Saturday, July 19, 2014

Stigma for fossil fuel companies, the reverse for the churches that dump them

World Council of Churches, Unitarian Universalists, United Church of Christ, and many smaller/regional church denominations and affiliated organizations have established climate divestment policies. Others are percolating - the Methodists are studying their investment policy, the Presbyterians are first going to try to persuade the companies to give up their core business model (good luck with that!)* and then we'll see them and others consider this issue.


People involved in climate divestment and had also been involved in South Africa divestment a generation ago say that climate divestment is moving faster. An Oxford study backs that up (p. 11).

The same study acknowledges limited direct financial impacts of divestment except for coal industry, but then focuses on the stigma issue:

As with individuals, a stigma can produce negative consequences for an organisation. For example, firms heavily criticised in the media suffer from a bad image that scares away suppliers, subcontractors, potential employees, and customers. Governments and politicians prefer to engage with ‘clean’ firms to prevent adverse spill-overs that could taint their reputation or jeopardise their re-election. Shareholders can demand changes in management or the composition of the board of directors of stigmatised companies. Stigmatised firms may be barred from competing for public tenders, acquiring licences or property rights for business expansion, or be weakened in negotiations with suppliers. Negative consequences of stigma also include cancellation of multibillion-dollar contracts or mergers/ acquisitions. Stigma attached to merely one small area of a large company may threaten sales across the board.
(p. 14, citations removed)

The stigmatization from divestment will have financial consequences. These companies will have to pay more for employees and for other businesses to work with them. Companies with a toe-hold in the fossil fuel sector will find it better for them to get out.

Most important is that stigmatized industries will find it tougher to manipulate the political sector. That's one reason why they disguise their funding, but the disguise is imperfect, and the difficulty gets worse with the stigma.

Two other points. The study acknowledges political restrictions resulting from the climate divestment effort could destroy the perceived value of reserves that end up staying in the ground. When the carbon bubble pops is hard to predict, but any downward pressure increases the possibility of it happening soon.

Second, when companies divested from South Africa they weren't required to physically blow up the businesses they left behind - they sold them. The argument that it had no financial impact was around then, but we see what happened in the end.


*I think there is a business case that fossil fuel companies should 1. stop wasting money exploring for new reserves, 2. sell the reserves they're not going to be allowed to develop before the carbon bubble bursts, 3. play out the remaining and cheapest reserves and 4. either distribute the profits and wind down their companies, or invest in another business model. Not bloody likely to happen, though.

I'm ignoring the complications of when natural gas can substitute for coal. 

15 comments:

William Connolley said...

> 2. sell the reserves they're not going to be allowed to develop before the carbon bubble bursts

How would that work, in your ideal world? Obviously in the real world, they are assets, and you could sell them. But if you're selling them because you can't develope them before the bubble bursts, then you're selling them to fools who will lose all their money. In an ideal world those people wouldn't exist.

So I think the only way this makes any sense is if the assets have a probability of being developed, not a certainty of not being developed, and you sell them to people who thing the probability is higher. Just selling them to someone who is tougher and less interested in stigma wouldn't help anyone.

turboblocke said...

Alternatively: don't sell the assets, sell your shares in the company. Companies, contrary to the US position, are not people. But people own the shares... I see a lot of financial press still talking up FFs. Surely the exit strategy for the vested interests is to get rid of their shares without a loss. Once they're fully divested, they don't care what happens to the FF companies.

Just mention "stranded assets" on a financial discussion board in the context of FF and wait for the fireworks.

turboblocke said...

Alternatively: don't sell the assets, sell your shares in the company. Companies, contrary to the US positioning, are not people. But people own the shares... I see a lot of financial press still talking up FFs. Surely the exit strategy for the vested interests is to get rid of their shares without a loss. Once they're fully divested, they don't care what happens to the FF companies.

Just mention "stranded assets" on a financial discussion board in the context of FF and wait for the fireworks.

turboblocke said...

Oops sorry about the double post. It said that verification had failed,so I tried again

Hank Roberts said...

> invest in another business model.
> Not bloody likely

Say what? Watching Duke Energy (where my family grew up)

https://www.google.com/search?q="duke+energy"+"solar+farm"
and also converting two old coal plants to biomass.

Every big solar operation I know of turns out to already be partly owned by (directly or at some remove) a company also in fossil energy.

Pure evil is hard to find among the users (generating companies). Maybe the suppliers are purely invested in owning coal, hoping to be paid to leave the stuff in the ground -- which wouldn't surprise me terribly.

And of the suppliers, I think a lot of them 'own' lease options on federal land. As I recall, they were pushed a few years ago to either develop or give up those options, which seemed rather shortsighted of the US government.

Magma said...

@ Hank Roberts, 14 years ago BP tried an abortive (and insincere) attempt at positioning itself as an 'energy company' with the lovely yellow and green sunflower logo and "Beyond Petroleum" slogan.

Well, there's been a lot of water (or oil) under the bridge since then and BP is still working hard to keep the world safe for petroleum.

But when more large companies start deferring costly new fossil fuel projects, closing down marginal fields, and selling wasting assets to suckers or vultures and moving into alternative energy business in a big way you'll know we've arrived. For obvious commercial reasons it will probably be a quiet, stealthy transition.

Brian said...

William - the business case is that the bubble is already here, so you, Mr. FF CEO, shouldn't want to be the one stuck with the stranded asset when it bursts. The stranded asset being your share of the 2/3 of the FF reserves that are the most expensive/take the longest to extract.

In my ideal world noone would buy them, the bubble would burst today, and investment for future needs would switch to non-FF sources. A more realistic best case would increase the number of sellers relative to buyers and drop the value of these reserves, stranding the worst ones. You don't need either argument though to make the business case to an individual CEO, just the eventuality of a bubble bursting in an uncertain timeframe.

And these arguments about selling businesses or selling stocks would have applied in South Africa too, yet we got a good result.

Hank - you're right that some/many FF companies are diversifying, and that's a good thing. A massive switch is much harder though.

I believe Duke supported the Waxman cap-and-trade bill. A reasonable counterargument to climate divestment is the claim that political opposition to climate legislation is driven by ideology more than FF corporations. Not sure what I think of that - ideology and economic interests are intertwined.

Fernando Leanme said...

Preliminary disclosure: I worked in the oil industry from 1975 to 2013, most of my career involved activities outside the USA, but I'm fairly familiar with the USA industry, SEC rules, and legal framework.

The overwhelming majority of oil reserves and resources are held by state owned enterprises. These include Saudi Aramco, Venezuela's PDVSA, National Iranian, Kuwaiti National, Sonatrach, the Chinese National companies, Petroecuador, and on and on. This divestment campaign is meaningless because it really doesn't impact the biggest reserves holders.

Then there's the simple fact that if churches sell assets others will buy. Some of us are much more familiar with market dynamics than churchmen, and we realize the stock values should be set using the cash flow generated in the future. Divestment doesn't impact the cash flow because oil prices are likely to increase. They are likely to increase because demand pull isn't ceasing and we are running out of oil anyway.

Do note I'm limiting this discussion to oil. I read comments by some people who should have known better, such as Ms Figueres at the UN, and they tell me quite a few of them don't understand the industry and can't tell oil from other fuels.

Anonymous said...

To Brian:

Re your comment: "and investment for future needs would switch to non-FF sources."

I take that to mean "investment for future needs would switch to" investment in non-FF sources.

My question: when it has become too expensive/difficult to extract FF sources, what is to be the ENERGY source by which the financial investments in non-FF sources are to be realized?

The point is that an effective transition to non-FF sources must be accomplished, with the judicious use of remaining FF energy sources, WELL before they become stranded.

John Puma

Kevin O'Neill said...

Fernando - the financial impact is really not a concern. The divestment is a moral statement, not an economic one.

As a recent article in the Harvard Political Review says, "However, the [South African] divestment campaign likely had a different, non-financial impact. Divestment greatly increased public visibility surrounding the injustices of South Africa’s apartheid government. It is almost certain that worldwide popular opposition in the 1980s contributed to the decline of apartheid, and divestment was an important piece of this puzzle.

Mal Adapted said...

Brian: "A reasonable counterargument to climate divestment is the claim that political opposition to climate legislation is driven by ideology more than FF corporations. Not sure what I think of that - ideology and economic interests are intertwined."

In the US at least, political opposition is effectively sustained by fossil-fuel billionaires, who buy legislators' commitments directly and also fund the disinformation campaign to keep the public in doubt about climate science. Sometimes those billionaires publicly profess Libertarian ideology, to reported mass acclaim. Should we conclude that climate legislation is driven by ideology?

Martin Vermeer said...

> Just selling them to someone who is tougher and less interested in stigma wouldn't help anyone.

William, purely on market logic you are absolutely correct. But more than market logic applies here: these smaller companies have less political and media leverage, and they will be more unadulteratedly, i.e., visibly, evil. Clarity. A gain in my book.

Fernando Leanme said...

Kevin, I think I understand now. The idea is similar to what we do when we refuse to purchase Israeli products because they abuse the Palestinians. It doesn't seem to work but it makes people feel good.

I gave orders to my whole extended family to avoid purchases at chevron because they loaned $2 billion usd to the Venezuelan dictatorship. We realize it's not very effective because if Chevron doesn't lend some other company will probably do it. But it sure feels good.

I guess I would rather target specific companies or countries. But I know a couple of outfits you can divest which impacts the oil industry much more than you can imagine. The key is that these guys provide technology and know how to the private as well as the public corporations.

I tend to think their existence is well known. And the fact that public corporations own most of the oil is also extremely well known. Therefore I think this divestment move is a bit distorted, probably dreamed up by leftists who don't use a fine focus. It reminds me of those feel good "lets not buy gasoline on Monday" movements.

If you want the names of the key companies look up who is most active in the OIL FIELD SERVICES sector in Saudi Arabia, USA, Russia, Kuwait, Venezuela, Iraq, and Iran. They are easy to find.

Kevin O'Neill said...

Fernando - If it was a matter of making the divestors feel good, then it would have no impact (except on the divestors 'happiness').

But just about every analysis of the end of apartheid in South Africa gives some credit to the divestment movement - even though no one believes that any companies were adversely affected.

I think we could consider it more akin to peer pressure. Behavior is changed to avoid social stigma - not economic consequences.

J Bowers said...

WmC: "But if you're selling them because you can't develope them before the bubble bursts, then you're selling them to fools who will lose all their money."

Like Wall Street invested in shale gas and then USGS cut estimates by up to 80% ? It's hardly unprecedented for idiots using other peoples' money to jump on get rich quick bandwagons. And now shale oil's been slashed by 97%.