Recently, the Rockefeller Family Fund, an $815 million foundation, announced that it will divest from investments in fossil fuels. In a letter posted to its website, the foundation wrote, “While the global community works to eliminate the use of fossil fuels, it makes little sense—financially or ethically—to continue holding investments in these companies.”
Divestment is a bold step for the Rockefeller family. Its fortune comes from oil tycoon John D. Rockefeller, founder of Standard Oil, the predecessor to all the major U.S. oil companies. The Rockefellers are not alone: the exodus from hydrocarbon companies has surpassed $2.6 trillion.
I applaud the Rockefeller family’s integrity, but I question their strategy.
For those of us who aspire to a carbon-free future, divestment is a double-edged sword. Divestment from fossil fuels does not equal re-investment into alternative energy sources. Divestment also means losing your vote. If you’re an ExxonMobil XOM -0.50%, Chevron CVX -0.14%, ConocoPhillips COP +0.69%, or Marathon Oil MRO -1.92% shareholder who cares about climate change, now is the moment to keep your seat at the table. Once you’re gone the companies have no reason to listen to you.
On Wednesday, Exxon shareholders will convene for an historical annual meeting. Shareholders could vote on as many as seven environmental resolutions, including one that requires Exxon to limit temperature gains to 2°C, in line with the Paris Agreement.
Despite protest from Exxon, the Securities and Exchange Commission (SEC) ruled that the company must allow shareholders to vote on that resolution and at least one other. The second proposal asks shareholders to vote on naming someone with climate change expertise to the Exxon board.
This is an opportunity to steer Exxon towards a course of sustainable industrial innovation. Now more than ever, the company needs environmentally conscious shareholders and board members.
Exxon is hardly the only company facing shareholder activism. Proxy Preview 2016, a report by the non-profit As You Sow, notes that U.S. firms face a record number of shareholder resolutions that address climate change – 94 this year, up from 82 in 2015. As I alluded, Chevron, ConocoPhillips, Devon Energy DVN -0.63%, and Marathon Oil also face environmental proposals.
Many hydrocarbon companies and large industries now facing major transition still assume that “greener” operations would hurt their profits. That assumption is flawed. The International Energy Agency (IEA) estimates that it will take $44 trillion in investments to decarbonize the global energy system by 2050. Just to meet the goals of the Paris Agreement,
Bloomberg New Energy Finance and Ceres estimate that we need $12.1 trillion worth of investment over the next quarter century. In other words, we need $484 billion per year over that period. In 2015, we invested $329 billion.
Who wouldn’t want a piece of that multitrillion dollar opportunity? Sustainable investment opportunities are popping up in every industry and are not only necessary, but will also be highly rewarding.
While it is encouraging to see that more and more countries are stepping up to the plate to help finance the necessary change, the financing will primarily need to come from the private sector.
If hydrocarbon companies wish to remain Fortune 500 companies into the future, they need to adapt now. Although it seems inconceivable, Exxon and its kin could play a leadership role in facilitating our transition to a carbon-free global economy – if shareholders exert their power.
We will always need energy and the hydrocarbon giants of today are actually well-positioned to become the green elephants of the future in a capital efficient way. But they can only use their balance sheet once! Their challenge is to position themselves for a cannibalization of their current core business over the next decades while increasingly taking on more significant positions in the emerging new energy industry. Without a clear strategy for that, they will be confronted with huge stranded assets and risk going the way of the Dodo.
Activist shareholders recognize that the transition to a carbon-free society must be profitable, not coerced. This brings me to the good news and bad news: we do not yet have the technology to go completely carbon-free. So we cannot go “cold turkey.” Things like aviation or powering a steel or aluminum plant require new solutions. For that we need more time, but we better try to accelerate change for these applications as well.
If we wish to go carbon-free, we need more breakthrough innovations such as nuclear fusion, wave power, or a totally new energy source. The good news is that there are many bright people out there who, given the opportunity and capital, will find these breakthrough solutions. And there are many large companies interested in using their capital, expertise and access to markets to help build these solutions, which could be crucial to their future. In the meantime, there is enough innovation around today that can enable hydrocarbon companies to reduce emissions on their way to becoming cleaner, cheaper and more diversified.
One day, we may live in a carbon-free society, but rapidly divesting from oil and gas will not necessarily hasten the transition. On the contrary, society is going to need to use Big Oil’s balance sheet to finance the transition to low-carbon energy. This spring, shareholders have a chance to hold hydrocarbon companies accountable to the Paris Agreement, and I hope they do. With this grand opportunity ahead, maintaining investments in hydrocarbon companies is a responsible course of action. Together we can win the war on carbon.
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