Ireland is the first country to implement divestment rules for its state investment program. This forms part part of an international movement that is committed to the reallocation of investments in favor of low-emission companies.
Ireland is the first country to implement divestment rules for its state investment program. This forms part part of an international movement that is committed to the reallocation of investments in favor of low-emission companies.
With a vote at the second reading of the Fossil Fuel Divestment Bill
1]
on 26 January 2017, the Irish Parliament decided in favor of landmark legislation. The Ireland Strategic Investment Fund (ISIF) is instructed to only invest in sustainable assets and to terminate its holdings in fossil energy companies. When this legislation enters into force, Ireland will be the first country to implement a divestment program for state assets.
Divestment from fossil energy companies is seen as an important strategy in the fight against climate change by various climate protection initiatives. The core idea is to reallocate investments from oil, natural gas and coal companies by selling assets and investing the capital in sustainable business models instead. The expected decline in the exploration and exploitation of oilfields, coal deposits and the use of fossil fuels (“keep it in the ground!”) is supposed to reduce greenhouse gas emissions and air pollution.
In the context of the Paris Agreement, which has just come into force, the avoidance of environmentally damaging investments might also be the best option for investors. Several bodies, including the Scientific Advisory Board of the German Federal Government on Global Changes in the Environment, have pointed out that only a fraction of the available fossil fuels can be used in order to meet the climate protection goals. If this requirement is enforced, most of the detected petroleum and coal reserves are inaccessible and therefore worthless. Since the valuation of energy companies is also based on their future extraction capacities, a massive loss of value for investors would be expected for such a case. The current situation is described as “carbon bubble” with overvalued fossil companies
2]
.
The power of Divestment results from the multitude of different actors that are able to participate in the movement. These include, in addition to private individuals, universities, religious communities, municipalities, non-profit foundations, development banks and lenders. Divestment programs are especially common in North America, the UK and Australia. In Germany, the cities of Münster, Stuttgart and Berlin as well as the Protestant Church in Hesse and Nassau have announced divestment initiatives. In the few years since the beginning of the movement, the number of supporters rose to around 700 institutional supporters and thousands of private individuals with a combined investment volume of more than 5,000 billion dollars
3, 4]
.
However, a study by the Smith School of Enterprise and Environment at the University of Oxford concludes that the movement is unlikely to reach a significant level that will harm the energy companies. This is due to the size of the market capitalization of fossil fuels and the existence of numerous other investors. The stigma caused by divestment can, however, in the long term increase the uncertainties regarding fossil business models, returns and the valuation of the respective companies. The coal industry would have to cope with the most serious implications for businesses
5]
.
In this respect, three factors are decisive for the continued success of the divestment movement: its ability to mobilize wealthy supporters, the development of the energy market (energy prices, investment opportunities in renewable energies) and the decisions of stakeholders (binding climate mitigation, Institutional investment). The decision of the Irish Parliament will initially have a symbolic effect. This mainly consists in showing that divestment has arrived at the state level. On the basis of this success, the movement could continue to gain momentum.
Author:
Dennis Nill
Tel. +49 (0)30 408 18 7017
dennis.nill@ikem.de
Contact person:
Simon Schäfer-Stradowsky
Magazinstraße 15-16 , D-10179 Berlin
Tel. +49 (0)30 408 18 7010
simon.schaefer-stradowsky@ikem.de
