How Does Divestment Work?

Groundwork’s Bite-Sized Books Vol. 5

How Does Divestment Work?

Jeff Wagner

How Does Divestment Work?

Jeff Wagner

www.layinggroundwork.org Groundwork is a 501(c)(3) non-profit offering educational programs and publications that seek to shift the foundations of the ways we understand ourselves and our place in the world. We envision a just and sustainable future, founded upon respectful and reciprocal relationships between the land and all its inhabitants.

Groundwork’s Bite-Sized Books Vol. 5 Copyright ©2022 by Jeff Wagner & Groundwork. All rights reserved.

Published 2022 by Groundwork. First printing, April 2022.

Bibliography online at layinggroundwork.org/bibliography-5 Cover by Bekah Sanders

Introduction Growing up in the 1990’s, the creek I played in carried aluminum cans in its waters. In school, I learned about pollution and recycling. Connecting the dots I was taught to see, I thought that if I recycled enough cans, I could stop the environmental problems everybody was talking about. The creek I loved would stay beautiful.

My teachers seldom talked about the role of money in environmental destruction. The economic factors driving that destruction were treated as unchangeable.

While kids like me learned to recycle, untold fortunes were invested in plundering the Earth for profit.

This booklet introduces some of the economic systems related to climate change, focusing on divestment. Part 1 offers a general overview of divestment. Part 2 talks about financial institutions’ relationships to fossil fuels.

Part 3 examines stocks. Part 4 is about pairing divestment with alternatives for re-investment.

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Part 1: The Foundations of Divestment “To turn $100 into $110 is work. To turn $100 million into $110 million is inevitable.”

—Edgar Bronfman

Escaping money’s gravitational pull Since the 1980’s, our world has moved towards a radical kind of capitalism: one with completely deregulated global markets. It’s a model that produces profits, but has no morals.

The result is predictable: vast sums of money concentrated into fewer and fewer hands and into destructive industries. Even as it destroys the Earth— the foundation of our economy and our lives—the fossil fuel industry holds a huge economic pull.1 Like gravity, the more money it amasses, the more attractive it becomes. A market with no morals acts selfishly and shortsightedly, choosing immediate profit over all else, destroying the Earth.

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Boycotting fossil fuels The easiest way for citizens at large to put companies out of business is with a boycott, a coordinated effort to stop buying a business’ goods and services. A full boycott would be a total shift away from fossil fuels: exactly what climate scientists say we need in order to address climate change.2 Unfortunately, boycotting fossil fuels is not possible all at once. We built our society to depend on fossil fuels, and if we stopped extracting fossil fuels overnight, the global economy would collapse. People would starve, suffer, and die. The transition will take time.

During that transition period, fossil fuels remain profitable investments. In an unregulated market, the economic drivers that support extractive industries like fossil fuels are still there. As fossil fuels continue to thrive, they maintain a huge influence over the politics of climate change, further extending their use.

Our economic system is stacked against the climate.

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Adding morals to the market Our society cannot immediately boycott fossil fuels.

Since governments are reluctant to enact regulations, it’s up to the people to add morals to the market.

Activists promote divestment as a way to exert systemic pressure, pushing financial activity away from fossil fuels.

Divestment is the opposite of investment. When you invest in something, you offer resources to support a business or a cause. In exchange, you share the profit.

Divestment is removing your money from companies or industries you no longer want to support.

Many people unknowingly invest in fossil fuels because our society is so heavily invested in fossil fuels. You might be invested in fossil fuels through your bank, through an employer-sponsored retirement plan, or through financial investments like index mutual funds.

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Divestment’s South African origins The fossil fuel divestment movement takes inspiration from the students and activists who tried to end apartheid by pressuring foundations and universities to divest from businesses operating in South Africa.

From 1982 to 1988, U.S. companies reduced direct investment in South Africa by over $1 billion ($2.2 billion in 2021 dollars). 3 Under local and international pressure, South Africa freed Nelson Mandela from prison in 1990. By 1994, Mandela was president.

Some see the South Africa campaign as a success story for divestment, but it’s impossible to quantify the actual impact on such a complex situation. Economic analysis shows that the effort was probably too small to put real financial strain on targeted companies.4 The movement did have a major social and political impact: it made apartheid an international issue. In 1986, the U.S. passed laws prohibiting investment in South Africa.5 Divestment began as a social movement, and became national policy with real economic impacts.

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Does divestment work?

Critics of divestment say that it’s not a boycott, so it won’t work. Divestment does not directly reduce demand for fossil fuels, but that doesn’t mean it can’t have an effect. Divestment works differently than a boycott. The five main goals of divestment are to: 1. Erode the Social License to Operate. For years, society’s tacit and at times blatant support of fossil fuels has created an aura of acceptance, where fossil fuels are seen as inevitable—just part of the way the world works. That kind of support is called a “Social License to Operate.” Divestment can help delegitimize the fossil fuel industry’s role in society, making it easier to pass climate change legislation.

This is the most immediate effect of divestment.

2. Legitimize economies that do not need fossil fuels. Shifting money to different economic areas can shift the requirements to receive a “Social License to Operate.”

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3. Withdraw funds from banks who lend to fossil fuel companies. With fewer deposited funds, those banks will have less money to lend to fossil fuel projects.

4. Devalue fossil fuel stocks by selling shares, reducing the market valuation of fossil fuel companies and the banks who lend to them. Poor stock performance can deter new investors and make people question long-term profitability.

5. Re-invest the divested funds into less harmful parts of the economy, including renewable energy.

Divestment works when it raises awareness and builds momentum for further climate action. Heads turn when institutions divest billions of dollars.

The Global Fossil Fuel Divestment Commitment Database reports that $40.43 trillion has been committed to divestment.6

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Types of divestment There are two major ways to divest from fossil fuels.

Each works in its own way.

1. Withdraw funds from banks that give loans to fossil fuel companies 2. Sell fossil fuel stocks and bonds Removing funds from banks works a little bit like a boycott, because those funds can no longer be made directly available for mining and drilling. This is the easiest strategy for local action. If enough individuals, businesses, and organizations boycott fossil fuel banks locally, those banks will feel market pressures to reduce their operations in that region, creating a feedback loop.

Selling stock and bonds is more complicated because financial markets are so large and complex. For this to be impactful, the divestment movement needs to affect trillions of dollars. The involvement of large institutions is crucial to this facet of divestment.

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Part 2: Removing Funds From Fossil Fuel Banks Is your money loaned for fossil fuel extraction?

When you deposit your money in a bank account, that bank controls it. They can loan it to anybody. If the bank loans your money to build an oil rig or a coal mine, your money is funding climate change. Through their banks, many people invest in fossil fuels without ever knowing it.

Withdrawing funds from fossil fuel banks reduces the capital available to loan for mining and drilling. When people divest from fossil fuel banks, they typically move to a financial institution with clear values and transparent practices. Four good options are: • • • •

Credit unions (member-owned financial institutions) Community Development Financial Institutions Banks certified as B Corporations Members of organizations like the Global Alliance for Banking on Values 10

The easiest climate action For individuals and businesses, switching financial institutions is simple: it’s a one-time action with lasting impacts. Your money is moved from a financial system that includes fossil fuels to one that excludes them.

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Which banks fund fossil fuels?

Worldwide, the four biggest lenders to fossil fuel corporations are the four largest U.S. banks7 : 1. JPMorgan Chase

3. Citi

2. Wells Fargo

4. Bank of America

Together, the assets of these four banks surpasses the combined assets of the next 38 biggest U.S. banks. 8 For information on other banks, The Rainforest Action Network’s annual Fossil Fuel Finance Report is a great place to begin. Most large national and international banks loan to fossil fuel companies. If you use a small bank, you can ask a manager about their policies on loaning to fossil fuel companies.

Some banks publicize paperless statements or energyefficient offices, which can distract from their fossil fuel loans. A bank’s true impact comes from how it uses its money.

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Credit unions: member-owned alternatives A credit union is a member-owned, non-profit financial institution. They offer the same services as banks, but all profits are returned to members in the form of more affordable and accessible loans, lower fees, and better interest paid on savings.

Credit unions began in Germany in the mid 1800’s as a way for ordinary people to pool their financial resources for communal good rather than to enrich those who already possessed wealth and power. The U.S. government enacted a law standardizing and insuring credit unions in 1934 as a response to the collapse of banks at the start of the Great Depression.9 Credit Unions emerged as a way for people to regain power when large, unregulated institutions no longer served society in a beneficial way. Plus, local control meant credit unions could tailor their operations to fit community needs.

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Safety, stability, and usability Deposits in U.S. banks are federally insured by the FDIC. Credit unions have a parallel government insuring agency called the National Credit Union Administration (NCUA). Both the FDIC and NCUA insure a depositor’s funds up to $250,000. No memberowners have ever lost funds insured by the NCUA.10 Since credit unions are inherently local, many people worry they won’t have access to their accounts while traveling. Most credit unions have joined together in a co-op that lets you use any co-op credit union branch or ATM nationwide as if it belonged to your own credit union. Service is comparable to any national bank.

Most credit unions pride themselves on excellent customer service compared to banks—they exist to serve member-owners, after all.

In addition to credit unions, models like Community Development Financial Institutions provide stable, financially secure options that have the greater good in mind.

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Part 3: Selling Fossil Fuel Stocks and Bonds The origins of stock markets In 1602, the Dutch East India Company became the first company to list shares on a public stock exchange.11 The company’s Asian colonialism required an incredible amount of resources, employing up to 70,000 people, including a 10,000-troop private army.12 By the 1630s, at the height of Tulip Mania, it was worth more than today’s 12 largest U.S. corporations combined: $7,900,000,000,000 in 2020 dollars.13,14 Investors purchased stock directly from the company to fund colonialism. In exchange, they received part of the profits as dividends.

Stocks are revenue generators for companies. After a company issues a stock, that company is not involved in further sales between individual investors.

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How stock prices can affect companies In economic terms, selling a stock decreases demand and causes its price to drop. In a market where morals are set aside, dropping share prices attract buyers, bringing prices back up. It’s the famous invisible hand of the market creating balance.

If enough people and institutions divest from fossil fuels, they add a moral dimension to stock markets, driving demand low enough to damage the performance of fossil fuel stocks.

Corporate executives are often paid partially in stock.

The value of their compensation packages depends on stock price, so large divestment movements can place pressure for change directly on decision makers as their net worth plummets.

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Selling stock If you manage your own retirement or investment accounts, selling stock is easy. Many small investors buy mutual funds (professionally managed collections of stocks and bonds). Mutual funds, including popular index funds, can contain fossil fuel stock. Instead, investors can seek ESG (environmental, social, and governance) funds, individual stocks and bonds, or invest outside of financial markets.

For larger pension funds that you don’t control, it’s more tricky. That’s where divestment campaigns come in—putting pressure on fund managers to divest.

If you work with a financial advisor, you should be aware they are bound by law to a fiduciary responsibility, meaning they must give financial advice to maximize profit. For advice including moral or environmental concerns, you must make a specific request.

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Shareholder activism There is a valid argument for people who care about climate change to continue holding fossil fuel stock.

Some investors believe that shareholder activism is more effective than divestment. A shareholder can vote in company affairs and influence change from the inside.

Some shareholder activist strategies include electing new board members, incorporating climate and environmental goals into company policy, and pushing fossil fuel companies to produce renewable energy.

Shareholder activism can be an effective strategy if you have the time to get involved in corporate affairs.

Changing the operations of a multinational corporation requires tremendous effort. Small shareholders usually don’t have enough time or energy to contribute to that kind of activism and make informed votes on corporate governance. Selling may be an easier path.

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Part 4: Re-Investing in a Better Future Divestment alone is not enough Divestment is not a stand-alone solution to climate change. As long as average people are fossil fuel users, the fossil fuel industry will stay in business.

In fact, opponents to divestment will point to the fact that the 13 largest energy companies worldwide are state-owned companies held by countries like Saudi Arabia, Russia, and China. State-owned oil companies control an estimated 90% of proven petroleum reserves and produce about 75% of the world’s oil.15 Individual investors cannot buy stock in these companies, so divestment has no impact on them.

Lowering demand for fossil fuels is the only way average people can impact state-owned fossil fuel companies.

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Starting down a different path Creating a world without the need for fossil fuels requires investment in change. Divestment frees up money to fund climate solutions. With money to work with, the average person might…

• Invest in companies that are doing right along moral and social lines, making investment decisions with the help of tools like www.asyousow.org/invest-yourvalues/.

• Invest in slow-return and cooperative growth opportunities like the Southern Reparations Loan Fund.

• Find traditional investment opportunities that support renewable energy, integrated and organic farming, and other less harmful practices. A tool to help find investment products is fossilfreefunds.org.

• Invest outside of financial markets for different kinds of “returns.”

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Investing outside of financial markets It’s easy to think about re-investment as purchasing renewable energy stocks. Investment can be much broader than the stock market and the energy sector.

Returns on investments don't need to be monetary— they can be social and environmental. Some investment options with both environmental and financial benefits are: • Purchase a CSA (community supported agriculture) share at a local farm.

• Make home improvements that reduce fossil fuel demand, like improved insulation, passive solar design, or photovoltaic or solar hot water panels.

• Invest in rental properties with intent to make properties less consumptive.

• Become a private investor in businesses with environmental goals.

• Plant fruit trees.

• Plant a garden.

• Invest in a lifestyle and location that reduces or eliminates car commuting.

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Conclusion The only way to slow climate change is by reducing fossil fuel demand and consumption.

The fossil fuel economy touches every aspect of modern societies, so it’s hard to disentangle from fossil fuels all at once. Divestment is a multifaceted way to leverage change in social, political, and financial systems. Re-allocating money can help raise awareness about the urgency of climate change and build momentum for climate action.

In the end, divestment comes down to this: moving your money is simple. While the financial impact on fossil fuel companies may not be straightforward, it is clear that your money can be contributing to better causes.

Whether proactively or reactively, we need to prepare ourselves to live in a world without fossil fuels.

Divestment is an easy step in that process.

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IPCC Report

Richard Knight. Chapter: "Sanctions, Disinvestment, and U.S. Corporations in South Africa". Sanctioning Apartheid (Africa World Press), 1990 https://www.usatoday.com/story/news/nation/2013/12/06/mandelaobama-reagan-south-african-disinvestment-movement/3890339/ 3

Siew Hong Teoh, Ivo Welch, and C. Paul Wazzan, The Effect of Socially Activist Investment Policies on the Financial Markets: Evidence from the South African Boycott (Journal of Business, 1999, vol. 72, no. 1) © 1999 by The University of Chicago.

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https://www.congress.gov/bill/99th-congress/house-bill/4868

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https://divestmentdatabase.org/

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ran.org/bankingonclimatechange2020

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"FDIC Quarterly". Federal Deposit Insurance Corporation.

https://www.mycreditunion.gov/financial-resources/calendar-events/ federal-credit-union-act 9

https://www.mycreditunion.gov/financial-resources/calendar-events/ federal-credit-union-act 10

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Tracy, James D. (1985). A Financial Revolution in the Habsburg Netherlands: Renten and Renteniers in the County of Holland, 1515– 1565. (University of California Press, 300 pp) 11

http://museum.wa.gov.au/explore/dirk-hartog/voc-united-dutch-eastindiacompany#:~:text=The%20VOC%20was%20granted%20a,the%20Persian %20Gulf%20to%20Japan.

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https://www.visualcapitalist.com/most-valuable-companies-all-time/

https://www.statista.com/statistics/263264/top-companies-in-theworld-by-market-capitalization/ 14

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