In a previous post, we explored the IP&G language that various FBAOs use to describe how they manage their oil & gas investments. Some of the faiths indicated that they use divestment under certain circumstances (mostly in the form of negative screens) to be more aligned with their beliefs, teachings and values.
This raised an interesting question: does divestment actually impact new oil & gas fundraising? We explored the topic and found that, in the view of some researchers, divestment is limited in restricting new fundraising and thereby is limited in its ability to reduce emissions.
In this article from the Oxford Journal of Economic Geography, researchers investigated the following hypothesis: to what extent are ‘fossil fuel divestment commitments related to capital flows into the oil & gas sector’? This was tested by performing an analysis of the ‘syndicated lending, equity and bond underwriting across 33 countries from 2000 to 2015’ and then comparing that with divestment pledges and government subsidies. The idea behind this method is to test the degree to which reduced capital flows (divestment) affect the financing (syndicated lending) of new oil & gas investment.
The researchers found that divestment is successful in reducing capital flows in countries with stronger government regulation of fossil fuels (as measured by proxy using oil and gas subsidies by country), where in countries with pro-fossil fuel regulations (read higher subsidies) there is a significant diminishing impact on capital flow reductions.
However, there is an unintended effect – it would seem that financial institutions compensate for this by ‘providing more finance to oil & gas companies abroad’ if the institution is located in a “stronger regulation” country – a dynamic of the ‘pollution haven hypothesis’. Additionally, there is also no guarantee that any divestment capital is put towards any investment in renewable or sustainable energy, and the authors did not attempt to track if there was a positive funding effect for non-carbon energy in strong regulation countries.
This research suggests that your divestment activities are helpful, but not sufficient in many cases – country level regulations and a globally fluid financial system may work against your intentions. But they are important!
Amidst all these considerations, what should FBAOs do? Some are determined to divest, some employ a hybrid approach of engaging and divesting if needed (based on their IP&Gs), while others remain invested to engage in advocacy/engagement policies. This is a critical decision, to be made only after careful consideration and discernment, relative to the faith’s values and resources. We recognise these strategies come with various advantages to exercising beliefs, teachings and values, in the context of the organizations' asset size, networks and capabilities.
As always, we recommend clear IP&G language to divestment or engagement/advocacy policies which provide specific guidance to how an engagement with an asset manager or organisation should be undertaken.