Driven by a global push for net-zero emissions, governments, companies, and investors are adopting diverse strategies to curb greenhouse gases. Divesting from carbon-intensive assets has gained significant traction, allowing corporations to reduce reliance on fossil fuels and accelerate their transition.

While withdrawing capital from polluting entities can help them align with sustainability objectives, its effectiveness in achieving net-zero targets is complex and may have unintended consequences. Exploring these implications can provide valuable insights for investors.

How Does it Work?

Carbon-intensive assets encompass infrastructure, businesses, and industries heavily reliant on fossil fuels, such as coal-fired power plants, oil refineries, and gas exploration projects. Divestment involves a company selling such assets to avoid risks associated with climate regulations, public scrutiny, and declining demand for fossil fuels.

These risks aim to pressure polluting companies, limit their access to capital, and accelerate the phase-out of outdated technologies. However, divestment doesn't guarantee emissions reductions; it can simply transfer ownership to new, potentially less-regulated entities.

Divestment generally aims to reallocate capital. Redirecting funds towards cleaner technologies and renewable energy sources can significantly advance a company's energy transition, enabling them to meet investor, market, and regulatory pressures driven by climate change including: 

1. Market Pressure: Polluting companies face growing pressure to decarbonize as investors increasingly prioritize sustainable investments. This pressure can manifest through limited access to capital and increased operational costs, pushing companies to adopt cleaner practices.
2. Shareholder Concerns: Shareholders and boards are increasingly aware of climate change and ESG risks. They can exert pressure and influence change through voting rights and active engagement with companies, demanding greater accountability and action on climate issues.
3. Regulatory and Legal Burdens: Location-specific emissions regulations are a key driver of divestment, despite their limitations in addressing global warming as a whole. Additionally, climate litigation is increasingly used by stakeholders to force companies to reduce greenhouse gas emissions. A landmark 2021 ruling by the Hague District Court ordered Shell to reduce its emissions by 45 percent by 2030, relative to 2019 levels.

Despite these motivations, divestment is not a full-circle solution. While it severs the financial link between the divesting entity and the polluting activity, it does not guarantee that those assets will cease emitting greenhouse gases or even become cleaner-running in any way.

The Limitations of Divestment

Asset Transfer Without Emission Reductions

A major limitation of divestment is that carbon-intensive assets are often sold to new owners instead of being decommissioned. This means global emissions remain unchanged, even though the divesting company appears to have a smaller carbon footprint. New owners may operate in less-regulated markets or lack commitment to climate goals, potentially perpetuating or even increasing emissions. For example, private equity firms or state-owned enterprises in countries with weaker environmental regulations might acquire these assets.

When global oil giants began exiting the Niger Delta, they made progress toward their net-zero goals. However, Nigeria's overall oil production experienced higher greenhouse gas emissions and a dramatic increase in flaring and oil spills.

Economic and Social Impacts on Local Communities

Selling assets often leads to significant job losses, which can devastate communities, particularly those heavily reliant on carbon-intensive industries. Without comprehensive transition plans, divestment risks exacerbate economic inequality and social instability in affected areas.

Greenwashing 

Divestment can be misused as a form of greenwashing, allowing companies to appear environmentally responsible and gain positive publicity without making substantial changes to their overall carbon footprint. It can enable temporary emissions reductions, giving the impression of progress while companies continue to expand their carbon-intensive operations in other areas. This misleads stakeholders and distracts from genuine efforts to achieve net-zero goals.

The Need for a Comprehensive Approach

While divestment from carbon-intensive assets can be a valuable tool for advancing an entity's net-zero transition, it is not sufficient on its own. For the strategy to be truly effective, it must be part of a broader transformation of the global economy toward sustainability. This requires scaling up renewable energy sources, implementing sustainable technologies, supporting affected communities, and ensuring global accountability.

BITA's comprehensive ESG database provides valuable insights into company emissions and net-zero commitments, enabling investors to make informed decisions about divestment and other climate-related strategies.

Additional Methods for Achieving Net-Zero Targets

Beyond divestment, companies are employing a variety of strategies to transition towards net-zero emissions. These methods are often combined to create comprehensive sustainability strategies that reduce emissions across multiple aspects of business operations.

Leading Companies

Achieving net-zero emissions requires a holistic and multifaceted approach that goes beyond asset divestment. Many companies are adopting innovative methods and leveraging technology to create comprehensive sustainability strategies. The companies highlighted below have made significant strides in reducing their carbon footprint.

References

Amazon. (2021). The Climate Pledge. Retrieved from: https://www.aboutamazon.com

Gözlügöl, A. A., & Ringe, W.-G. (2023). Net-zero transition and divestments of carbon-intensive assets (SAFE Working Paper No. 386). Leibniz Institute for Financial Research SAFE.

Gözlügöl, A. A., & Ringe, W.-G. (2023). Net-Zero Transition: An Inconvenient Truth About Carbon Asset Divestment. 

Gupta, S., & Rempel, H. (2021). "Stranded assets and transitions in climate policies." In IPCC Sixth Assessment Report: Accelerating Transition.  https://www.ipcc.ch/

Intergovernmental Panel on Climate Change. (2022). Climate Change 2022: Mitigation of Climate Change. Contribution of Working Group III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge University Press. https://www.ipcc.ch/report/ar6/wg3/

Intergovernmental Panel on Climate Change. (2023). AR6 Synthesis Report: Climate Change 2023. Contribution of the IPCC to the Sixth Assessment Cycle. https://www.ipcc.ch/report/sixth-assessment-report-cycle/

Microsoft. (2022). Environmental Sustainability Report 2022. Retrieved from https://news.microsoft.com/wp-content/uploads/prod/sites/42/2023/05/2022-Environmental-Sustainability-Report.pdf  

Microsoft. (2020). Sustainability Commitments. Retrieved from https://www.microsoft.com

Nestlé. (2022). Net Zero Roadmap. Retrieved from https://www.nestle.com

Ørsted. (2022). From Fossil Fuels to Renewables. Retrieved from https://orsted.com

Ørsted. (2022). Sustainability Report 2022. Retrieved from https://www.responsibilityreports.com/HostedData/ResponsibilityReportArchive/o/OTC_DOGEF_2022.pdf

Unilever. (2022). Annual Report and Accounts 2022. Retrieved from https://www.unilever.com/files/92ui5egz/production/0daddecec3fdde4d47d907689fe19e040aab9c58.pdf

Unilever. (2021). Sustainable Living Plan. Retrieved from https://www.unilever.com