Should you divest from fossil fuels entirely?

In a world facing unprecedented climate challenges, the debate over fossil fuel divestment has taken center stage among investors, activists, and policymakers alike. This article examines the complexity and urgency of the question: should you divest from fossil fuels entirely?

Background and Rationale for Fossil Fuel Divestment

Fossil fuel divestment refers to the strategic decision of removing investment assets from fossil companies, including stocks, bonds, and investment funds connected to coal, oil, or natural gas extraction. Originally inspired by social movements such as anti-apartheid divestment, this approach aims to accelerate the energy transition to renewables by undermining the financial and social standing of fossil fuel producers.

Since its modern revival in 2012, the divestment movement has grown exponentially. More than 1,300 institutions and $14 trillion in assets globally have pledged full or partial divestment. Campaigns span universities, pension funds, faith groups, and philanthropic foundations, showcasing the breadth of support for this strategy.

The campaign’s logic is twofold: first, reduce the sector’s capital by signaling that profiting from fossil fuels is socially unacceptable; second, stigmatize fossil enterprises to encourage policy changes and corporate shifts towards cleaner energy.

The Climate and Environmental Imperative

The scientific consensus is unequivocal: burning fossil fuels has driven over 75% of global greenhouse gas emissions. To stay within a safe planetary carbon budget and avoid warming beyond 2°C, only about 33%—and possibly as low as 10%—of known fossil fuel reserves can be consumed. In practice, this means that the vast majority of oil, gas, and coal reserves should remain untapped.

Research indicates that each additional half-degree of warming intensifies extreme events, undermining food security, water availability, and biodiversity. The loss of coral reefs, melting ice sheets, and sea-level rise illustrate the cascading effects on human societies and natural ecosystems.

Unchecked emissions threaten not only temperature rises but also extreme weather events and ecological collapse. Hurricanes, droughts, and wildfires have intensified in frequency and severity, placing insurance markets under strain and amplifying financial risk for individuals and institutions.

Financial and Portfolio Considerations

Investors weigh both performance and risk. Numerous studies show that excluding fossil fuels from portfolios does not harm returns or increase risk-adjusted volatility. Much of the apparent outperformance of fossil fuel companies stems from higher systematic risk factors, not inherent profitability.

Asset managers and boards increasingly recognize that climate change is not only an ethical concern but also a financial imperative. In 2019, the Task Force on Climate-related Financial Disclosures (TCFD) guidelines gained widespread adoption, requiring companies to report on climate-related risks and their effects on balance sheets.

Meanwhile, continued investment in fossil assets entails the potential risk of stranded assets as regulations tighten, carbon taxes accelerate, and consumer preferences shift. Pensions and endowments that fail to adapt risk facing significant write-downs, with some analyses estimating losses of 20%–40% on fossil-heavy assets over the coming decades.

• Performance comparison: Similar long-term returns once risk is adjusted.
• Stranded assets: Infrastructure left economically unviable by climate policy.
• Retirement security: Exposed to devaluation from climate-driven market shifts.

Market and Policy Environment

Government subsidies bolster the fossil fuel industry to the tune of $10–$50 billion annually in the United States, with proposals like Project 2025 threatening to roll back renewable support. Despite this, global investment in renewables now outpaces that in new fossil fuel generation capacity, signaling a broader market realignment.

Internationally, the trend toward renewables is unmistakable. In 2022, renewables accounted for nearly 90% of new power capacity added worldwide. Countries such as Germany, China, and India lead investments in solar and wind, while major corporations pledge net-zero targets that exclude fossil fuel expansions.

Policy changes such as carbon pricing, stricter emissions standards, and renewable portfolio mandates increase the cost of fossil operations while enhancing the competitiveness of wind, solar, and energy storage.

Risks of Continued Fossil Fuel Investment

Beyond stranded assets, fossil fuel investments face price volatility driven by geopolitical tensions, supply disruptions, and changing demand patterns. Coal has seen its share of US electricity generation plummet from over 50% two decades ago to 17% today.

Investor surveys rank regulatory uncertainty around carbon pricing and emissions limits among the top concerns for fossil investments. When a major economy signals a shift to aggressive decarbonization, share prices of oil and gas majors can plummet in days, illustrating the precarious nature of these assets.

Climate-related insurance crises already afflict regions prone to hurricanes and wildfires, increasing underwriting costs and further eroding the asset base of fossil-dependent portfolios.

Arguments for a Managed Transition

Not everyone advocates blanket, immediate divestment. Some investors argue that engagement with fossil fuel firms can influence corporate strategies, pushing companies towards cleaner technologies and more transparent reporting on climate risks.

Natural gas is often cited as a “bridge fuel” to smooth the shift from coal to renewables, especially in regions where energy demands and infrastructure constraints necessitate reliable baseload power.

Singapore illustrates the challenge: with limited land for solar installations and no domestic fossil resources, the city-state relies on imported liquefied natural gas. Recognizing the long-term risks, its government simultaneously invests in offshore floating solar arrays and explores regional power grids for hydropower imports from neighboring countries.

• Engagement: Shareholder pressure to align with net-zero goals.
• Bridge fuels: Debated role of natural gas during energy transitions.
• Context matters: Tailored solutions for unique geographic needs.

Social, Ethical, and Political Dimensions

Divestment campaigns harness the moral weight of climate responsibility. Drawing parallels to tobacco and apartheid divestment, activists aim to brand fossil fuel profits as socially unacceptable or odious.

Public opinion polls show that a majority of citizens in many countries support divestment as a tool to combat climate change. Younger demographics, in particular, view fossil fuel investments as incompatible with responsible stewardship of the planet.

Universities, faith-based organizations, municipalities, and pension funds have joined the movement, leveraging divestment to demonstrate leadership in climate ethics and to pressure governments for more aggressive decarbonization policies.

Economic and Social Impacts

Opponents warn that phasing out fossil fuel investments could cost jobs in the sector. However, analyses forecast that halting support for fossil fuels while accelerating renewables could yield 1.7 million additional US jobs by 2030, compared to marginal gains in a fossil-dependent trajectory.

Shifting subsidies and investments promises not only cleaner air and reduced health costs but also new industries, from manufacturing solar panels to building green hydrogen infrastructure.

Conclusion: Navigating Complexity Towards Impact

The debate over complete divestment hinges on balancing environmental urgency, financial performance, and transitional realities. The weight of evidence increasingly supports divesting—both to protect portfolios from devaluation and to uphold climate goals.

Investors looking to pursue divestment can adopt a phased approach: begin with high-carbon assets, engage with remaining holdings on targets and transparency, and reinvest in renewables, energy efficiency, and green technologies. Transparent communication with stakeholders ensures alignment and maintains fiduciary trust.

Yet, a nuanced approach may be appropriate. For some, immediate divestment sends a clear moral signal. For others, strategic engagement with fossil firms and the use of transitional fuels can soften economic impacts while still charting a path to net zero.

Ultimately, the goal remains consistent: minimize climate risk and optimize financial returns while accelerating a just energy transition. Investors must assess their values, fiduciary duties, and the evolving policy landscape to determine whether a full divestment strategy aligns with their mission and risk tolerance.

By understanding the full scope of environmental imperatives, financial realities, and social responsibilities, investors can make informed decisions that contribute positively to the planet’s future—even if it means leaving some carbon in the ground.