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By divesting, the cost of capital for these firms increases which makes the marginal projects no longer economically feasible. By then putting money into cleant

by voisin 7y ago

By divesting, the cost of capital for these firms increases which makes the marginal projects no longer economically feasible. By then putting money into cleantech, like Gates suggests, we reduce the cost of capital for these firms which is obviously a good thing. His actual quote is that it has probably had zero impact to date which may be true but is largely irrelevant to the proposition that we should divest and increase the cost of capital for these firms.

triceratops 7y ago
Or it reduces the stock price of those firms giving better returns to those who are not so morally-driven in their investing decisions.
- kelnos 7y ago
  Not sure I understand. If large-scale divestment of fossil fuel investments lowers their stock prices, how will that give the non-morally-driven investors higher returns? (Assuming we both agree that "morally-driven" investors will tend to invest in renewables.)
  - andylei 7y ago
    this explains it pretty well. https://www.aqr.com/Insights/Perspectives/Virtue-is-its-Own-Reward-Or-One-Mans-Ceiling-is-Another-Mans-Floor https://www.aqr.com/Insights/Perspectives/Virtue-is-its-Own-...
    - shkkmo 7y ago
      It's a bit wordy, but the relevant argument is here: > everything still gets owned by someone. So, clearly the group without such qualms, call them the sinners, have to own more than they otherwise would of the sin stocks. How does a market get anyone, perhaps particularly a sinner, to own more of something? Well it pays them! In this case through a higher expected return on the segment in question.
      - gowld 7y ago
        The article's loose language is confusing. The full analysis has 3 parties: virtuous boycottor investors, vicious (as in vice) investors, which the article incorrectly calls "sinner", and the evil corporation. The conclusion is that the virtuous boycottor investors' weapon is forcing the evil company to pay the vicious investors a premium return, until the corporation is bankrupt, and the vicious investors laugh all the way to the bank while the virtuous investors take pride that their financial sacrifice improved the world.
        shkkmo 7y ago
        The specific question being answered was: > how will that give the non-morally-driven investors higher returns? Which is why I only quoted the section that applied directly. The argument doesn't say that "sinful" companies will be forced into bankruptcy, it goes more like this: 1) virtuous boycotting of a company means the stock has to offer higher returns to "sinful" investors so they buy more shares. 2) Higher returns mean that the bar for the expected return of "sinful" capital expenditures by companies will be higher and thus there were be fewer choices by companies to expend capital in "sinful" ways. I think the second stage of this argument is... weak and conditional. For a company like BP that offers significant dividends, a lower stock price directly correlates to a higher return without costing the company anything. There is only a downside if that company is selling stock to raise capital. Since BP has been buying back stock for years, it seems like this is actually a benefit to BP as well.
  - shkkmo 7y ago
    Because investors will be able to own a piece of that company for less. The company hasn't changed, its ability to offer dividends hasn't changed, its longer term prospects haven't changed (due to divestment.) Really, the only impact this might have is a slight reduction in the ability to those companies to raise capital by selling stock (and I don't think that is incredibly common in the oil industry).
    - munk-a 7y ago
      If the lack of investment from certain segments of the population was sustained then the stock will be of lower demand in the long term hurting it's price for investment, if this is really well sustained and consistently done then IPOs for such industries will raise less capital because there is less demand available when initial investors want to cash out. However, that's really conditional, I think in actuality we're observing a short term fluctuation and eventually investment will resume - in that case you're essentially handing your money to the people you disagree with by taking a loss (or less or a gain) when selling your stock, allowing them to purchase it under value, and then letting them resell the stock once the market has recovered from it's temporary depression. So divestment would work in theory with good coordination, but I don't think it'll work in practice because humans are terrible.
      - shkkmo 7y ago
        > if this is really well sustained and consistently done then IPOs for such industries will raise less capital because there is less demand available when initial investors want to cash out. Would this really have an impact on fossil fuel usage? The companies that drive fossil fuel consumption are established players and it seems like limiting seed funding in their industry would only help these players. I'm pretty sure that you would have a bigger impact teleconferencing rather than flying around for meetings and investing the money saved on airfare in oil companies. The solution is not divestment, but investment. Taking your money out of oil companies seems far less effective that putting your money into green companies.
        munk-a 7y ago
  - shoo 7y ago
    Consider the case of an investor, Alice, willing to invest in fossil fuel stocks, who is currently sitting on $100 cash and looking for a profitable investment. Last year the fossil fuel company X was trading at $10 / share, largely based on a valuation from discounted cash flows that would be returned to the investor (forecast dividends), giving a net present value of buying and holding the stock of $10 / share assuming that investors require a 10% discount rate when calculating NPV. Suppose this year there is no change in the fundamentals of the company -- the business is exactly the same -- but nearly all investors are not willing to hold shares in X for moral/ethical reasons, so many former investors have sold, and there is reduced demand to buy. So now the quoted market price of one share of X is $1 / share, but the fundamental valuation of X based on forecast future dividends is still $10 / share, still using the same discount rate. Alice can now spend $100 to buy and hold 100 shares in X, which she values as being worth $1000 in net present value due to forecast returns from dividends by holding the stock and never selling it. Suppose Bob is another investor who is willing to invest in fossil fuel stocks, but had invested his $100 into 10 shares of company X at last year's price of $10 / share. This year the quoted market price of Bob's 10 shares is $10 . Bob will incur a 90% loss in capital if he sells at the current market price. But if he refuses to sell and holds, he will still achieve a fair return from dividends of holding the stock. If Bob has spare cash he can, like Alice, buy additional shares of X at the new low price. Further tangents: https://en.m.wikipedia.org/wiki/Mr._Market https://en.m.wikipedia.org/wiki/Mr._Market http://www.efficientfrontier.com/ef/401/fisher.htm http://www.efficientfrontier.com/ef/401/fisher.htm
  - amalcon 7y ago
    You should definitely read the take linked by a sibling comment, it's a very good explanation. There's another angle from which to look at it, however, that I tend to prefer. It amounts to the same thing, just a different perspective. There are basically three ways to make money in the stock market: gambling (attempting to predict what other market participants will do, or other events that affect the market), exploiting liquidity issues (market making / arbitrage / other HFT activity), and value investing (finding investments that should to directly give money back on some time horizon, usually through dividend or stock buyback). When an external force (like principled noninvestment) forces the stock price down, not much changes for most of these. HFTs will generally find ways to make money either direction that the stock moves. Gamblers can also either make or lose money either way the stock moves, depending on whether they are long or short. Value investors, however, are the ones who will ultimately end up owning that asset you've just sold. They want this asset because it will give them money down the line; they don't care about the short-term stock price. The share of future dividend or buyback that the asset represents hasn't changed, but the price of that asset has. The asset costs less, but returns the same -- exactly the sort of thing that a value investor wants.
graeme 7y ago
If prices are based roughly on economic value, then how would divestment by a portion of the market affect capital access? You'd need virtually all capital to have an impact. Otherwise amoral investors could swoop in and capture the profits. I could see divestment in early stage funding being more impactful when things are less liquid.
- rocqua 7y ago
  Prices are set by supply and demand. Divestment reduces demand. Probably, the falling prices also increase demand, but fundamentally, if fewer people want something the price should drop.
  - graeme 7y ago
    Does this work in liquid markets though? Demand could obviously drive up price beyond fundamental value in a bubble, or below fundamental value in a panic. But in the ordinary course of things, we would expect the price of a security to match its value in the long run. If you are a rational, amoral investor, and you see a security worth $100, you would be prepared to pay up to $100 for it, and to buy it in as large a quantity as you could if it was selling for less. Assuming there is more than one such investor in the market, we would expect them to bid roughly to the expected value of the stock. I suspect this was the reasoning underlying Mr. Gates' comments. As long as customers buy the oil then the security has value for investors.
    - olau 7y ago
      > Does this work in liquid markets though? Well, I think the idea is to try to the make the market for these stocks less liquid. And it might work, because the long run you're talking about isn't actually looking too bright due to the technological developments with renewables and electric vehicles. These stocks are not retirement stocks, unless you're retiring in a couple of years.
      - solveit 7y ago
nradov 7y ago
Divesting only (marginally) increases the cost of capital for firms which seek additional financing through secondary stock offerings. That doesn't apply to most oil companies.
Nicholas_C 7y ago
It’s a bit more complicated though as oil prices will rise if firms don’t take on projects. This in turn would cause those marginal projects to look a lot better down the road and oil prices for consumers will be a lot higher (which might be a good thing if it lowers fuel usage). I think this might be happening right now. There isn’t a lot of reserve replacement going on as everyone is focused on cash flow and the capital markets for energy remain closed due to ESG concerns from investors. If so, the prices will rise eventually and new projects will start.

by voisin 7y ago

triceratops 7y ago

Or it reduces the stock price of those firms giving better returns to those who are not so morally-driven in their investing decisions.

kelnos 7y ago
Not sure I understand. If large-scale divestment of fossil fuel investments lowers their stock prices, how will that give the non-morally-driven investors higher returns? (Assuming we both agree that "morally-driven" investors will tend to invest in renewables.)
- andylei 7y ago
  this explains it pretty well. https://www.aqr.com/Insights/Perspectives/Virtue-is-its-Own-Reward-Or-One-Mans-Ceiling-is-Another-Mans-Floor https://www.aqr.com/Insights/Perspectives/Virtue-is-its-Own-...
  - shkkmo 7y ago
    It's a bit wordy, but the relevant argument is here: > everything still gets owned by someone. So, clearly the group without such qualms, call them the sinners, have to own more than they otherwise would of the sin stocks. How does a market get anyone, perhaps particularly a sinner, to own more of something? Well it pays them! In this case through a higher expected return on the segment in question.
    - gowld 7y ago
      The article's loose language is confusing. The full analysis has 3 parties: virtuous boycottor investors, vicious (as in vice) investors, which the article incorrectly calls "sinner", and the evil corporation. The conclusion is that the virtuous boycottor investors' weapon is forcing the evil company to pay the vicious investors a premium return, until the corporation is bankrupt, and the vicious investors laugh all the way to the bank while the virtuous investors take pride that their financial sacrifice improved the world.
      - shkkmo 7y ago
        The specific question being answered was: > how will that give the non-morally-driven investors higher returns? Which is why I only quoted the section that applied directly. The argument doesn't say that "sinful" companies will be forced into bankruptcy, it goes more like this: 1) virtuous boycotting of a company means the stock has to offer higher returns to "sinful" investors so they buy more shares. 2) Higher returns mean that the bar for the expected return of "sinful" capital expenditures by companies will be higher and thus there were be fewer choices by companies to expend capital in "sinful" ways. I think the second stage of this argument is... weak and conditional. For a company like BP that offers significant dividends, a lower stock price directly correlates to a higher return without costing the company anything. There is only a downside if that company is selling stock to raise capital. Since BP has been buying back stock for years, it seems like this is actually a benefit to BP as well.
- shkkmo 7y ago
  Because investors will be able to own a piece of that company for less. The company hasn't changed, its ability to offer dividends hasn't changed, its longer term prospects haven't changed (due to divestment.) Really, the only impact this might have is a slight reduction in the ability to those companies to raise capital by selling stock (and I don't think that is incredibly common in the oil industry).
  - munk-a 7y ago
    If the lack of investment from certain segments of the population was sustained then the stock will be of lower demand in the long term hurting it's price for investment, if this is really well sustained and consistently done then IPOs for such industries will raise less capital because there is less demand available when initial investors want to cash out. However, that's really conditional, I think in actuality we're observing a short term fluctuation and eventually investment will resume - in that case you're essentially handing your money to the people you disagree with by taking a loss (or less or a gain) when selling your stock, allowing them to purchase it under value, and then letting them resell the stock once the market has recovered from it's temporary depression. So divestment would work in theory with good coordination, but I don't think it'll work in practice because humans are terrible.
    - shkkmo 7y ago
      > if this is really well sustained and consistently done then IPOs for such industries will raise less capital because there is less demand available when initial investors want to cash out. Would this really have an impact on fossil fuel usage? The companies that drive fossil fuel consumption are established players and it seems like limiting seed funding in their industry would only help these players. I'm pretty sure that you would have a bigger impact teleconferencing rather than flying around for meetings and investing the money saved on airfare in oil companies. The solution is not divestment, but investment. Taking your money out of oil companies seems far less effective that putting your money into green companies.
      - munk-a 7y ago
- shoo 7y ago
  Consider the case of an investor, Alice, willing to invest in fossil fuel stocks, who is currently sitting on $100 cash and looking for a profitable investment. Last year the fossil fuel company X was trading at $10 / share, largely based on a valuation from discounted cash flows that would be returned to the investor (forecast dividends), giving a net present value of buying and holding the stock of $10 / share assuming that investors require a 10% discount rate when calculating NPV. Suppose this year there is no change in the fundamentals of the company -- the business is exactly the same -- but nearly all investors are not willing to hold shares in X for moral/ethical reasons, so many former investors have sold, and there is reduced demand to buy. So now the quoted market price of one share of X is $1 / share, but the fundamental valuation of X based on forecast future dividends is still $10 / share, still using the same discount rate. Alice can now spend $100 to buy and hold 100 shares in X, which she values as being worth $1000 in net present value due to forecast returns from dividends by holding the stock and never selling it. Suppose Bob is another investor who is willing to invest in fossil fuel stocks, but had invested his $100 into 10 shares of company X at last year's price of $10 / share. This year the quoted market price of Bob's 10 shares is $10 . Bob will incur a 90% loss in capital if he sells at the current market price. But if he refuses to sell and holds, he will still achieve a fair return from dividends of holding the stock. If Bob has spare cash he can, like Alice, buy additional shares of X at the new low price. Further tangents: https://en.m.wikipedia.org/wiki/Mr._Market https://en.m.wikipedia.org/wiki/Mr._Market http://www.efficientfrontier.com/ef/401/fisher.htm http://www.efficientfrontier.com/ef/401/fisher.htm
- amalcon 7y ago
  You should definitely read the take linked by a sibling comment, it's a very good explanation. There's another angle from which to look at it, however, that I tend to prefer. It amounts to the same thing, just a different perspective. There are basically three ways to make money in the stock market: gambling (attempting to predict what other market participants will do, or other events that affect the market), exploiting liquidity issues (market making / arbitrage / other HFT activity), and value investing (finding investments that should to directly give money back on some time horizon, usually through dividend or stock buyback). When an external force (like principled noninvestment) forces the stock price down, not much changes for most of these. HFTs will generally find ways to make money either direction that the stock moves. Gamblers can also either make or lose money either way the stock moves, depending on whether they are long or short. Value investors, however, are the ones who will ultimately end up owning that asset you've just sold. They want this asset because it will give them money down the line; they don't care about the short-term stock price. The share of future dividend or buyback that the asset represents hasn't changed, but the price of that asset has. The asset costs less, but returns the same -- exactly the sort of thing that a value investor wants.

graeme 7y ago

If prices are based roughly on economic value, then how would divestment by a portion of the market affect capital access? You'd need virtually all capital to have an impact. Otherwise amoral investors could swoop in and capture the profits. I could see divestment in early stage funding being more impactful when things are less liquid.

rocqua 7y ago
Prices are set by supply and demand. Divestment reduces demand. Probably, the falling prices also increase demand, but fundamentally, if fewer people want something the price should drop.
- graeme 7y ago
  Does this work in liquid markets though? Demand could obviously drive up price beyond fundamental value in a bubble, or below fundamental value in a panic. But in the ordinary course of things, we would expect the price of a security to match its value in the long run. If you are a rational, amoral investor, and you see a security worth $100, you would be prepared to pay up to $100 for it, and to buy it in as large a quantity as you could if it was selling for less. Assuming there is more than one such investor in the market, we would expect them to bid roughly to the expected value of the stock. I suspect this was the reasoning underlying Mr. Gates' comments. As long as customers buy the oil then the security has value for investors.
  - olau 7y ago
    > Does this work in liquid markets though? Well, I think the idea is to try to the make the market for these stocks less liquid. And it might work, because the long run you're talking about isn't actually looking too bright due to the technological developments with renewables and electric vehicles. These stocks are not retirement stocks, unless you're retiring in a couple of years.
    - solveit 7y ago

nradov 7y ago

Divesting only (marginally) increases the cost of capital for firms which seek additional financing through secondary stock offerings. That doesn't apply to most oil companies.

Nicholas_C 7y ago

It’s a bit more complicated though as oil prices will rise if firms don’t take on projects. This in turn would cause those marginal projects to look a lot better down the road and oil prices for consumers will be a lot higher (which might be a good thing if it lowers fuel usage). I think this might be happening right now. There isn’t a lot of reserve replacement going on as everyone is focused on cash flow and the capital markets for energy remain closed due to ESG concerns from investors. If so, the prices will rise eventually and new projects will start.