Divestment in resource and fossil fuel intensive shares

Recent announcement by ANU that it has dumped some of its holdings of shares in resource and fossil fuel intensive companies has created a lot of media attention. Even the PM himself stood up to brand this decision as being ‘stupid’. In response, ANU’s VC published a comment, defending his University’s action.
ANUs move is a really a part of a global movement to divest in shares of businesses that are seen as fossil fuel intensive.
While there are significant ethical principles that underpin this divestment drive, to which I am personally strongly sympathetic, it is important to understand the economic/finance workings to assess how effective the divestment might be. There are in general two types of sources of finance for big businesses: debt (i.e. borrowing from the banks, or issuing corporate debt instruments) and equity (i.e. issuing shares). The divestment campaign directly targets the latter, but the resource businesses have been increasingly relying on the former (for some actual numbers refer to PwC’s Mine 2014 publication). That’s not surprising given that debt is cheap in the current economic conditions. Those conditions have already lasted for several years now, and will likely last for several more. There is cheap credit everywhere, and companies like BHP or Exxon do not have any trouble borrowing funds at very low rates.
So, the divestment in shares by few Universities around the world, of which not many in Australia,
is not going to do much harm to the finances of corporations operating in resource and fossil fuel sectors. The whole campaign might provide a warm fuzzy feeling for the students and academics in those Universities who divest, but unfortunately, it is not going to make that much of a difference.

Author: Tiho Ancev

Tiho Ancev is a Professor of Agricultural and Resource Economics in the School of Economics, University of Sydney. His main research areas are agricultural, environmental, natural resource and energy economics. Tiho’s main contributions have been in water economics and policy, economics of energy, economics of air pollution and climate change policies, and economics of precision agriculture and agricultural input use. He has published widely on these topics in top international peer reviewed journals. Tiho has led and contributed to national and international research projects in these research areas. He is currently the Managing Editor-in-Chief of the Australian Journal of Agricultural and Resource Economics.