground?
This is where innovation, ambition, and measurable action come in:
- Innovation – is the company investing in R&D to meet their net-zero goals?
- Ambition – is there genuine drive from corporate leadership to meet the net-zero goals?
- Measurable Action – have clear short, medium and long term targets been set with clear pass or fail criteria?
We must be clear here, these are not hard and fast metrics/tests that spit out a value. They will ultimately provide a fund manager with clarity over whether or not a company is on track to meet its net-zero goals. And maybe used to clarify a choice between two companies.
Let’s take the deeper look at the two investments mentioned above.
Steel Manufacturing
Currently there is no commercially viable way of manufacturing new steel on a large scale without generating lots of CO2. See this blog for more information. However, there are methods to produce steel without – or with significantly less – CO2 either through reduction of iron ore with hydrogen or recycling of scrap metal using arc-furnaces. But these methods are either not yet at a commercial scale (hydrogen) or they are not yet a like-for-like replacement for iron ore reduction (arc-furnaces re-melt recycled steel).
That is not to say an existing steel manufacturer can just sit on their hands and claim there is nothing to be done. More can be done to improve the energy efficiency and reduce wastage during steel manufacturing and processing. If corporate leadership is actively putting effort into producing an innovation roadmap with tangible milestones and a company is actively and measurably engaging in these innovative activities, as well as showing a tangible commitment to implementing them on a large scale in the future, then it could potentially be considered a net-zero investment (by 2050).
Innovation does not have to be purely R&D based, the steel maker could look to diversify and clean its product range by providing alternative products to steel. For example, cross-laminated timber for construction or aluminium for mechanical parts (the fund manager could always invest in these products instead).
Internal Combustion Engine (ICE) Parts Supplier
In the internal combustion engine (ICE) parts supplier example, the idea of innovation, ambition and measurable action takes a slightly different route since there is already existing technology which can replace the internal combustion engine – batteries and electric motors. And there are already other companies which can be invested in that operate in the EV electric motor and battery supply chain.
Therefore, unless the ICE parts supplier has a credible project on the go for migrating its business away from ICEs and towards EVs then the net-zero alternative already exists, ready to serve as a replacement investment.
Net-zero Investments = Fossil Fuel Divestment Re-imagined
The differing examples of steel manufacture and ICE parts supplier actually mirror the existing fossil fuel divestment movement. If there were no alternatives to fossil fuels then there would not be a fossil fuel divestment movement, because very few people would be willing to plunge themselves and the world economy back into a pre-industrial/fossil fuel world.
But because there are viable alternatives (renewables and nuclear) then an ethical choice can be made, and viable investment decisions have been made to push industry in that direction.
However, where there are not straightforward or ready-made alternatives in place an investor’s or fund manager’s judgement is required to discern whether or not a company has made concrete and measurable commitments to developing alternative technologies, strategies, or products that satisfy a net-zero standards.
If fossil fuel divestment is equivalent to putting out the fire, then net-zero investments are rebuilding the house in a sustainable manner.
It’s now down to deciding which materials to use and how…
In the next blog in the series we will be discussing the commercial advantages and disadvantages of net-zero investments.
References
- http://fossilfreeindexes.com/research/the-carbon-underground/
- https://gofossilfree.org/
- https://gofossilfree.org/divestment/commitments/
- The Global Fossil Fuel Divestment and Clean Energy Investment Movement, Arabella Advisors, 2018, https://www.arabellaadvisors.com/wp-content/uploads/2018/09/Global-Divestment-Report-2018-1.pdf
- https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
- https://unfccc.int/news/87-major-companies-lead-the-way-towards-a-15degc-future-at-un-climate-action-summit
- https://sdg.iisd.org/news/73-countries-commit-to-net-zero-co2-emissions-by-2050/
- https://www.bp.com/en/global/corporate/news-and-insights/press-releases/bernard-looney-announces-new-ambition-for-bp.html
- https://www.shell.com/energy-and-innovation/the-energy-future/shells-ambition-to-be-a-net-zero-emissions-energy-business.html
- https://www.total.com/media/news/total-adopts-new-climate-ambition-get-net-zero-2050
- Jon R. Stone, The Routledge Book of World Proverbs, 2006, Routledge