Anti-coal activism has unsound basis

The fossil fuel industry, in general, and the coal industry, in particular, has come under attack from environmental activists seeking to end Australian coal production and exports.

If the goal of the campaign is to end coal production, the means to that end is to persuade investors that coal has no economic future and to persuade them to "divest" out of fossil fuel-based industries.

The campaign rests, however, on false premises and unsubstantiated claims and may breach Australian law.  Taken at face value the logic of the claims is appealing, and is scientifically and economically sophisticated.  Upon close evaluation, however, the divestment logic is fragile and driven by the desired conclusions.

Despite lip-service being paid to a 2 degrees temperature target increase, most governments are making little or no progress to achieving that target.  Whether or not that target will be breached is a function both of CO2 emissions and technology.

The divestment campaign logic ignores technological improvements that could vary the maximum amount of CO2 emissions.  The divestment campaign suggests that investors are capable of understanding that the "solution" to the carbon risk problem is to divest portfolios of fossil fuel stocks.  Yet the World Wildlife Fund has not divested its fossil fuel exposure, but rather hedged that risk.  In this respect, the WWF is following the practice of ordinary investors, who are indeed pricing the risk of climate change, but just not as highly as the environmental movement would like.

Ultimately, the divest campaign is making a forecast on future fossil fuel demand and is just one of many such forecasting exercises, and should be seen and treated as such.  Investors, and policy-makers, should rely on energy projections from a variety of independent-minded forecasters, not those written by activists with an ideological axe to grind.

CENTRAL ROLE IN FUTURE

The principal international energy forecasters — private and public — all suggest that coal will have a central role in energy generation for decades to come.  Finally, the campaign may contravene the letter or the spirit of the Corporations Act.  While activists argue that wealth portfolios without fossil fuel stocks perform just as well as those with fossil fuel stocks, the reality is that failing to hold a well-diversified portfolio has substantial economic costs in the form of higher risk and lower returns.

So if investors make valuation errors based on the divestment campaign and relinquish high-performing stocks, a breach of the Corporations Act may have occurred.

There is a potential role for the Australian Securities and Investment Commission to examine whether the stigmatisation of the fossil fuel sector via the divestment campaign is a breach of the Act.  The divestment campaign would amount to an unlawful secondary boycott if environmental activists were covered by those laws.

They are seeking to restrict coal mining in Australia by targeting a critical supplier to the sector.  The bottom line is that the divestment campaign is environmental activism dressed up as investment advice.

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