This article seeks to explain some realities of the stock market mechanisms that determine what would happen if there were big sales by large financial institutions of holdings in companies engaged in fossil fuel extraction, processing or ongoing use. In other words, bulk disinvestments.
Owners of such shares could be banks, investment fund managers, university and public sector pension funds, life assurance companies and the less visible private investment funds (sometimes called ‘family offices’).
The shares to be sold could be in businesses that are wholly involved in fossil fuel extraction and use, mainly involved or only partly involved. Deciding which stock market listed companies ought to be on an ‘undesirable’ list is a challenge in itself. The debate about what counts as a ‘fossil fuel’ business will not be addressed here.
The author does not challenge the proposition that fossil fuel consumption contributes to climate change or that it it is legitimate to apply pressure in all ways legally possible to reduce such consumption.
The objective is to enlighten and inform people who are not familiar with the workings of global financial markets of the possibility that they may get misled about the effectiveness of what they think they are asking for and to explain some other useful tactics.
Problems of terminology
Most people would be hard pressed to explain what they mean in detail if they say a bank is ‘invested in coal mining’. Banks are providers of services, including investment services, but since the financial crisis, they conduct very limited direct investment activities on their own account. In other words, it is not a main activity of banks to invests banks’ money – they invest as managers of other people’s money.
So when it is said that banks are investing so many billions in fossil fuels, that is a slightly inaccurate choice of language.
Banks do of course lend huge amounts of money to businesses, both to make money by charging interest and as the agents of governments. That is obviously a mainstream banking activity. Some of that lending may go to mining companies but that is not investment. It might be thought desirable to close off that flow of funds, but a proposal that a certain class of business ought to be banned from borrowing money would require some political support and probably legislation.
How should we understand what is meant when it said that a bank or other institution is ‘invested in’ fossil fuel businesses? In reality, this means that in its capacity as a manager of other people’s money, an institution uses its discretion to buy shares in the companies whose activities are contributing to climate change.
So the plea ‘don’t invest in fossil fuels’ translates properly as: ‘don’t use your discretion in managing other people’s money to buy shares in fossil fuel businesses’, and in addition, ‘sell the shares you already have’.
The latter part of the plea gives rise to the idea of disinvestment.
It is important to realise that the consequences of any sales would not be felt by the institution itself – indeed it may earn fees from making sales – but by the ultimate owners of the shares in the fossil fuel companies. They would be the institution’s customers.
Does it matter?
You may well be saying that this is just boring semantics, but actually it is important to appreciate what really happens and why it may not be as effective an approach as we might like.
If we want our bank to sell shares in a fund it is managing for its customers (maybe their ISA or pension), that action is not directly connected with the operations of the company whose shares are being sold at all. They will just notice that a new owner of those shares is named in their shareholder registry. The shares are not cancelled, there are no payments to or from the business and in fact the whole process is just routine.
This is because shares are traded ‘second hand’.
After the initial listing on a stock exchange, shares in issue are no longer a means of raising funds for the company. They are traded between parties who see them as offering financial value. The activities of the businesses whose shares are being traded are only indirectly relevant, because the profits of those businesses will be paid out in part as dividends to the owners of the shares.
Thus, after issue, shares only have value because the company makes profits (or is expected to, to be more accurate), and pays dividends. The share is believed to be worth owning because the owner will get an income in the form of a dividend. The owner may hope the value goes up, but that is only because it is expected that the dividends will increase. A share value can be defined as the sum that people are prepared to pay for all the future cash flows they will receive as owner – mostly dividend income.
So if our banks sells shares in XYZ Mining plc, the business operations of XYZ plc are not impacted in any way whatsoever.
You could argue that if enough people sold the shares, the price would fall so much that the directors lose out on their share options schemes, which would make them pay attention, and raising new money will be more difficult. That much might be true. The share price falling dramatically would also damage the wealth of many other (often unknowing) investors.
We need to bear in mind that, if someone sells a share, it is a dead certainty that someone else buys it. Share trading is a remarkably simple market. If there are a lot of sellers, and there are fewer potential buyers, that means that the price will fall. Sellers coming to the market later in a big sell off will get significantly lower prices because there is a ‘buyers’ market’. This is not always a reflection of the trading profits being made by the company in question – it is just that there are more sellers than buyers – as a result of a disinvestment policy, for example.
It is important to appreciate that a large part of the investment market these days is made up of investment funds that are strictly obliged to own all the shares in a stated stock market index like the FTSE 100, UK All Share or S&P500 in the USA. These are the passive or index tracker funds and multi-asset portfolios.
As long as shares in fossil fuel businesses are listed in those indices (all the largest ones are), investors in the likes of Vanguard Lifestrategy or other passive multi-asset funds will own them – they have no option not to. These are the people, and there are very many of them, whom I called unknowing investors.
Other really effective ways of making a difference
People who want their money invested in sustainable businesses need to investigate ESG investments – those that take account of the environment, sustainability and governance.
The last criterion is usually skipped over by most people because they have no idea what it means. It is actually more important than many people suspect. It would be upsetting to find out that the company whose shares you own via your chosen fund is delivering a sustainable service and has sound ecological policies but that is hides its profits in tax havens and its directors are becoming billionaires while its employees are working for minimal wages and have poor employment protection.
In many cases well governed businesses do offer sustainable products and services and have sound environmentally sensitive methods of working, so in the best scenarios E, S and G come together.
It is also true that poorly governed businesses will be prone to polluting, exploiting employees, deceiving consumers and cheating on taxes.
How does ESG filtering work
Significant effort is now being made to rate companies using better and better research against an agreed ESG standard, so shares and investment funds have ever better ESG data available for potential investors to look at.
Some investment operators in the UK have specialised in this sort of investment for many years and have very good track records in delivering investment returns to customers.
As to who they are, any competent qualified financial adviser or wealth manager will know, but it is not difficult to find out oneself thanks to the depth of data available via the internet and search engines. The EIRIS foundation is one good starting point – www.eirisfoundation.org.
A great example of a specialist fund manager is WHEB – www.whebgroup.com – but there are many investment options for those who want their personal actions to help improve the world for future generations. Fund managers like Jupiter, Liontrust, Janus Henderson, Royal London and others have a wide range of long running sustainability filtered investment offerings.
If you start to invest in funds or shares with the right ESG focus and sell investments that are index trackers or have no ESG filter, you will trigger disinvestment in fossil fuel businesses. The more money that goes to ESG rated funds, the less goes into investment vehicles with fossil fuel holdings.
If you don’t have any investments, you may well have a pension plan through your job. This is very likely to have an option to direct your personal savings into a sustainable or ESG fund. Ask the person who set the plan up for you, or contact the pension company who send you statements if you want to find out.
Even if you work in the public sector or a very large business and so don’t see too much about your pension plan’s investments, you will probably find that there are member trustees on the pension scheme governance board and you can contact them or read their policy on the scheme’s web site.
If you have no pension and no investment, you can still of course apply lobbying pressure in whatever way you like on those who control investments to stop offering as default or mainstream products those investments that are not filtered to exclude fossil fuel producers. That certainly does include the banks we know in the UK, but also organisations as diverse as churches, universities, charities, pension funds and maybe your neighbours!
The Wrap
If banks sold their (customers’) investments in fossil fuel shares, others would simply buy them. If they were able to get them cheap because banks were unloading such shares (and what’s more known to going through an extended period of unloading), those ‘others’ would make excess profits in due course when the market ‘normalises’.
As the potential buyers of non ESG shares are likely to be less scrupulous about the environment, then that potential discounted price and potential extra future profit may not be a gift we would want to make them.
A more effective way to push fossil fuel extraction and production out of business is to do all we can personally to reduce consumption and promote alternatives. Alternative technologies do need investment and stock markets are geared up to provide that, using our money.
We can participate in the investment selection process and send a message that we support the move to sustainable energy by choosing our investments carefully. If we don’t have investments, we can at least widen the discussion and try to get our elected representatives and our friends and associates to support sustainable investment within the public and private sector.
As sustainable alternatives to fossil fuels come on stream, the demand for fossil fuels will fall. That will make fossil fuel led businesses less profitable and no-one will want their shares, but better than that, because businesses know that they have to adapt, they will slowly change, or if not, go bust.