Fossil fuel: warming to a theme

Lots of people refuse to invest in tobacco. These upstanding types do not, presumably, think that withholding capital will make anyone quit smoking. They just do not want to make money from others' misery.

Some big investors, including the Church of England and Stanford University, plan to shift their capital away from fossil fuel producers. If you take the view that burning these fuels warms the planet, the logic is the same as for tobacco. These boycotters, however, might also hope to reduce carbon emissions.

If enough people refuse to invest, the cost of capital for fossil fuel companies would increase. One ironic effect of this would be better returns for those who did invest (a higher cost of capital implies higher expected returns). But it would also discourage companies from investing in marginal expansion projects, leaving more CO2 under the ground. This, in turn, would increase the scarcity of fossil fuels, driving prices up and demand down, and making alternative fuels relatively more attractive.

But the scale of the boycott would have to be vast to meaningfully increase costs of capital. The 20 largest oil and gas companies alone have a total market capitalisation of $2.2tn, according to Capital IQ.

A targeted approach would make more sense. Focus on reducing production of the dirtiest fuels: coal has twice the CO2 of gas, for example. Restricting the number of target companies would increase the impact on costs of capital and - for companies able to invest in various fuel types - provide a route off the boycott list. A blanket boycott leaves companies without options (and perpetuates the silly idea that we should or could stop using fossil fuels altogether).

Most people profess concern about global warming, but do little about it. A Pew Research Center study before last year's US elections revealed that nearly half of Americans considered warming a major threat, but that it was low on the list of issues on which they assessed candidates. Investors who want to overcome this apathy need to set policies that do more than keep their own hands clean.

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