Divestment from fossil fuels, advocated by climate action campaigners such as Bill McKibben, is a blunt instrument for reducing carbon emissions, according to climate risk analyst Robert Litterman in an interview for The Conversation. Responding to climate risk, he argues, will depend on global action to reduce emissions.
Climate change poses both short- and long-term risks, particularly to infrastructure, real estate and fossil fuel reserves, both through extreme weather events and climate policies that punish greenhouse gas emissions.
Litterman worked for 23 years at Goldman Sachs, and retired in 2009 from head of risk analysis. He is now Chairman of the Risk Committee at global asset managers Kepos Capital LP. He is also a Director at the Asset Owners Disclosure Project. Recently in Australia, he was interviewed by climate economics expert Hugh Saddler at the Australian National University. Saddler also sits on the board at The Climate Institute.
Hugh Saddler: What sort of risks does climate change pose to investments?
Robert Litterman: Climate change exposes investments to many types of risks, including both anticipated and unanticipated impacts, and over both short and long run time horizons.
In the short run the first type of risk is the direct physical impact of extreme weather on exposed infrastructure. A second type of short run risk is the decline in demand for assets that create emissions because incentives are created to reduce the production of greenhouse gas emissions.
In the longer run, there are both the direct impacts of weather-related outcomes as well as the indirect effects of climate change such as rising temperatures, severity of storms, floods, droughts, forest fires, rising sea levels, acidification of the oceans, loss of ecosystem services, large increases in species extinctions, disease, human conflicts, food scarcity, etc.
In addition to the anticipated impacts of climate change, there is also the risk of exposure to a sequence of events that creates positive feedbacks leading to time compression and potentially catastrophic outcomes.
There may also be legal liability, similar to that levied against tobacco companies, for those corporations that have either created significant emissions and/or taken actions to prevent appropriate regulatory responses from being implemented.
Hugh Saddler: Which economic sectors/industries are most exposed to these risks?
Robert Litterman: Infrastructure investments and real estate are most exposed to extreme weather impacts, whereas high-carbon, expensive to extract, fossil fuel reserves are most exposed to the pricing of emissions.
Hugh Saddler: How large are these risks?
Robert Litterman: The size of the risk depends on the valuation of the exposed assets and extent of their exposure.
The magnitude of the exposure of infrastructure depends on its location and resilience to extreme weather.
The size of the exposure of fossil fuel reserves depends on the intensity of the emissions they create as well as the extraction expense. High-carbon fuels and those which are relatively more expensive to extract are the most exposed.
From a portfolio perspective, the magnitude of the total exposure depends on the concentration and size of the exposed assets.
Hugh Saddler: What is the overall implication of these risks for US investments as a whole? And for Australian investments, particularly superannuation funds?
Robert Litterman: The main implication of climate risks is that there is an urgent need to create appropriate global incentives to reduce greenhouse gas emissions. The atmosphere’s ability to safely absorb emissions is a scarce resource that is currently being wasted. Given the virtually unbounded magnitude of worst case climate change outcomes prudent risk management requires that the potential damages created by emissions be reflected in economic activities that create additional greenhouse gases. These implications are true for all investors, including those in the US and Australia.
Hugh Saddler: Is divesting from fossil fuels an economically sound strategy for an individual or, most particularly, a super fund, rather than just a moral argument?
Robert Litterman: Divestment of all fossil fuels is a rather blunt, expensive, and potentially risky response to the dangers created by climate change. It rests on a false premise that all fossil fuel companies are somehow unethical or immoral.
Fossil fuel companies are, for the most part, profit maximising entities that are optimising the valuation of shareholder’s investments given the irrational incentives that governments have created for them.
Certain fossil fuels, such as coal, which are often referred to as “stranded assets,” are clearly exposed to the potential loss of value created by the increased expectations of the introduction of incentives to reduce emissions. This asset valuation risk can, and should, be hedged.
Other fossil fuels, in particular natural gas, which is much cleaner than coal, may actually become more valuable, at least for some period of time, if those appropriate incentives to reduce emissions are put in place. Rather than divesting all fossil fuels, an economically sound response for investors is to hedge the stranded assets in a fund.
Hugh Saddler: What are the impediments to more comprehensive disclosure to individual investors of the nature and size of the risks? Are the regulation settings right?
Robert Litterman: Disclosure of climate risks embedded in portfolios is made extremely difficult by the complexity of the risks involved and the uncertainty of the global policy response. There have been few, if any, clear guidelines for disclosure, although clearly many funds are moving in the direction of creating additional transparency for their beneficiaries of the extent of their exposures.
Hugh Saddler: The coal industry argues that coal will be a sound investment for decades thanks to consumption in China and India. Divestment advocates say coal mines will become “stranded assets”. How are we to make sense of these contrasting arguments? What is the evidence that investing in coal is unsound?
Robert Litterman: The concept of a “carbon budget” refers to the unknown quantity of emissions which can be safely allowed into the atmosphere. The well-understood fact that higher levels of greenhouse gases in the atmosphere lead to higher risks of extreme, and potentially catastrophic climatic outcomes implies that a rational, risk-averse society should immediately create incentives to sharply reduce emissions.
To the extent that expectations of the creation of such incentives become more likely and at higher levels than currently exist, demand for coal, and thus it’s expected value, will decline.
Future consumption of coal in China and India, as well as the rest of the world, is highly uncertain and dependent on the expected future price of emissions. Arguments that rely on extrapolating past, unsustainable policies indefinitely into the future are fatally flawed.
The best evidence to date that investing in coal is unsound is the recently announced policy of the Stanford University endowment that it is divesting of its coal assets. This decision is likely to be the first of many such actions by investors around the globe. Clearly, investors who anticipate such a response will want to act before valuations are impacted.
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Comments on this article are now closed.
Suzy Gneist
Suzy Gneist is a Friend of The Conversation.
Multi-tasker at Gneist Design
"[Divestment] rests on a false premise that all fossil fuel companies are somehow unethical or immoral." Excuse me, but one does not follow the other that is oversimplification at its worst. An argument resting on this statement/conclusion also rests on a false premise.
Michael Wilbur-Ham (MWH)
Writer (ex telecommunications engineer)
Both major parties are encouraging investment in further coal extraction and export.
The interview makes clear that the future viability of these mines…
Read moreBrad Farrant
logged in via email @hotmail.com
Thanks Michael, I absolutely agree as to who the real extremists are.
Felix MacNeill
Environmental Manager
They're not only extremists, they're also fantasists.
Ross Barrell
Aikido Student
Yes Michael. I listened to an interview on RN this morning with Eric Abetz. He repeatedly referred to the Greens as extreme.
It is this sort of repeated…
Read moreHenry Verberne
Once an IT professional in the fossil fuel industry but now free to speak up
The real extremist party is the LNP; they are no longer what could be termed "liberal" but they are hard right. Evidence is the budget.
Michael Wilbur-Ham (MWH)
Writer (ex telecommunications engineer)
Today the ABC Just-In reports that the Greens say that they can no longer trust the Abbott government in any negotiations - see http://www.abc.net.au/news/2014-05-26/milne-says-pm-cannot-be-trusted-in-negotiations/5477198…
Read moreMichael Wilbur-Ham (MWH)
Writer (ex telecommunications engineer)
Yes Henry, the last budget shows that Abbott is tea-party extreme.
But all the Rudd/Gillard budgets showed that Labor are are right wing government pushing the neoliberal agenda. So don't think the progressives have won just be kicking out Abbott (which will happen one day).
Ross Barrell
Aikido Student
Well. This would be true to form. Abbott would take the view that the best defense is attack. Milne said this morning that she thought Tony was a "crash…
Read moreMichael Wilbur-Ham (MWH)
Writer (ex telecommunications engineer)
Today the ABC reports that "Abolishing renewable energy target could cost billions" and that it would result in HIGHER electricity prices.
Any conservative…
Read moreSarah Glass
Sarah Glass is a Friend of The Conversation.
Retired scientist/technologist
Yes, very good point. It seems that no matter the evidence, the "believers" in neocon dogma can't hear it!!
Brad Farrant
logged in via email @hotmail.com
Given the utter failure of governments and fossil fuel companies to do what is required to prevent dangerous climate change the question of whether or…
Read moreMichael Wilbur-Ham (MWH)
Writer (ex telecommunications engineer)
I do like the suggestion that just like the tobacco companies are having to pay for their unethical behaviour in the past that the polluting industries might also one day be held to account.
For example, the funding of climate denial groups might one day be be found to be illegal.
Brad Farrant
logged in via email @hotmail.com
Yes the court action by the teenagers in the USA may well be a good start down that road.
http://ourchildrenstrust.org/US/Federal-Lawsuit
Ross Barrell
Aikido Student
Yes. And according to the guardian article cited in the words above at this site:
http://www.theguardian.com/sustainable-business/stanford-millennial-coal-oil-dump-investment-endowmen…
Read moreBrad Farrant
logged in via email @hotmail.com
Thanks Ross. Market Forces also has useful information on divestment related to banks and superannuation.
http://www.marketforces.org.au/super/climate-risk
http://action.marketforces.org.au/page/s/banks-on-notice
Sean Douglas
logged in via email @hotmail.com
HI Brad, that was a good summary about what makes very little common sense in the article and the comments quoted from Litterman. also I note that: "Litterman…
Read moreGeorgina Byrne
Georgina Byrne is a Friend of The Conversation.
Farmer at Farming
Including the comment that gas is "much cleaner"! Sad really to be taking the opinions of an obviously somewhat poorly informed investment banker so seriously...but…
Read moreMichael Wilbur-Ham (MWH)
Writer (ex telecommunications engineer)
Gas emits lots of carbon, but it does emit less carbon than coal for the same amount of electricity.
So moving from coal to gas does result in less…
Read moreBrad Farrant
logged in via email @hotmail.com
Thanks Sean, nice to have all that info on the carbon budget. It seems that more scientists and others are coming to the conclusion that if we were to…
Read moreBrad Farrant
logged in via email @hotmail.com
Michael,
I see that the greenhouse gas estimates from the unconventional gas (csg, shale etc) lifecycle continue to climb as we get better measurements…
Read moreMichael Wilbur-Ham (MWH)
Writer (ex telecommunications engineer)
Brad, you are right that gas from fracking can have significant leakage which may be enough to counter the increased generating efficiency of gas.
And…
Read moreAlice Kelly
Alice Kelly is a Friend of The Conversation.
sole parent
I would agree with you Brad. And as with tobacco industry divestment previously, It is happening now. It has started with Universities, has moved to Cities…
Read moreSean Douglas
logged in via email @hotmail.com
Thanks Georgina, sad it is. Hugh Saddler is a regular here, and he typically brings credible well researched facts and an analysis of a high value. I don't…
Read moreSean Douglas
logged in via email @hotmail.com
re "Divestment is one of the best tools that the average person has." Yes, and it is an effective approach, which while many say it isn't it actually works…
Read moreTony Dickson
Farmer at Farm Forestry and Ecological services
The cleaner burning potential for gas is significantly offset by leakage at all stages of extraction and distribution. If memory serves, methane has a…
Read moreTony Dickson
Farmer at Farm Forestry and Ecological services
Sean, whilst I am entirely sympathetic with your perspective of economics being entirely at odds with reality, I would offer a defence of Prof Saddler…
Read moreSean Douglas
logged in via email @hotmail.com
Great ref there Alice TY ... "While administrators at some of the nation’s most influential colleges and universities continue to resist the students…
Read moreSean Douglas
logged in via email @hotmail.com
Tony, thanks for the reply, that was really excellent. I agree with everything you say, and I have known all of that myself for many decades, and totally…
Read moreTony Dickson
Farmer at Farm Forestry and Ecological services
Indeed. I suppose that the most relevant issue is the audience. It would seem that, judging by the comments, this one is unlikely to derive much from Litterman's…
Read moreSean Douglas
logged in via email @hotmail.com
re "... under some circumstances, competition could be counterproductive and that co-operation could produce better results" Was that last night for a…
Read moreMichael Wilbur-Ham (MWH)
Writer (ex telecommunications engineer)
> Gas is is "sightly" cleaner in that it doesn't have all the add on pollutants that coal brings.
Wrong - the big difference is that most of the energy…
Read moreMichael Wilbur-Ham (MWH)
Writer (ex telecommunications engineer)
The Stern review states that climate change is the greatest and widest-ranging market failure ever seen, presenting a unique challenge for economics.
Economics has been a big part of the problem, and getting the economics right will be a big part of the solution.
Tony Dickson
Farmer at Farm Forestry and Ecological services
No, it was on AM a few days ago. It shouldn't be hard to find, but doubt it is worth the effort.
Tony Dickson
Farmer at Farm Forestry and Ecological services
I find that you are a master of understatment. I could, and have, enlarged on this at great length, but will refrain from a sense common decency.
Sean Douglas
logged in via email @hotmail.com
Was I talking about wet brown coal specifically? No.
Was I speaking about Victoria only? No.
Is what I said "wrong"? No.
Do I care? No.
Michael Wilbur-Ham (MWH)
Writer (ex telecommunications engineer)
Was what you said wrong? Yes.
The Victorian example was an example, And it shows why our LaTrobe Valley has some of the world's 'dirtiest' coal stations.
And do you care that you are sometimes wrong? Well you answered that yourself - no.
Sean Douglas
logged in via email @hotmail.com
GO AWAY .. NOT INTERESTED
Felix MacNeill
Environmental Manager
Tell me I misunderstood this comment:
Read more"Divestment of all fossil fuels is a rather blunt, expensive, and potentially risky response to the dangers created…
Michael Shand
Software Tester
It is the fine art of mis-representing someone's view and then attacking your own misunderstanding
Felix MacNeill
Environmental Manager
Yup, classic vampire squid tactics then...
Alice Kelly
Alice Kelly is a Friend of The Conversation.
sole parent
There are some compelling points made here Felix.
Read moreBut there is one which idea which should be discussed. The idea that we can keep temperature rises at…
Felix MacNeill
Environmental Manager
Yup - seems borderline-bearable is now the best we can hope for...and people wonder why we get a little impolite at times...
Alice Kelly
Alice Kelly is a Friend of The Conversation.
sole parent
I wouldn't want to live more than 50 kms from the ocean. And in my own way, I'm cynically banking on it.
Warwick Rowell
Permaculturist at Rowell Consulting Services
HI Alice. A permaculture perspective:
West coasts generally have less extreme climate than east coasts.
Read moreSalt levels drop each 100m you are in…
Anthony Nolan
logged in via email @hotmail.com
Divestment is a lot less blunt an instrument than a crowd of rope carrying citizens looking for irresponsible CEO's to whom to teach a lesson. Doubtless…
Read moreFelix MacNeill
Environmental Manager
Anthony, Hugh Saddler's a decent bloke with good credentials and track record, but I agree that Litterman was embarrassingly bad...must be too many years inside the great vampire squid...
Anthony Nolan
logged in via email @hotmail.com
Felix, I wish I could agree with you. But reading this sort of tripe reminds of discussing the future of capitalism with a member of the International…
Read moreComment removed by moderator.
Felix MacNeill
Environmental Manager
For some reason my reply to you has been censored. I can't honestly recall what I said that was offensive. Perhaps I used a rude word.
Anyway, all I'd…
Read moreAnthony Nolan
logged in via email @hotmail.com
Fair enough Felix :)
John Newlands
tree changer
What seems to be working is borderline investment returns coupled with green issues. Deutsche Bank would probably have pulled the pin on the Abbot Point…
Read moreSteve Hindle
logged in via email @bigpond.com
I agree an emissions cap is probably the most efficient way to reduce the carbon going into the atmosphere. But to be really effective it needs to be supported…
Read moreSean Douglas
logged in via email @hotmail.com
And I totally agree Steve. A couple of First principles analogies. Car seat belts were legislated in Australia in the early 1970s (and globally at different…
Read moreSean Douglas
logged in via email @hotmail.com
HI John, my response here concurs with your thinking i believe. https://theconversation.com/in-conversation-with-robert-litterman-divestment-is-a-blunt-weapon-in-the-climate-fight-27154#comment_385506
Aden Date
Service Learning Coordinator at University of Western Australia
"It rests on a false premise that all fossil fuel companies are somehow unethical or immoral.
Fossil fuel companies are, for the most part, profit maximising…
Read moreRoss Barrell
Aikido Student
I think amoral would be the key word here.
Brad Farrant
logged in via email @hotmail.com
As I said elsewhere - The time where people could get away with making decisions that negatively impact on people or the planet by simply saying "I am…
Read moreMichael Shand
Software Tester
Keep this in mind the next time you hear talk about less government, smaller government, less regulation, green tape, red tape, getting in the way of business
Tony Dickson
Farmer at Farm Forestry and Ecological services
The primary legal obligation imposed on commercial corporations by Commonwealth legislation is to maximise profits for their shareholders. This is only…
Read moreAden Date
Service Learning Coordinator at University of Western Australia
I think of Hannah Arendt's Banality of Evil. Evil doesn't require that our corporations be malicious or even to possess intent. It only requires that they…
Read moreTony Dickson
Farmer at Farm Forestry and Ecological services
Aden, I don’t disagree with your ethical position; any differences between us are of a semantic and pragmatic nature.
Read moreI agree that corporations do immoral…
Michael Shand
Software Tester
Interesting Interview, I think a critical point was his description of companies
(If you change "Governments" to "Markets" because governments can…
Read moreSean Douglas
logged in via email @hotmail.com
"You can't shame a company into acting right"
No you can't. The ONLY thing found to be effective since Comapnies were created as "entities" has been…
Read moreFelix MacNeill
Environmental Manager
Funny how corporations are legal 'people' for some purposes (being protected by the law), but not for others (being responsible under the law).
Pretty much socialising risk but privatising profit again, just in a slightly modified form.
Michael Shand
Software Tester
It's pretty shocking isn't it, I think your phrasing is great.
IMO, all the arguments for corporate personhood are deeply flawed
Most notably by…
Read moreFelix MacNeill
Environmental Manager
Then again, Michael, the neo-cons are doing their darndest to educate us so we too can, as mere smelly, flesh-and-blood organisms, might attain the semi-divine…
Read moreMichael Shand
Software Tester
"Hey, I like Money, you like money too?" - Idiocracy
Felix MacNeill
Environmental Manager
Got it in a word!
Gary Murphy
Independent Thinker
Of course what these corporations are really worried about is the potential for investing in assets that will become stranded. That is why the smart ones are already factoring an emissions price into their investment decisions.
Dave Bradley
logged in via email @yahoo.com.au
Stranded assets? don't worry tony will rescue them, rescue it's in his dna
Warwick Rowell
Permaculturist at Rowell Consulting Services
Thank you all for the comments on this article. I just went back, and reread the first sentence:
Divestment from fossil fuels .. is a blunt instrument…
Read moreSean Douglas
logged in via email @hotmail.com
Hear hear!
You no doubt know about this as well, being a permaculturist Warwick
http://www.resilience.org/stories/2014-01-20/crash-on-demand-welcome-to-the-brown-tech-future
http://holmgren.com.au/crash-demand/
Warwick Rowell
Permaculturist at Rowell Consulting Services
Sorry ... .. no government will put in place...
Tony Dickson
Farmer at Farm Forestry and Ecological services
“If we examine the outcomes achieved since the first revelations about the risk of climate change in the mid eighties,...”
Read moreSorry to be pedantic Warwick…
Warwick Rowell
Permaculturist at Rowell Consulting Services
Thanks for the correction, 1972 was quite a year; Blueprint For Survival, Vol 1 Issue 1 of The Ecologist Magazine...
Tony Dickson
Farmer at Farm Forestry and Ecological services
Not to mention "Limits to Growth" and about a squillion great LP's.
ted rees
Retired Read-Write Engineer at disk memory
We've got a problem with excess CO2 generated mostly by burning fossil fuels and deforestation. Divestment is one strategy that hopes to reduce CO2 generation…
Read moreAlice Kelly
Alice Kelly is a Friend of The Conversation.
sole parent
"the missing ... is to stop using"
Read moreI have no doubt this will happen Ted.
I heard an interview with Tim Flannery, he described a meeting of Fossil Fuel…
Tony Dickson
Farmer at Farm Forestry and Ecological services
Can't argue with that, in fact I have spent most of my life attemting to do just that. I'm still working on it.
Thomas Kim Wearne
logged in via Facebook
I think some of you have got the wrong idea about Robert Litterman, he is someone who campaigns ferociously for market mechanisms, especially carbon pricing…
Read moreWarwick Rowell
Permaculturist at Rowell Consulting Services
The next step with your divestment programme is to look to the positive side, and invest in a company you regard as ethical, or if that is too hard, in…
Read moreThomas Kim Wearne
logged in via Facebook
I am also with Australian ethical super and encouraging others in my life to do the same. Without being much of an investor, it is easy to appreciate that…
Read moreMichael Ekin Smyth
Investor, narrator
Litterman is right that divestment is an extremely blunt weapon - and potentially counter-productive.
Read moreWhile a case for disinvestment in coal producers…