Credit: WorldTraveller/Wikipedia

Will divestment from coal make a difference to climate change?

Norway's vast sovereign wealth fund prepares to ditch coal investments in the latest sign that action on climate change is hotting up.

by Adam Gale
Last Updated: 01 Jun 2015

If Norway was a person, it would be that friend you had in college who was annoyingly brilliant at everything but whom you couldn’t quite bring yourself to dislike. Its levels of economic development, income and gender equality, educational performance, social cohesion and crime are among the very best in the world.

Much of this success has been built on the rather solid foundation of North Sea oil, and yet the country’s stunning fjords aren’t spoiled by slicks or choked by smog. Norway is among the most environmentally conscious nations, you see. Of course it is...

That may strike some as hypocritical, given that all that oil will be burned somewhere else, but it seems Norway is now applying its green domestic principles to its international investments. The nation’s vast sovereign wealth fund (a £594bn pension pot filled by decades of oil revenue, worth roughly £117,000 for every single Norwegian and by far the world’s largest) is about to divest from coal.

The Norwegian parliament’s finance committee announced yesterday that it wants the Government Pension Fund Global to pull investments from all companies that make 30% or more of their fossil fuel revenue from coal or produce 30% or more of their electricity from burning it. Given that it enjoys cross party support, the change is likely to be approved by parliament next week.

This is part of a wider trend of institutional investors backing away from coal, and to a lesser extent other fossil fuel companies. Insurance firm Axa said it would sell off €500m of such assets this year, while in the last two months the Church of England divested £12m from tar sands oil and thermal coal and the University of Oxford said it would make no future investments in them.

Norway’s divestment is far more significant (though not its first – last year it ditched 32 coal companies from its portofolio), but is driven by the same forces. While some of it is about reputation and image (who wants to be seen as profiting from global warming, after all), the main reason is that coal’s getting risky.

In December, world leaders will meet for the UN’s climate change conference in Paris, and there are increasing signs that real progress might be made. The main one is the agreement late last year between the US and China to cut greenhouse gas emissions.

The US committed to a 26-28% cut by 2025 from 2005 levels, while China set targets to peak emissions by 2030 and raise renewable power to 20% of its total by the same year. These countries produce a third of the world’s emissions and have immense clout between them - their support for cuts and caps could genuinely be enough to drive through agreement at the UN.

For fossil fuel companies, then, there is a risk their industries might be suffocated by international regulations, and that’s ultimately why Norway is starting to pull out.

Will the Norwegian decision make a real difference to coal miners or energy providers? Perhaps. It’s unknown how much of their assets are in companies that meet their divestment criteria. The figure could be substantial, in which case the downward pressure of the share price would lead to corresponding pressure from shareholders on bosses to get out of coal and into cleaner fuels.

The problem is, how clean can a coal company get? Indeed, how far could Shell or BP reduce their own dependency on oil? The real danger for these firms and for the world is that if governments agree to cap emissions by regulation and carbon taxes, it will crash the assets of some of the world’s biggest companies.

ExxonMobil, for instance has $350bn (£227bn) of assets. If it were told half of its proven oil reserves couldn’t be extracted, how much would this wipe off the world economy? If anything happens too quickly, oil could be the next subprime.

The pressure from investors like Norway, while potentially significant and growing, is far gentler. It’s a reaction to a coming change, rather than the cause of it. Whether it will be enough to encourage the energy sector to reform itself before regulation forces it to remains to be seen.

As far as Norway is concerned, any hit to the fossil fuel sector would be painful – the Norwegian Petroleum Directorate estimates that only 45% of its discovered and undiscovered North Sea resources have so far been exploited – but not ruinous. Owning over 1% of the world’s equity makes for a pretty decent insurance policy.

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