Carbon Capital Questions and answersAugust 2013

Campaign briefing

About the campaign WDM is an organisation focussed on fighting poverty in the global south, why are we focussing on the UK financial sector?

Few people connect the immaculate glass façades and swish offices of the financial sector with the dirty, polluting world of fossil fuels and the damage done to communities directly affected by their extraction in the global south. The truth is that banks, pension funds and other investors pour billions of pounds into fossil fuels every year, bankrolling projects that are not only highly damaging locally, but contributing to climate change that is already leading to drought, famine and flooding in some of the world’s poorest countries.

With the Carbon Capital campaign, WDM is exposing the lack of regulation of finance as a climate justice issue with direct relevance to the fight against poverty in the global south.

Will we be working in solidarity with groups resisting dirty energy projects in the global south as part of this campaign?

We are currently in contact with groups in the global south resisting energy projects being pursued by companies funded by the UK financial sector. However, not all the groups we work with will be focussed on climate change and we won’t be focussed solely on the high-carbon aspect of these highly destructive projects. We stand in solidarity with people who are fighting fossil fuel energy because of the damaging local effects of these projects while also condemning the irresponsibility of the financial sector firms bankrolling projects that contribute to climate change.

In Nigeria Shells operations burn nearly 100 flares day and night. Many local groups are active against oil spills and gas flaring.

Photo: Ellaine Gilligan/Friends of the Earth

Don’t some fossil fuel energy projects increase energy access?

If we are to tackle climate change, fossil fuels must be phased out. However, there are many other injustices in addition to climate change. People having no access to energy is one such injustice. WDM believes that tackling climate change and improving energy access should go hand in hand. Rich countries like the UK have a moral imperative to compensate countries like Bangladesh, whose per capita emissions are a tiny fraction of the UK’s, so that they can avoid following the same high-carbon development path that we took.

Every project has to be judged on its own merits. If a country in the global south with otherwise low emissions were to use local resources to increase fossil fuel energy capacity in a way that genuinely increased energy access for people without causing negative effects for local communities, you wouldn’t find us campaigning against it. But you wouldn’t find the UK financial sector investing in it either.

The fossil fuel projects bankrolled by UK investors mostly involve extracting fuels for export or to serve manufacturers that export products to industrialised countries like the UK. These projects very rarely increase energy access, but often displace thousands of people, pollute land and water, and increase health risks.

How does WDM define dirty energy?

‘Dirty energy’ is shorthand for energy production that accelerates climate change and harms communities in the global south.

Most dirty energy projects involve fossil fuels (oil, gas and coal), which release carbon dioxide into the atmosphere when they’re burned. This is the leading cause of climate change. The burning of fossil fuels can be targeted at any point in the supply chain, from mining and oil or gas drilling through to burning fuels in electricity generation plants. Increasingly, that takes the form of ‘extreme’ energy projects like mountain-top removal coal mining, or the extraction of oil from tar sands. The extraction of fossil fuels can displace people, damage their health, pollute land and water, and exploit workers.

Fossil fuels don’t have the monopoly on dirty energy. For example, big dams are a major source of another greenhouse gas, methane, as well as leading to the displacement of many communities in the global south. And false solutions such as agrofuels – energy from plants and animals – have high hidden greenhouse gas emissions and lead to the loss of livelihoods as smallholder land is lost to agribusiness.

The community impacts of dirty energy What is the impact of fossil fuel projects on local communities?

The local effects of fossil fuel energy development are often hugely damaging. Coal mines displace people from their homes, oil pipelines leak and cause local people to lose their livelihoods and coal-fired power stations cause pollution that in India alone has led to an estimated 120,000 deaths. These projects also contribute greatly to climate change, which makes the situation faced by communities in the global south even worse.

What is the likely impact of climate change on communities in the global south?

Even if countries stick to the internationally agreed target of two degrees of warming, whole countries could disappear as a result of rising sea levels. But if, as is looking increasingly likely, emissions are not curbed enough to meet this target, we could see up to six degrees of warming, a situation which could mean the deaths of millions of people.

Rich countries bear the responsibility for this situation because of their historically high emissions. This means that we must put an immediate stop to all new fossil fuel projects in rich countries. And investors from the global north must also stop profiting from climate change through their involvement in damaging fossil fuel projects in the global south.

Global north and global south What about China, India and the other ‘emerging’ economies?

Much of the high carbon development happening in the global south – including in emerging economies - is being funded by the UK financial sector. For example, the Cerrejon coal mine in Colombia is being developed with money coming from the UK.

Countries like China and India whose greenhouse gas emissions are rising fast are often used as an argument for the futility of emissions reductions in rich countries. Chinese emissions are increasing at an unsustainable rate, but the average emissions per person in the UK are still higher than those of China and India, even before ’exported emissions‘ related to consumer products are taken into account. In any case, we should not see rising emissions from emerging economies as somehow absolving rich countries of their responsibility.

Aren’t fossil fuel exports an important source of revenue for countries in the global south?

Fossil fuel exports provide important revenues to some countries, in particular where the oil and gas industry is nationalised. For example, Venezuela, Bolivia and Ecuador reinvest a considerable proportion of their oil and gas revenues to help local people (although their state oil companies are not immune from criticism for environmental and human rights abuses).

By contrast, the UK financial sector is investing and facilitating financial flows into companies like BP, Shell and Rio Tinto which extract poor countries’ resources and take the profit for themselves. Take Nigeria, which should be rolling in cash as Africa’s biggest oil producer. Instead, large profits are creamed off by Shell and corrupt officials while local people endure oil spills and extreme poverty.

If the UK financial sector were to stop fossil fuel investments, wouldn’t those just pass through other countries instead?

Yes and no. It’s true that unilateral action by UK regulators could lead to different national flags being put on the same investments, but that doesn’t mean domestic action is ineffective.

For example, the UK currently plays host to some of the world’s largest tax havens, with the City of London acting as the hub for trading in thousands of companies formally located offshore. Enforcing greater transparency (en route to shutting down those tax havens) would make it a lot harder for money to be shunted around the global economy.

The same is true for fossil fuel investments more generally. The countries with the strongest regulations domestically are usually those that argue hardest for tougher international rules. Pressing the UK to have tougher emissions reporting standards and legal liabilities for corporate abuses would reduce the likelihood of our politicians and civil servants watering down international agreements, and may even contribute to pressure for tougher global rules.

The City and the UK economyWhat is the City of London? I don’t live in London, how is this campaign relevant to me?

The City of London has become convenient shorthand for the UK financial sector. It’s traditionally where stocks and commodities are traded (although in reality this mostly happens online now), and where most big banks and financial services firms have their headquarters.

In reality the financial sector extends far beyond London. The big firms have branches across the country and RBS, one of the UK’s biggest banks, is headquartered in Edinburgh. Some of the biggest pension funds, which collectively invest billions in dirty energy, are run by universities and local authorities. So there are plenty of ways to campaign against ‘The City’ and its dirty energy binge, whether you’re in Liverpool, London, Larne or Lincoln.

The City of London Corporation – an archaic local council, ’voted’ for by corporations and existing outside of many of the laws that govern the rest of the country – acts as an informal lobby group that pushes financial services liberalisation internationally, doing away with regulations and ensuring many of the dirtiest deals happen in secret.

The main UK financial services lobby group is also called TheCityUK.

Don’t banks need to make profits to pay back their government loans and support British companies?

Royal Bank of Scotland (RBS) and Lloyds TSB had huge bailouts, but those took the form of renationalisation rather than loans. With these major banks under national ownership, the government could use its position to terminate fossil fuel projects and shift investment to renewable energy, although it has chosen not to do so. Such investments could be profitable while being socially beneficial. We need to challenge both the assumption that investing in fossil fuels is the key to making money, and the assumption that making money is the only purpose of investment.

It is important to support local companies in order to ensure that finance benefits local economies and contributes to job creation. That’s very different from offering blanket support for British companies, especially the big oil and gas multinationals whose main business involves exploiting resources in the global south.

How can we explain the role of banks in climate change simply to people in the streets?

Imagine you want to buy a holiday home. You’d probably need to go to a bank for a mortgage, or to share ownership with some friends, to make it affordable. When oil, gas or coal companies want to expand abroad, they’re in the same situation – either they need to borrow the money or to share the ownership. It’s banks who do this lending, and often they’re the ones trading or owning shares too. So they have the power to decide where they’ll put their money. And since most of a bank’s money is actually our money to start with, they also have a responsibility to do that in ways we’d approve of. There’s nothing ethical about investing in fossil fuels when climate change is already happening – so we need to tell banks to stop doing so.

What about ethical banks and pension funds?

There are many good reasons to favour ethical banks and pension funds over their high street rivals, but going fossil free is not yet one of them. Divestment campaigns are starting to change that, and several US pension funds and investment portfolios offer packages without fossil fuels. UK providers would do well to follow their lead.

If it’s our money, how can the banks get away with not listening to us?

Money talks in the banking sector, and unless you’re one of the richest people in the country it’s unlikely your money is being heard. That’s why acting together is far more

effective than individual action. Moving your money to credit unions, building societies or ethical banks can help to create a more diverse and sustainable financial system – and puts it in the hands of those who may well be first to go fossil free.

But the real problems lie with investment banking, where banks club together to provide loans for fossil fuel projects or to underwrite bond issues (helping fossil fuel firms to sell

‘I-owe-you’ slips to investors). Mandatory carbon reporting guidelines so that banks must account for the climate impact of their investments would be a first step in making clear their risky over-exposure to fossil fuels, as well as helping campaigners to identify who’s behind some of the world’s most controversial projects.

How will reporting on financed emissions improve the situation? How do you ensure things are not double counted?

Just reporting on financed emissions does not stop them, but it’s a good step. It would force financial services to consider their role in causing climate change, while giving campaigners a tool to name, shame and hold them to account. It would help investors to consider whether they really want to risk putting money into inflating a ‘carbon bubble’ - companies whose value is based on fossil fuel reserves that would cause runaway climate change if they were all extracted and burnt.

Double counting means that you add up the potential emissions impacts more than once – for example, attributing them to a coal mining company, and again to an electricity generator burning coal. It’s an issue if you’re trying to count emissions reductions under global agreements and work out what each country has to do, and even more so with carbon trading schemes where claimed

‘reductions’ are tied to payments, but it’s less of an issue for financial services reporting.

It would be possible to avoid double counting by simple allocation rules (eg counting fossil fuels at the point of extraction, rather than use) if need be. But the point of reporting financed emissions is to make visible financial backing of the entire fossil fuel supply chain. If the point is to incentivise changes across the board, rather than to allocate reduction payments, then double counting is not necessarily a bad thing.1

What about our pensions? Aren’t we all complicit in the problem? And if there aren’t ethical pensions that are fossil fuel free, what should I do?

As far as we know, there are no fossil fuel free pensions in the UK at present, so anyone who has a pension is complicit to some extent. That’s not a question of individual guilt, but one of systemic failure. So instead of whipping ourselves for our sins, we’re organising to do something about changing the situation.

It’s only by acting together that we can make a big difference, and showing pension companies that they need to consider climate change as an ethical issue is a good place to start. There are clear precedents too, with several examples of US funds successfully cutting their carbon and divesting (taking their money out of) oil, gas and coal.

If banks and pension funds are forced to stop investing in dirty energy, will I make less money from my investments?

Possibly. We’re not your financial advisers, so we aren’t in a position to say how much you currently make (or lose) from having money invested directly in fossil fuel stocks or indirectly via your pension fund. What we do know, though, is that there are plenty of other investment opportunities out there, not least in renewable energy, so it’s certainly not true that backing away from fossil fuels necessarily leaves you out of pocket. And with stock markets risking massive amounts of money on fossil fuel projects that would lead to runaway climate change if even a fraction came into fruition, greening your investment portfolio could be a very smart step.

If the UK financial sector stopped investing in fossil fuels, would that not lead to a massive shrinking of the UK’s economy?

What’s good for the UK economy is not the same as what’s good for the financial sector. Many of our current economic problems stem from an over-reliance on the financial sector, which has brought scant benefits to most ordinary people and contributed to the worst financial crisis since the 1930s. Curbing the financial sector’s fossil fuel investments would shrink the amount of money that passes through the City every day, but that’s not the same as damaging the economy. In fact, the financial sector adds less value to the UK economy than even the depleted manufacturing sector.2 Yet when speculative finance overreaches itself, it is the first to ask for government bailouts.

It is neither sustainable nor ethical for the UK financial sector to be pouring money into a resource that we will have to stop using very soon if we are to avoid climate catastrophe. Once the so-called ‘carbon bubble’ bursts, investors holding fossil fuel stocks will be left with a bunch of useless assets.

Instead, we need to build a diverse and sustainable economy that doesn’t depend on causing climate change and throwing billions of people in the global south into deeper poverty and hunger.

How do you calculate how much carbon is on the London stock market?

There’s no simple answer to this question. In our Carbon Capital booklet, we calculated that the fossil fuel reserves of

companies listed on the London Stock Exchange (LSE) were equivalent to 214 GtCO2 (Gigatonnes of carbon dioxide). That figure was based on data that led the Carbon Tracker initiative to conclude that around 106 GtCO2 were listed on the LSE in 2011.

The reason these figures are so different is that our higher figure includes all of the emissions of companies that trade on the London stock market, even if they also trade some or all of their shares elsewhere. The Carbon Tracker figure, by contrast, is a conservative estimate of how much trading actually takes place in London, since all of the emissions are attributed to the ’primary‘ market where the company is listed.

Say, for example, Russian oil giant Rosneft trades 80 per cent of its shares in Russia. Our figure for “fossil fuel reserves of companies listed on the London stock exchange” includes all of these figures in the total. But the Carbon Tracker figure would ascribe all of its emissions (plus the 20 per cent traded in London) to Moscow. In reality, the main difference between these figures relates to Russian companies, which retain a London listing to attract more international investors while taking advantage of the UK’s lax (compared to rivals like New York) financial regulations.

Ultimately, any figure for how much carbon is listed on a stock market is an estimate that puts a local face to a global problem. We chose to list the reserves of companies trading in the UK to highlight the City’s role in these global

networks, whereas Carbon Tracker had a more ambitious goal of mapping responsibility globally. Their 2013 report on the global ‘carbon bubble‘ raises the estimate for London’s responsibility to 113 GtCO2. The same report estimates that the “potential coal, oil and gas reserves” listed in London could top 289 GtCO2.3 Let’s not get lost in the numbers, though. Whether you use the most conservative estimates or the most generous, it’s clear that there’s a huge problem of investors backing fossil fuel projects that have the potential to create runaway climate change, and that the UK financial sector plays a key role in that problem.

The web of power: revolving doors between politics and corporationsIsn’t it good that politicians have experience of/links with business?

Of course. We’re not saying that people who have worked in banking or energy shouldn’t be allowed to be politicians, but it is shocking that these two sectors are so over-represented in our governing elite. WDM’s Web of Power report suggests that a third of government ministers have either worked in or received donations or other benefits from fossil fuel companies or the financial sector. This generation of politicians need to make the tough choices needed to move away from fossil fuels and create a

The Cerrejon Coal company operates an open-pit coal mine in northern Colombia, owned by London-listed multinationals Anglo American BHP Billiton and Xstrara.

Photo: Tennhaus/Flickr

sustainable economy based on renewable energy. They are less likely to do this while accepting cash from a financial sector that is ploughing billions into fossil fuels.

Are you seriously blaming people like William Hague for causing climate change?

Yes and no. We’re not talking about the carbon footprint of individual politicians. But political decisions can make a big difference in regulating greenhouse gas emissions and encouraging a transition away from fossil fuels. That includes how the financial sector is regulated. At the moment, banks and pension funds are getting away with ploughing billions into dirty energy projects that cause harm to some of the world’s poorest people. That’s why we need to end the high-carbon free for all in the City. But with a political elite that is closely intertwined with big finance and big energy, change is very much less likely to happen.

Our solutionsWhat can be done to stop the UK financial sector investing in fossil fuels?

It certainly isn’t easy, but a first step would be more transparency. Most people don’t realise that their bank and pension fund money is being used to bankroll climate change. By forcing financial institutions to disclose the full carbon footprint of their investments and services (and not just the energy use of their offices as is currently the case) we can at least have the information to be able to tackle the problem.

But ultimately transparency isn’t enough. We need tough regulation of investors to force them to pivot away from putting money into fossil fuels. The UK needs more investment in green energy, social housing and other locally beneficial projects, not exploitative oil and gas projects in Africa.

For example, regulators could follow China’s lead in requiring banks to invest more in green projects and divest from dirty industry (while doing more than the Chinese to actually enforce such rules).4 There should also be legally enforceable environmental and human rights safeguards, and redress mechanisms for communities affected by projects.

WDM’s campaign is currently in a first phase of exposing the problem. We will move into later phases in which we will campaign for specific regulatory solutions. Because of the scale of the problem, which relates to the two difficult issues of energy and of the role finance plays in our economy and involves challenging entrenched political positions, this is no easy task. We will be bringing together experts on climate finance and together with them we will thrash out an idea for a regulatory solution that is both meaningful and achievable.

Does divestment make a difference?

Divestment is about moving your money away from fossil fuel firms, which is harder to do than it sounds. Most investments nowadays are organised into one or several layers of funds and portfolios. Any one fund can have hundreds or thousands of members, and spreads its bets by owning tiny pieces of a lot of companies. Withdrawing from these funds is not going to make a huge dent in the overall value of the oil and gas companies themselves. Divestment may also not change stock prices much – less scrupulous investors will probably step in to buy any shares that we dump.

But divestment campaigns can make a real difference in changing perceptions about the role of fossil fuel companies, of how markets work, and the massive bets they’ve made on fossil fuels. Fossil fuel companies should be moral pariahs, just like tobacco or arms companies, and divestment is a strong way to send that message.

Isn’t divestment contradictory to the idea of shareholder action?

Shareholder action isn’t about buying into fossil fuel companies to change them from the inside. That hasn’t worked and won’t work. By way of analogy, it wasn’t slave owners who were leading the reforms when slavery was abolished. Decisions were taken despite them, and the economy carried on without them. Today, fossil fuel companies have ‘wrecking the planet’ at the core of their business. We can produce enough energy for all our needs without them.

When we engage in shareholder action, we take a token shareholding in companies so that communities whose rights and livelihoods have been abused by fossil fuel companies can go to company meetings and directly challenge executives. The point is to expose the role of fossil fuel companies and send a clear public message that their activities are ethically unacceptable.

Doesn’t opposing investment in fossil fuels lend support to the expansion of nuclear power? How can governments encourage investment in renewables instead?

Fossil fuels versus nuclear power is a false dichotomy, often promoted by big energy companies that want to defend their current model of big, centralised power generation.

There are plenty of studies showing that industrialised countries could make the transition to renewable energy without recourse to nuclear power. There are also real world examples, such as Germany’s Energiewende (energy transition), an ambitious set of policies to phase out nuclear power and fossil fuels while building more renewables and improving energy efficiency. Most of the new renewables capacity so far comes from small-scale producers, and many towns and cities are acting to take electricity supplies back under their control, so that they are not so reliant on the big energy companies.

The path to renewable energy for all isn’t exactly the same in the global south, where the first priority is often any kind of access. But it’s clear that nuclear power, with its huge costs, safety risks and long-term legacy of toxic waste, should not be part of the answer.

What should the role of individuals be in bringing about change?

Individual decisions make individual changes, but by acting together we can make a bigger difference. We’re taking on some of the world’s largest companies, not to mention the current policy of almost all of the world’s governments, so change isn’t going to be quick or easy. But there are lots of things, large and small, that we can do.

Putting pressure on banks and pension funds should encourage them to move away from fossil fuel investments. That same pressure, applied to the UK government and EU, can force changes in investment rules and reporting standards to make fossil fuels less profitable, and renewables more so.

Legal changes to make fossil fuel firms and their executives liable for environmental and human rights abuses committed under their watch would force greater accountability. We should also be encouraging the British government to use its role on the Boards of the European Investment Bank, International Finance Corporation, and the bailed-out banks RBS and Lloyds TSB to force through cleaner lending policies. We should pressure the UK, as part of the EU, to create robust greenhouse gas, renewable energy and efficiency targets. That needs to be backed up by a set of policies like Germany’s Energiewende energy transition to cut the UK’s reliance on fossil fuel and big energy companies.

1 http://personal.anderson.ucla.edu/felipe.caro/papers/pdf_FC16.pdf

2 http://www.parliament.uk/Templates/BriefingPapers/Pages/BPPdfDownload.aspx?bp-id=sn06193, p.3

3 http://carbontracker.live.kiln.it/Unburnable-Carbon-2-Web-Version.pdf p.19

4 See eg. http://www.banktrack.org/manage/ems_files/download/environmental_report_on_chinese_banks_2011_english_/121201_environmental_report_on_chinese_banks_2011.pdf and http://www.chinadialogue.net/blog/6288-Can-Chinese-banking-policy-help-save-the-Great-Barrier-Reef-/en

References

Take action To find out how more about the Carbon Capital campaign and for campaign materials go to www.wdm.org.uk/carbon-capital or call 020 7820 4900

The World Development Movement campaigns against the root causes of poverty. Working in solidarity with activists around the world, we oppose injustice and challenge the policies and institutions which keep people poor.

World Development Movement, 66 Offley Road, London SW9 0LS t: 020 7820 4900 e: wdm@wdm.org.uk w: www.wdm.org.uk

South African activists protesting against a new coal power plant demand that Anglo American invest in renewable energy and leave coal in the ground.

Photo: Earthlife Africa