In 2016, a Danish pension fund had a change of heart that is rare in the financial sector. At the time, AkademikerPension had $1 billion (then around €904 million) in investments in what were considered the safe financial havens of oil giants like ExxonMobil, Shell and BP. But as global temperatures continued to rise, that didn't sit right with the company board.

Members studied different climate scenarios available at the time and saw that continued investment in fossil energy was not going to make financial sense in the long term.

"That was really the main conclusion for us driving our decision to divest the sector," Anders Schelde, the fund's chief investor, told DW. The decision was not only about achieving "good investment results," but about doing it "in a responsible manner," he added.

So, the fund pulled its $1 billion out of the oil companies with a view to using it in a more climate-friendly way.

The move was an active statement, but it did not dent the fortunes of the fossil fuel industry. The sector still receives an annual trillion dollars in investments and saw a bumper in 2024 with oil, gas and coal use reaching global highs. In addition, new exploration licenses issued collectively cover an area the size of Sweden.

Even as global temperatures, inextricably linked to emissions from burning fossil fuels, continue to rise, predictions are for more growth in the sector. While many say they'll invest in renewables, investors are slow to follow through. So, what's holding them back?

How does the money flow?

Most new energy capacity now comes from solar or wind, which are both much cheaper to install than digging for coal or drilling for oil. But a report by Bloomberg's market research branch, BNEF, found that for every $100 (now €88) banks invest in such renewable infrastructure, they put $112 into fossil fuels.

In its latest World Energy Investment report, the International Energy Agency (IEA) said higher energy demand for artificial intelligence, data centers and the desire for energy independence is driving investment in renewables. But to meet the targets agreed in global climate talks, "the annual investment required in renewable power still needs to double," according to the IEA.

At the same time, "the fossil fuel industry is still very profitable, with high returns in the short term," said Nadia Ameli, professor in climate finance at University College London.

That's reflected in the investment habits of around 60 of the world's biggest banks, which have injected around $7 trillion into the fossil fuel industry since the 2015 Paris Climate Agreement, according to a 2024 report published by several NGOs. In Paris, the world pledged to try to keep global warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit) by burning less coal, oil and gas.

Whether in the form of bonds or syndicated loans, which sees several banks band together to grant a joint loan, much of the cash has repeatedly come from the same financial institutions.

Yet many of those banks, along with asset managers and insurers, have pledged to align their investments with reduced emissions by 2050. Ameli said commitments made in initiatives like the Net-Zero Banking Alliance, which aims to support banks in meeting the Paris Agreement goals, were voluntary and have not yet amounted to much.

"Even if we see some banks reducing their investments over time, when we look at the total finance provided to the fossil fuel sector, the amount was always the same. So that means someone else stepped in," she said.

One major investment company told DW that as long as fossil fuel demand exists, money will be invested, adding that it's up to politics, tech and consumers to make investors shift their money.

The case for divestment

Divestment from fossil fuels has grown in recent years. According to a nonprofit database, more than 1,600 organizations, including churches, universities and a couple of large funds, have committed to either wholly or partly withdrawing their investments from the industry.

Motivated by a wish to avoid the financial risk of stranded assets in the case of declining fossil fuel use as the world continues to warm, they also want to take climate action. That means stopping the burning of oil, coal and gas, which are responsible for almost 90% of all planet-heating CO2 emissions.

For AkademikerPension, that meant moving the $1 billion they had tied up in oil giants to renewable energy companies like Danish wind energy giant Orsted.

Divestment versus engagement

Some of that money was in bonds, some in shares. Owning shares means owning a part of the company. Unlike loans or bonds, where the investor charges interest on what they lend, buying shares in a company brings more than just financial gain.

Stable share ownership is a vote of confidence for a company and helps to create buoyant market value. Shareholders, in turn, gain a seat at the company table, where they can exert influence on activities.

To that end, critics of divestment say that rather than pulling investment out of fossil fuel companies, it's better to try to have some internal influence to steer a company's course from within.

But the evidence of whether divestment or engagement is more effective is scant.

One US study that examined ownership of high-emitting businesses, including fossil fuel companies, found reductions in greenhouse gas emissions when stock ownership by green funds increased. The study concluded that "green investors make companies greener."

According to an overview study, divestment can reduce a fossil fuel company's market value but doesn't seem to impact its carbon emissions. Additionally, Ameli said the overall volume of investment in the sector hasn't changed.

"If an investor withdraws support, someone else is ready to step in," she reiterated.

Many researchers and investors suggest the best way to exert pressure on a company to cut emissions is engagement, with divestment as a backup.

Investment in renewables is growing

Overall, Schelde, from AkademikerPension, views the divestment as profitable for their pension fund. "But if you take a short-term horizon, just measure over the last three or four years, it's been a very bad decision."

In recent years, many renewable energy companies, including Orsted, have performed poorly on the stock markets.

Ameli said the renewables sector faces different challenges to coal, oil and gas. It is "way more fragmented," she said, making it more difficult to invest large sums. And because it also often generates revenue in local currencies, volatility can influence the profit for investors.

Binding regulation rather than voluntary divestment is needed to accelerate change, say experts.

"Like a public, transparent assessment of a country's financial sector and its exposure to the fossil fuel industry," said Katrin Ganswindt, a campaigner at nonprofit Urgewald.

This is something France is doing. The idea is that laying fossil fuel investments bare increases pressure to transition to renewable energy investments. 

France has also tightened international standards for green investments, which are often criticized for giving loopholes to fossil fuels. Similar strict rules apply to investors operating throughout the EU.

"European countries are leading the way," Ameli said, adding that regulations need to target the world's biggest banks to create a ripple effect.

"If the biggest investors pull out of fossil fuels, this could trigger a global retreat of banks from the sector," she said.

Edited by: Tamsin Walker