The Case for Divesting from Fossil Fuels in Canada

Global Economy Program
Centre for International Governance Innovation

Emissions reduction targets pledged recently by 174 countries, including Canada, require urgent actions whose impact on global fuel demand seem incompatible with a sustained and strong recovery in fuel prices that the oil sands and other high-cost fossil fuels require to remain economically viable. Federal and provincial governments need to ensure that the financial risks posed by climate change to the oil, coal and natural gas industries are fully recognized in the investment and lending decisions of major public pensions and banks in the country.

Timing of Financial Risks have been Brought Forward

The call for divestment from fossil fuels has traditionally been pitched to protect the future wealth of pensioners and other long-term investors. But the time frames for action have shifted markedly over the last two years, with the collapse in coal, oil and natural gas prices already triggering a massive decline in the equity valuations of fossil fuel producers. At the same time, the strengthening resolve of the world to pursue more aggressive climate change targets at the twenty-first session of the Conference of the Parties, COP 21, to the United Nations Framework Convention on Climate Change brings forward the timing of needed reductions in global fossil fuel consumption. As measures to achieve these reductions take hold, they threaten to stymie any strong recovery in fuel prices, without which much of today’s fossil fuel industry is already at economic risk.

Canadian investors — as well as lending institutions — are particularly exposed, given the large weighting of oil and gas stocks in the Toronto Stock Exchange Composite Index, and the loan exposure of Canadian banks to the energy sector and its high-cost oil sands. The decarbonization of the global economy sanctioned by the recent COP 21 agreement to limit the average temperature increase to between 1.5°C to less than 2°C threatens to marginalize much of Canada’s carbon reserves and points to a significant downsizing of oil sands operations in the future — and, potentially, of other fossil fuel industries in the country, including coal and possibly natural gas.

Given the energy sector’s importance in Canada to pensions and other institutional portfolios as well as bank lending, economic stresses in the oil sands and other fossil fuel industries could have wide-reaching effects on all Canadians. Pensions and lending institutions need to stress test their oil, gas and coal assets to verify that they will remain economically viable as Canada’s commitments, as well as those of 173 other countries, to reduce carbon emissions weigh heavily on fossil fuel markets around the world.

Fossil Fuel Divestment Movement has become the Fastest Growing in History

Ethical investing has a long history dating back to the eighteenth century when the Religious Society of Friends, also known as the Quakers forbade its members from participating in the slave trade. The landscape of ethical investing has broadened considerably since then. Munitions, the former apartheid regime in South Africa, alcohol and tobacco have all been targeted by funds looking to invest in a socially responsibly fashion. More recently, executive compensation, gender and racial equality, respect for human rights and independence of corporate directors have been added to the list.

Under the rubric of what is now more commonly known as responsible investing, there is a growing movement to tie portfolio selection not only to expected financial performance, but to a wide range of issues relating to corporate behaviour and governance, as well as, notably, fossil fuels.

Mounting worldwide concern over the impact of carbon emissions on climate change has recently shone the divestment movement’s spotlight on fossil fuels and the companies involved in their extraction and processing. In recent years, the movement against fossil fuels has become the fastest-growing divestment campaign in history (Howard 2015). Beginning from a handful of campus movements in the United States launched by Bill
McKibben’s 350.org, the fossil fuel divestment movement has mushroomed across countries and continents to include a variety of institutions — religions institutions, sovereign wealth funds, state and municipal pension plans, charitable organizations and private fund managers. Currently, more than 500 institutions have divested some US$3.4 trillion in assets from fossil fuel extraction companies. In addition, more than 50,000 individuals have divested US$5.2 billion from the fossil fuels sector.

Some of the largest divestments have been made by university endowment and pension plans. In May 2014, Stanford University’s US$18 billion endowment fund
divested from coal stocks, citing its social responsibility to help mitigate climate change. A year later, the entire University of California system announced that it would be jettisoning coal and oil sand stocks from its endowment and pension portfolios, selling US$200 million in related securities.

Student- and faculty-led divestment campaigns are under way at other prominent institutions in both North America and Europe. In the United Kingdom, both Oxford and Cambridge universities have adopted divestment policies. In Canada, divestment campaigns have been launched on no less than 30 different campuses, including the University of Toronto, McGill University and the University of British
Columbia.

Since its campus origins, the divestment movement has broadened to include pension funds and other institutional investors. More than 180 pension funds, cities, foundations, charities and financial institutions around the world have made commitments to divest.

And medical associations in the United Kingdom, Australia and Canada have opted to remove fossil fuels from their portfolios, citing the growing health risks associated with global climate change.

The Case for Divesting from Fossil Fuels in Canada – PDF

Jeff Rubin
Centre for International Governance Innovation

Jeff Rubin is a senior fellow of the Centre for International Governance Innovation. A Canadian
economist and author, Jeff is a world-leading energy expert and former chief economist at CIBC World Markets. At the Centre for International Governance Innovation, he is currently
researching the impacts and opportunities for Canada in its transition toward a more sustainable economic model.

Jeff’s work explores the future of Canada’s oil sands in an emissions-constrained world, the divestment of Canadian fossil fuels, the case for a national carbon tax and the evolving value of Canadian resources.

Global Economy Program
Centre for International Governance Innovation

Addressing limitations in the ways nations tackle shared economic challenges, the Global Economy Program at the Centre for International Governance Innovation strives to inform and guide policy debates through world-leading research and sustained stakeholder engagement.

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