Keep the stocks: an argument against divestment

Fossil fuel divestment crusades are perennial events on college campuses, and Swarthmore students are among the most passionate about the issue. These campaigns are part of a broad environmental movement that advocates the transition from fossil fuel energy to alternative cleaner energy. On the surface, divestment appears to be a sensible measure. Fossil fuels are a finite resource and produce undesirable carbon emissions. It seems reasonable for Swarthmore to withdraw its money from fossil fuel companies and reinvest it elsewhere. Close examination, however, indicates that divestment is a poor, ineffectual policy that works against the interests of the environmental movement.

The basic economic argument behind divestment is that the widespread disposal of fossil fuel shares will damage the targeted firms, leading to their decline and, ideally, replacement by green energy companies. This argument does not hold to scrutiny. The act of divestment tends to have little or no effect on a company’s financial well-being. Selling shares does nothing but make them available to another buyer — and that buyer probably won’t be environmentally conscious.

Let’s examine a historical example which illustrates these facts. Divestment from South African corporations during the 1980s, widely believed to have been integral to the fall of apartheid, was ineffective in economic terms. In the 1999 study “The Effect of Socially Activist Investment Policies on the Financial Markets: Evidence from the South African Boycott,” business analysts C. P. Wazzan and Ivo Welch discuss the failure of Western activists to cause appreciable damage to firms doing business in South Africa. The authors observe that “the boycott primarily reallocated shares and operations from ‘socially responsible’ to more indifferent investors and countries.” They concluded that “the sanctions may have been effective in raising the public moral standards or public awareness of South African repression, but it appears that financial markets managed to avoid the brunt of the sanctions.” The study notes that from 1984 to 1988, when Congress passed the Comprehensive Anti-Apartheid Act and many organizations divested from banks and firms holding South African assets, those banks and firms experienced almost no losses at all. The only notable economic consequences of the policy were the minor losses suffered by the divesting firms themselves.

Presumably, the transfer of instruments from a “socially responsible” shareholder to an “indifferent” one is what divestment activists would like to avoid. Investment capital seeks the highest returns available given the risk tolerance of the investor; divesting the stock of an oil company from the endowment of a university has little impact on the stock’s desirability or market price.  That price is determined by the expectation of future profit, not by ideological campaigns. In sum, divestment redistributes rather than reduces corporate activity.

Putting divestment’s economic flaws aside, the goal of “raising public moral standards or public awareness” still seems valid.  After all, even if Swarthmore itself can’t make much of a difference, wouldn’t it at least be exposing the issue to the public eye? Yes, but unlike apartheid, fossil fuels cannot be practically abandoned. At our current stage of technological advancement, it is not economically viable to desert fossil fuel companies. These businesses meet the vast majority of America’s energy demand; as of now there is no alternative that can survive on the market for long. Research funding and green energy subsidies may yield future results, but at present this country — indeed, the world — relies heavily on fossil fuels. One can talk about alternative energy in a classroom, but most people cannot afford the luxury of buying electric cars.

Swarthmore and like-minded institutions should not ignore these facts. By divesting, the college’s voice on the question of fossil fuels is silenced. By removing itself from a company’s list of shareholders, Swarthmore loses all influence in the affairs of that corporation. Walking away from the company altogether would simply allow it to continue the unsatisfactory practices for which it was criticized in the first place. Any chance that the university has of changing the fossil fuel company’s habits dies with divestment. Rather than cutting relations with the corporation in disgust, universities should instead work to shape the corporation’s business routines and environmental standards.

Universities need to recognize that fossil fuels are an uncomfortable necessity — the damage of which can be mitigated. Fuel conglomerates have been improving their extraction and purification techniques for decades, the automobile industry has been limiting carbon emissions with sophisticated filter systems and electrical companies have worked hard to minimize their carbon discharge. In 2012, American greenhouse gas emissions were at their lowest in almost two decades. This progress was achieved in part by the lobbying of environmentally conscious shareholders. It was not achieved by abandoning the companies.

I don’t deny that fossil fuels contribute to atmospheric pollution. I don’t oppose the search for alternative energy sources. But I do oppose a policy oriented more toward ideological fulfillment than actual results. Divestment exercises hardly any influence on a firm’s financial status; it is a self-imposed muffle on the divestor’s mouth, and in some ways it is even an abandonment of responsibility. It is easy to point accusingly at an oil company and disassociate yourself from it. It is much harder, yet more productive, to address the company directly — pressure it without running from it — and make it change. Those at Swarthmore who advocate divestment would better serve their cause by engaging with, rather than fleeing from, the business they dislike.

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