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What To Watch: Issue #3

June 5, 2019

Even Denver, Colorado announced in March that it would divest from fossil fuels in its $6 billion general fund portfolio. Don’t shrug this news off as yet another piece of irrelevant divest nonsense. Although the divest movement may not directly impact your company’s bottom line or share price, you need to understand and mitigate the risk it’s creating for your business and the sector.

Both of these things are true:

  1. The divest from fossil fuel movement is unlikely to directly impact a company’s share price or valuation.
  2. The growing success of divest-from-fossil-fuel efforts normalizes the idea that our society does not need fossil-based energy to survive and thrive.

The problem:

The divest movement has broadened and accelerated in the last two years. College campuses, public pension funds, cities, and states are increasingly announcing their intention to remove investments (“divest”) from fossil fuels. Once isolated to college campus clubs, the movement now includes pension funds, cities, states, and university endowments — all making public commitments to ending investment in fossil fuels. In 2018, New York City announced its intention to divest its $194 billion in pension funds. Organizations as diverse as international Catholic entities, the Canadian medical association, and the American Federation of Teachers have passed resolutions encouraging and empowering further divest action.

It matters because:

While the direct financial implications for your firm may be minimal, these divestitures fuel public pressure on regulators to stop oil and gas projects and encourage communities to oppose their construction. They also propel the public conversation about energy and climate further into an expectation that our society has moved “beyond fossil fuels.”

Take Colorado as a prime example. The 2019 legislative session brought a massive overhaul of oil and gas regulation in the state. While many of us were working to have a pragmatic conversation about the important role of oil and gas in our economy and way of life, Denver —the city where the legislature sits — was committing to divesting from fossil fuels. The see-saw tips further away from balance.

The critical mistake companies are making:

Companies are dismissive of the divest movement as a fringe activity of college students. It was. It’s now a mainstream activity for which those formerly “fringe” activists now claim $6 trillion has been divested. And they’re aiming for $10 trillion by next year.

Seize the day. Successful companies will:

  • Seek first to understand. Each of us must get to know and understand the worldview that sees fossils as dead — it’s the only way to engage in the conversation successfully.
  • Show some respect. Most of the public is largely agnostic on the subject of fuels and the future of energy, but they watch the conflict as rubberneckers do a traffic accident — they can’t help themselves. The largely neutral public is our audience, and they want to see that you understand opposing viewpoints and engage respectfully.
  • Get working on that ESG strategy. As I discussed in my previous posts, What to Watch Private Financing and What to Watch – Investor Climate Activism, your risk analysis and proactive ESG approach are critical components of your mitigation strategy.
  • Get ready for this question. “Why should we support you and perpetuate our addiction to fossil fuels?” Your ESG strategy should make the answer to this question clear.

It’s painful to watch the growing success of the anti-fossil movement. Your company will be best equipped to mitigate theses risks by tracking and understanding their potential impact.

Send me your thoughts and questions; I’ll incorporate themes into upcoming installments.

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