Swarthmore’s largest financial consultant, Cambridge Associates, recently announced that it will actively assist institutional investors in implementing fossil fuel divestment. For years, the Board of Managers has argued that it cannot divest because our existing fund managers do not offer fossil-free options. Cambridge’s offer means that a plan for divestment could now be just a phone call away. Following Cambridge’s announcement, the financial case for divestment is stronger than ever. By divesting from fossil fuels, we can align our investments with our values and shield our endowment from what the financial community has termed the ‘carbon bubble.’
Cambridge’s announcement means that, for the first time, the door to fossil-free investment is wide open to Swarthmore and the dozens of other schools whose endowments Cambridge manages. The Board of Managers’ May 2013 report argued that if Swarthmore divested, we would need to switch investment consultants and move from actively managed, commingled funds to indexed funds, which the Board said receive lower returns. Now that Cambridge has offered to help institutions move to fossil-free investment, this barrier no longer exists.
Over the past two decades, fossil fuel investments have become poor investments. Due to growing fossil fuel scarcity, costs are rising, and companies are switching to more expensive, unconventional methods of extraction such as tar sand oil extraction, mountaintop removal coal mining and hydrofracking. At the same time, alternative energy sources like wind and solar power are becoming more and more affordable. Over the past decade, the fossil fuel industry has considerably underperformed the market average. Based on analysis by Standard & Poor’s, fossil-free funds outperformed the market average by approximately 10 percent over the last ten years.
The outlook for fossil fuel investments appears much worse. As the recent UN Intergovernmental Panel on Climate Change report confirmed, if the world is to prevent catastrophic warming, we must limit temperature increases to less than two degrees Celsius. That means that only 20 percent of known fossil fuel reserves can be burned. In other words, the fossil fuel industry has five times as much carbon in reserve as is safe to burn. The fossil fuel industry is in denial of this reality and continues to find and develop new reserves. The 200 largest fossil fuel companies spent an estimated $674 billion on exploration and development alone in 2012. If governments enact policies like carbon taxes to make these reserves uneconomical, $20 trillion in fossil fuel reserves will need to be left unburned. Even in the absence of policy to cap warming at two degrees Celsius, fossil fuel investments still pose serious risks. As UN Climate Chief, Christiana Figueres ’79 notes that either “we will move to a low-carbon world because nature will force us, or because policy will guide us,” and that continued investment in fossil fuels a “blatant breach of fiduciary duty.”
A host of mainstream financial experts are beginning to raise red flags, too. Henry Paulson, who was the Republican Secretary of the Treasury when the credit bubble popped in 2008, argued in a New York Times op-ed that “we’re making the same mistake today with climate change.” Paulson calls the carbon bubble “a crisis we can’t afford to ignore.” HSBC estimates that if the world prevents a two-degree rise in global temperatures, fossil fuel stocks will face a 40 to 60 percent devaluation. We obviously do not want to be invested in an industry that takes that kind of hit.
The carbon bubble looms more prominently than ever, following unprecedented commitments made by the U.S and China to dramatically reduce emissions. China agreed to peak emissions by 2030 and the U.S. committed to reducing emissions to 26 percent below 2005 levels by 2025. Prior to this announcement, skeptics of the carbon bubble counted on governments to allow climate change to go on unchecked. Without the world’s largest polluters on board, it seemed like other market forces such as rising capital expenditure costs and alternative energy competition would present larger threats to overvalued carbon assets. Now that the EU, China and the U.S., which represent over 50 percent of world emissions, have unprecedented commitments on the table, the carbon bubble is more likely than ever to pop. Jeremy Leggett, chairman of the Carbon Tracker think-tank, warns that, following new UN climate agreements next fall, investors “might find they are in a sense playing catch-up to the markets that are already cutting emissions for them by default.”
Large investors are taking notice. In September, the Rockefeller Foundation, built off of oil profits, divested, stating that if John D. Rockefeller, the founder of Standard Oil, “were alive today, as an astute businessman looking out to the future, he would be moving out of fossil fuels and investing in clean, renewable energy.” Just last month, Norway’s largest public pension fund, worth $84 billion divested from coal and reinvested in renewable energy. Norway is now considering divesting its $840 billion sovereign wealth fund, which is derived from oil and gas revenues, as a means to send a political message and protect the fund from the risk of fossil fuel investment.
The moral and political imperatives for divestment are as strong as ever. Millions die every year as a result of our fossil-fueled energy infrastructure, and the potential damage wrought by unchecked fossil fuel extraction is unthinkable. In the wake of Cambridge’s offer, there is vanishingly little excuse for an institution like Swarthmore, which prides itself on a commitment to civic responsibility, not to divest. Divestment is a common-sense way for us to leverage our institutional power to create change and, as Bevis Longstreth, the former Commissioner of the Securities and Exchange Commission, said, “is a just, sound, risk-averse investment judgement.” By maintaining investments in fossil fuels, we, as an institution and community, are saying that the carbon bubble does not exist, that fossil fuels are good investments and that the fossil fuel industry’s business model, which is based off a plan to burn five times as much carbon as is safe, is compatible with our values. By refusing to divest, the Board of Managers is betting against the stability of our generation’s future. This is exactly the wrong message for us to be sending as an institution that values civic responsibility. As the campus where the fossil fuel divestment movement began, we are a unique spotlight.
It is morally unacceptable for the Board of Managers to refuse this unprecedented opportunity to make Swarthmore a leader on climate change and put us in front of the curve, morally, politically and financially. They have a choice: to lead or to follow. This weekend, we will be showing them what leadership looks like and urging them to take advantage of this incredible opportunity to make Swarthmore a leader on this critical issue. Join Mountain Justice and allies Saturday, at 10 a.m. in Parrish Parlors for a march, rally and petition delivery to the Board.