Stranded Assets & Divestment

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This is an important and interesting addition to the responsible investing – divestment discussion. The Smith School issued a report on stranded assets, that is investments that “have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities.” This can occur for a number of reasons, but I think that this is what the fossil fuel divestment movement is hoping with happen to companies like Exxon, Chevron and others. I’ve gone on record saying that I don’t think it will happen and definitely not the extent that companies will suddenly have to stop producing fossil fuels.

For this to happen, there has to be mass-scale divestment and it also assumes that no other investors will buy those shares (which will likely be sold at a reduced price and a loss to the divesting institution). And, as the report states, university endowments is a small portion of financial market ownership. That means that the divest movement must expand beyond universities to have any effect. Furthermore, only 2% of U.S. university investment is in fossil fuels – about $9.5 million. A large amount – but not for energy companies. The large oil companies can easily cover this with cash reserves.

The report analyses past divestment efforts and finds that, contrary to public perception, they had little impact. For example in tobacco:

“despite the huge interest in the media and a three-decade evolution only about 80 organisations and funds—including religious organisations, public health organisations, universities, and public pension funds—from a universe approaching 1,000 such global funds, university endowments and organisations have ever substantially divested from tobacco equity and even fewer from tobacco debt. According to Social Funds the tobacco divestment outflows total only about $5 billion as shown in Figure 21. Contrast this with the $500 billion market capitalisation of big tobacco companies in 2013, which has been growing at a compound annual growth rate of nearly 15% since 1995.”

Read it – there’s a lot more detail in the report. It’s a fascinating and important addition to the discussion.