The High Cost of Divestment

By Benjamin Sporton
Acting Chief Executive, World Coal Association

Since 2012, when launched its “Fossil Free” campaign, there has been an increasing global campaign to divest fossil fuel assets, particularly coal. The approach has been supported by some institutions that have divested, while rejected by others. For instance, in February 2015, despite an expert panel supporting continued investment, NBIM, the manager of Norway’s sovereign wealth fund, announced it had divested a number of fossil fuel companies from its portfolio.

In contrast, a number of other high-profile organizations have resisted calls for divestment. Harvard University, Brown University, the University of Oxford, and the Wellcome Trust, among others, have released statements questioning the rationale of the campaign. Indeed, the President of Harvard, Drew Faust, who controls the university’s $32 billion endowment, stated:1

Divestment is likely to have negligible financial impact on the affected companies. And such a strategy would diminish the influence or voice we might have with this industry. Divestment pits concerned citizens and institutions against companies that have enormous capacity and responsibility to promote progress toward a more sustainable future.

As the divestment campaign has grown in exposure, proponents have begun to suggest that the financial valuations of energy companies may be damaged by strict international climate policies. Campaigners suggest that in order to avoid the potential impacts of climate change, governments must adopt policies consistent with limiting global average surface temperature increases to 2°C above pre-industrial levels. This scenario would require deep structural changes to the business model of conventional energy companies. In effect, they argue, it would render large volumes of coal and hydrocarbon reserves “unburnable”. The concept continues that stock market valuations of fossil fuels are overvalued creating a “carbon bubble”. Under these circumstances, campaigners have begun to pressure governments and institutions to divest their financial holdings from companies that explore, produce, market, and/or exploit fossil fuels.

However, with deeper analysis, it is clear that the movement is built on unsubstantiated claims and flawed logic.


Calling for divestment from coal does not recognize the reality of growing energy demand, the continuing role of coal, and the importance of technology in enabling coal use to be compatible with global efforts to reduce emissions. Coal has accounted for nearly half of the increase in global energy use over the past decade. In terms of energy, the 21st century has been built on coal. In the early part of this century, coal’s global contribution alone has been comparable to the contribution of nuclear, renewables, oil, and natural gas combined (see Figure 1).2

FIGURE 1. Incremental world primary energy demand by fuel, 2000–2010

FIGURE 1. Incremental world primary energy demand by fuel, 2000–2010

The latest figures from the BP “Statistical Review of World Energy” show that coal’s share of global primary energy consumption in 2013 reached 30.1%—the highest since 1970.3

There are 1.3 billion people in the world today who live without access to electricity; 2.6 billion people rely on traditional fuels, such as dung and wood, for cooking. No doubt that is why, according to the World Resources Institute, 1199 coal plants (representing 1,401,278 MW) are anticipated across 59 countries, many of them in the developing world.4 This is because coal is the most affordable, easily accessible, and reliable source of power.

Alongside its vital role in electricity generation, coal is also an indispensable ingredient for building modern infrastructure, such as transport systems, equipment, and high-rise buildings, to support urbanization and economic development. The materials used in these projects—steel, cement, glass, and aluminum—are highly energy intensive. Coal’s social value was highlighted by Christina Paxson of Brown University in her response to calls for divestment when she said, “A cessation of the production and use of coal would itself create significant economic and social harm to countless communities across the globe.”5


At the core of divestment campaigns are forecasts about the future demand for fossil fuels. Investors and policymakers rely on energy projections from a variety of independent sources and these shape investment decisions. Leading energy forecasters, such as the IEA, all suggest that coal will have a central role to play in energy generation and in industries, such as steel production, for decades to come. Even under the IEA’s New Policy Scenario (see Figure 2), which assumes all government promises on funding renewables and building nuclear power plants are implemented, coal consumption increases by around 17% through to 2035 and there is little change in the global energy mix.2 Coal continues to make up 25% or more of primary energy demand—as it was in 1980, and as it has been for most of the past 30 years. This will also be 25% of an energy pie that IEA projects to grow by 40% over the next quarter century.

FIGURE 2. Historical and predicted energy makeup under the IEA’s New Policies Scenario2

FIGURE 2. Historical and predicted energy makeup under the IEA’s New Policies Scenario2


Divestment campaigns assume investors do not understand the risks associated with the investments they undertake and, as such, they are incapable of pricing the risk within their portfolios.

There are risks for every business and future demand conditions may result in losses given current business models and business strategies. The fossil fuel industry is not unique in this. However, divestment campaigns seem to be based on the argument that investors are somehow oblivious to the risks. Investors have known about climate change since at least 1992, when the United Nations Framework Convention on Climate Change (UNFCCC) was negotiated.

In fact, a University of California study has refuted claims that the so-called “carbon bubble” will soon burst.6 The study found that rational investor expectations of future cash flows derived from fossil fuel assets have already adjusted for the likelihood of global action to reduce CO2 emissions.

Investors may not value the risks to the level that divestment campaigners would like, but it is an unsubstantiated claim that markets ignore these risks. An appropriate response to any risk is a well-diversified portfolio.

Coal is projected to continue to make up 25% of primary energy demand.

Coal is projected to continue to make up 25% of primary energy demand.


Divestment campaigns pressure investors to divest fossil fuel stocks irrespective of whether they have good or bad Corporate Social Responsibility (CSR) indicators. All fossil fuel companies are grouped together—no benefit is given to companies with a good CSR performance.

However, environmentally conscious investors are able to ensure responsible corporate behavior through the adoption of CSR programs that enhance environmental outcomes. For instance, investment has led to developments in cleaner coal technologies, such as high-efficiency, low-emissions (HELE) coal-fired power plants and carbon capture, use, and storage (CCUS), which have made a significant contribution to reduce global CO2 emissions. The potential of CCUS is evidenced by the Boundary Dam coal-fired power station in Canada. This pioneering project will reduce greenhouse gas (GHG) emissions by one million tonnes of CO2 annually, the equivalent to taking more than 250,000 cars off the road each year.

Stepping away from the fossil fuel industry does not mean that the demand for fossil fuels will go away, it just means that environmentally conscious investors lose any influence they have over the operation of those companies.

By definition, divestment requires a change in ownership of assets: Institutes and individuals may sell their shares but can only do this if other institutes and individuals buy these same shares. In other words, divestment does nothing to affect the demand for or use of fossil fuels.


The large mitigation potential of cleaner coal technologies, including HELE coal plants and CCUS, invalidates the central argument of divestment campaigns. Coal can be, and in many cases already is, used in a sustainable way through the use of modern technologies. Investing in cleaner coal technologies is often criticized as a means for the coal industry to “smuggle” its products into a low-emissions future. The reality is that cleaner coal technologies are needed because coal demand will continue and, thus, coal is part of our energy future. Raising the global average efficiency of coal plants from 34% to 40% with today’s off-the-shelf technology would save two gigatonnes (Gt) of CO2 each year. This is more than the total annual CO2 emissions of India—the third largest CO2 emitter in the world.

In addition to the significant benefits from reducing CO2 emissions, modern HELE plants can almost eliminate emissions of nitrogen oxides (NOx), sulfur dioxide (SO2), and particulate matter (PM). Real solutions to climate change will come largely through technological change and action on all low-carbon options. CCUS will be a key technology to reduce CO2 emissions, not only from coal, but also gas and industrial sources. The IEA has estimated that CCUS could deliver 14% of cumulative GHG emissions cuts through to 2050 and that climate change action will cost an additional US$4.7 trillion without CCUS.7,8 However, in comparison to other low-carbon technologies, CCUS is underfunded. The Global Subsidies Initiative has reported that renewable energy projects (excluding hydroelectricity) receive US$27 billion in public funds every year.9 In comparison, in the decade since 2005, only US$12.2 billion has been available to fund CCUS demonstration—in total.


Funds subscribing to the objectives of the divestment campaign will incur three types of costs: trading, diversification, and compliance.

Processing and execution costs, as well as reduced return on investment, mean that divestment could be expensive.

Processing and execution costs, as well as reduced return on investment, mean that divestment could be expensive.

Trading costs refer to the outlays involved in selling fossil fuel securities and purchasing new compliant stocks. In addition, many exchanges are also liable for exchange fees and taxes. A recent study titled “Fossil Fuel Divestment: A Costly and Ineffective Investment Strategy” by Professor Daniel R. Fischel suggests that these processing and execution costs are approximately $0.18 per $100.10 Professor Fischel suggests that U.S. universities would incur costs of $40.2 million for processing and execution.

Investment risk is best mitigated by a diverse asset port-folio. Restricting or eliminating fossil fuels from investments will likely reduce the average return. Again, Fischel’s study provides compelling evidence to support this argument. The study assessed a portfolio containing energy stock against a portfolio with no energy stock from 1965 to 2014. In addition to a reduced return of 0.7% per year, the assessment found that the portfolio that did not have energy assets was more susceptible to volatility.

Finally, divestment compliance is a complex process that is highly sophisticated and demanding. Thus, it comes with commensurate resource and cost burdens. More than simply divesting from fossil fuel companies, policy may demand that investments are withdrawn from index and commingled funds and moved to actively managed funds. Assessments suggest this would cause management fees to double. To address these compliance concerns, portfolio managers are beginning to offer funds with “green” objectives. Industry reviews, however, indicate that mutual funds with an environmental focus come with higher management fees.

Independently the various costs associated with divestment are substantial. Cumulative costs, however, are significant and may impair the objectives or even function of endowments and pension funds. Divestment by tertiary organizations is especially counterintuitive, given their role in providing solutions to energy and climate issues through research and grants.


The direct impacts of fossil fuel divestment are unlikely to be significant; this view is grounded in financial logic. In contrast, however, the indirect impacts of campaigners should not be discounted.

Perhaps most significantly, divestment would lead to responsible investors leaving the energy industry. As demonstrated by the projected growth of coal, stepping away from the fossil fuel industry does not mean that the demand for fossil fuels goes away. Instead, a more likely scenario is that environmentally conscious investors will lose any influence they had over the operation of those companies. Indeed, this outcome was highlighted by Jeremy Farrar, Director of the Wellcome Trust, who responded to the recent Guardian divestment campaign by stating:11

We use our access to boards to encourage them to adopt more transparent and sustainable policies that support transition towards a low-carbon economy. And we adopt the same position with companies that consume fossil fuels as we do with the companies that supply them. Carbon emissions are driven by both supply and demand: it makes no sense to devote attention purely to one side of this equation. This maximises our influence as investors.

The divestment campaign threatens the coal industry’s investments to improve environmental performance, starting with the potential to reduce 2 Gt of CO2 emissions each year with off-the-shelf efficiency increases. This is why the World Coal Association has recently published a concept paper on launching a global Platform for Accelerating Coal Efficiency (PACE) to support the deployment of HELE technologies. Moreover, deployment of HELE is a critical step on the pathway to the deployment of CCUS technologies. As shown by the Intergovernmental Panel on Climate Change, this is a vital development if global temperature increases are to be kept below 2°C.12


  1. Harvard University, Office of the President. (2013, 13 October). Fossil fuel divestment statement,
  2. International Energy Agency (IEA). (2011). World energy outlook 2011,
  3. BP. (2014). Statistical review of world energy 2014,
  4. World Resources Institute. (2012, November). Global coal risk assessment,
  5. Brown University, Office of the President. (2013). Coal divestment update,
  6. Dominguez-Faus, R., Griffin, P., Myers Jaffe, A., & Lont, D. (2014, June). Science and the stock market: Investors’ recognition of unburnable carbon. Presented at the 37th International Association for Energy Economics Conference on Energy and the Economy, New York, NY,
  7. IEA. (2013). Technology roadmap carbon capture and storage,
  8. IEA. (2010). Energy technology perspectives 2010: Scenarios & strategies to 2050,
  9. International Institute for Sustainable Development. (2011).
    Subsidies and external costs in electric power generation: A comparative review of estimates,
  10. Fischel, D. (2015). Fossil fuel divestment: A costly and ineffective investment strategy, (accessed March 2015)
  11. Farrar, J. (2015, 25 March). Fossil fuels divestment is not the way to reduce carbon emissions. The Guardian,
  12. Intergovernmental Panel on Climate Change. (2005). Carbon dioxide capture and storage,

A copy of the WCA’s PACE concept paper can be downloaded from the WCA website:


The content in Cornerstone does not necessarily reflect the views of the World Coal Association or its members.
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