We can talk about carbon bubbles and the risk of investing in fossil fuels, but the most profound changes come from breaking down acceptance of existing norms, says Brett Scott

In the early 1700s, investing in ventures that used slave labour was considered to be a normal and prudent practice among financiers. In this context, abolitionist campaigners had two options. Either they could talk the language of the merchant banks and traders, arguing that it is unproductive, unprofitable and reputationally damaging to finance slavery. Or, alternatively, they could argue that it is just plain wrong, regardless of profitability.

Slave labour could be delegitimised as a backward and embarrassing relic of a medieval economy, not fit for an enlightenment era.

The fossil-free divestment movement faces a similar societal dynamic right now. Continued investment in fossil fuel extraction is a recipe for ecological and humanitarian crisis, but large investors plough money into it as if it were perfectly prudent. The aim of divestment movements is to delegitimise the apparent normality of such practice, and to showcase the fossil fuel industry as an entrenched relic of the industrial age resisting attempts to modernise.

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In the course of this battle, divestment movements face a similar choice to that of the abolitionists. Does one argue within the existing terms of the financial mainstream – asserting that fossils fuels are not a prudent investment – or do you attempt to challenge those existing terms, arguing that such investment is simply wrong, regardless of whether it is profitable or not?

Arguing within the existing terms

The language of mainstream investment is the language of risk and return, in which investors ask themselves “how much money do I have to put in, relative to how much money I get out over time?”

In practice, this means an investor is going to assess three things. Firstly, how much does it cost? Secondly, how much can they expect to get back from it in terms of predicted future cash flows? Thirdly, what is the risk that those cash flows will actually not materialise?

These basic building blocks of investment desirability can be used by divestment campaigners. To challenge an investor thinking of putting money into a coal corporation, for example, you should argue three things. Firstly, that the costs of doing so are inflated. Secondly, that the imagined future cash flows are actually much lower than expected. Thirdly, that the risks of those returns not materialising are much higher than expected.

The Carbon Bubble argument, for example, attempts to show that fossil fuel investments are overvalued, by arguing that they are based on false expectations of future cash flows, stemming from the imagined sale of fossil fuel reserves that cannot actually be allowed to be burned.

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Arguing in such terms of financial risk and return naturally leads to risk management solutions. Thus, groups such as the Asset Owners Disclosure Project call for large investors to “hedge” the risk of their carbon-intensive portfolios with investments in low-carbon projects.

The strength of these approaches is that they tap into a rationality that mainstream investors readily understand, taking seriously the constraints and incentives that a fund manager may face.

On the other hand, they sometimes appear shallow. Given that investors are frequently focusing on shorter-term profitability, is it really less profitable to invest in fossil fuels? And, while it’s true that a carbon bubble exists conceptually, does it really impact the fund manager right now?

Redefining the terms

Many campaigners are thus suspicious of reformist approaches that accept the terms set by the mainstream investment industry. Talking in terms of monetary returns may get the ear of investors, but only at the risk of implicitly legitimising that existing rationality.

Consider, for example, this question, frequently asked within investment circles: ‘Will sustainable investment impact our returns?’

Sustainable finance professionals are often quick to buy into the terms set by that question, passionately arguing that high-carbon investment won’t actually be profitable in the long run.

The alternative approach, however, is simply to deny the validity of the question, rejecting the idea that monetary profitability should hold any moral weight, and pointing out that an investment framework that has the ability to view planetary-level disruption as justifiable is simply unacceptable.

Even if fossil fuels are profitable, and even if sustainable investment is less profitable, financial returns are invalid if the broader stability of human society is undermined in the process of obtaining them.

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Indeed, investors often fetishise monetary returns without thinking about the world in which those monetary returns will have to be spent. This is partially due to misunderstanding the nature of money, which is best thought of not as an independent “thing”, but rather as a claim upon society. What is the point of amassing such monetary claims if the society in which I can use them in has become a lot less liveable?

Divestment campaigns engage young people into politicising investments that will impact their future. They recast fund managers and investors as political agents who wield power over how the world of the future will look. They erode the social license of the financial sector to engage in unsustainable investment, while simultaneously offering it a new role in creatively investing in a better world.

Blending the two approaches

In practice, divestment campaigns – and other sustainable finance movements – work best when they blend together the two broad schools of argument sketched out above. In the short-term, it can help to tap into the language of mainstream finance, but the most profound changes come from breaking down social acceptance of the existing norms of investment.

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The two approaches converge in three areas. Firstly, in the campaign to broaden the notion of fiduciary duty. It is not acceptable for fund managers to hide behind their apparent duty to a narrow group of clients as an excuse for not considering the future stability of human society.

Secondly, they find common ground in the quest to redefine the time horizon in which investments should be assessed. Investors must move beyond the short-term interests of a few, and focus on the broad long-term interests of future generations.

And thirdly, they converge in the battle to incorporate non-monetary returns and losses into investment assessments. People would be far better off with lower monetary returns within a healthier environment to enjoy those returns in, than they are with higher monetary returns in a compromised, unstable world.



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