Editor’s note: This article was initially published in The Daily Gazette, Swarthmore’s online, daily newspaper founded in Fall 1996. As of Fall 2018, the DG has merged with The Phoenix. See the about page to read more about the DG.
I’m an economist – or, at least, Swarthmore and other institutions trained me as one. The moral arguments over divesting from fossil fuel companies to me play second fiddle to the economic issues involved and their political implications.
I favor divestment as an investment strategy for a number of reasons, which I will elaborate shortly, and I also favor the tactic as part of a larger political strategy. We need to divest as political strategy if we are to alter the current path of fossil fuel use and associated global climate change that scientists claim is a potential threat to the very existence of our species. The U.S. Department of Defense suggests we need such a strategy since the potential effects of climate change constitute a serious threat to this nation, but that is a parochial view and I’d rather address the problem from a broader perspective.
First, “Socially Responsible Investing” (SRI) is not a start-up sector in the investment community isolated to universities and liberal arts colleges. SRI is decades old, arguably growing out of the apartheid divestment movement. Funds have been developed that avoided companies using child and other exploited labor, tobacco manufacturing, nuclear energy, arms manufacture and the like. (TIAA-CREF, which manages the retirement assets of a large proportion of all university faculty in the US – including Swarthmore faculty and this emeritus – has had a Social Choice Fund investment option for decades.) Just last week, we witnessed the launch of BlackRock Impact, a new unit created to coordinate the parent firm’s many investment products with social and environmental goals. BlackRock manages well of $1 trillion in assets. We’re not talking about marginal financial players getting into the SRI business as the firm is in the Fortune 100.
SRI focusing on avoiding fossil fuels is an ongoing business. Fossil burning minimizing portfolios exist, have been shown to be competitive to those including fossil fuels in recent years, and they continue to attract more attention, which means more and more investors, including institutional investors such as pension funds and endowments, are investing in them. It’s not that surprising, given the findings of a 2013 report by Standard and Poor’s entitled What A Carbon-Constrained Future Could Mean For Oil Companies’ Creditworthiness. Fossil fuel investments are risky business these days, and Wall Street knows that better than Main Street. Thus, the student movement to get universities to move their endowment investments out of fossil fuel companies is not an isolated effort. Universities are not trailblazing here, but rather are following a well-worn path accepted by many in the investment mainstream.
Second, I would like to address some points made by Professors Wallace and Burke in their recent pieces about strategies to combat climate change. Professor Wallace suggested that fossil fuel investments were comparable to investing in ““child labor, blood diamonds, or sex tourism.” Professor Burke then spent some time refuting the ethical argument made by his colleague. I submit they are both wrong in seeing a parallel.
Amazon, Apple, Nike, Time Warner, Verizon, and Comcast may be ethically challenged, but none engage in the level of effort committed by the companies in the fossil fuel industry to influence public policy and challenge the veracity of findings about climate change. They are not in industries that benefit from over $4 billion in subsidies from the federal government which they do not need for profitability while their competition – in this case, renewable energy firms and promoters of energy efficiency – get far less support. The national contribution to the fossil fuel industry has no parallel, especially when one adds in the costs of military adventures to protect overseas petroleum sources.
Burke claims to be arguing about tactics, not morals. I applaud that approach. But from where should the Swarthmore endowment take funds to make a $20 million investment in renewable energy, which he suggests? Given the importance of the energy sector to the US socio-economic system, it seems logical for the endowment to be invested in the sector, but should it reduce its investment in other sectors to invest in renewables? Might it not be more logical to shift investments from fossil fuels to renewable energy? That would suggest that there really is less disagreement about tactics between Messrs. Wallace and Burke than the latter suggests.
But Burke also argues, by analogy to South African divestment, that university engagement in divestiture is premature. He recounts a broad alliance of for-profit and non-profit entities collaborating in that early instance and seems to assume that such an alliance is not present relative to efforts to reduce greenhouse gas emissions. On that basis, he objects to the divestment tactic being pursued by Mountain Justice and others.
Burke’s assumption that collegiate disinvestment efforts are an isolated effort is, however, erroneous. Cities, companies, foundations and many others are in the process of divesting from fossil fuels and working to reduce their carbon footprint. (Nations started examining how to do that after the RIO Earth Summit in 1992.) An array of funds and investment pools were created in recent years to serve the demands of investors trying to minimize their involvement with fossil fuels.
Finally, lost in the debate over the morality and strategy of divestment is the fact that divestment is a financially sensible decision. Stranded assets – coal, oil and gas left in the ground – pose a real problem for companies whose market valuations are based on the assumption that all those fossil fuels will be consumed. If those assets cannot be used, that is equivalent to not having those assets and so stock prices will tumble. Those stocks’ prices may rise for a while until something moves the world to constrain greenhouse gas emissions, but timing risk poses a problem for investors: if they are not among the first to realize the assets will be stranded, they could suffer massive investment losses.
If I were dependent on my investments – which I am, and which Swarthmore is now and was when I was a student in 1961-65, notwithstanding Professor Burke’s claim that endowment assets were just rainy day funds – that risk would concern me. Risk, not just morals, argues for a lower investment in fossil fuels.
Admittedly, there has been inadequate information available to casual or complacent investors about how they could earn their expected returns while reducing fossil fuel investment. The OECD in 2012 released The Role of Institutional Investors In Financing Clean Energy which argued that “… outside the major pension funds and insurance companies […] institutional investor allocations to clean energy projects remain limited …. Reasons for institutional investor hesitancy include a lack of information and expertise.”
In response, 350.org and some of its allies produced Pathways to Fossil Free Investing: Endowment Management in Warming World in May 2013, responding to that need and other opportunities to educate investors. The Forum for Sustainable and Responsible Investment, an umbrella association for SRI firms and participants, offers annual reports back to 2009, so it has been around for a while – and it published Investing to Curb Climate Change – A Guide for the Institutional Investor in 2014 to serve just the need identified by the OECD need. (There is an analogous guide for individual investors.)
Mountain Justice and its allies are just trying to get the Swarthmore Endowment Fund to catch up with other investors. Nothing “self-flattering and insular” about student effort.
Peter B. Meyer ’65 is Professor Emeritus of Urban Policy and Economics at the University of Louisville and President and Chief Economist of The E.P. Systems Group, Inc.