Divestment: It’s not Morality – It’s Economics

mountain justice

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.


  1. The claim that divestment as a tactic will hurt fossil fuel companies is wrong. You can argue all day long whether divesting from fossil fuel companies is a good financial decision, and i don’t give a rat’s ass whether it is or not for your money, but in the end, divestment is not a strategy to bring down the fossil fuel industry. It’s more like a correlated symptom that occurs *while* the industry is falling. It’s not the cause, it’s an effect. As a campaign, i don’t think it’s a good one, really, being predicated on a lot of half truths and not-truths. I much prefer a carbon fee and rebate, as an economist, and most economist agree.

    How could you write this article without even mentioning a carbon tax? As an economist, how can you do that?

  2. The claim that divestment as a tactic will hurt fossil fuel companies is wrong. You can argue all day long whether divesting from fossil fuel companies is a good financial decision, but in the end, divestment is not a strategy to bring down the fossil fuel industry. It’s more like a correlated symptom that occurs *while* the industry is falling. It’s not the cause, it’s an effect. As a campaign, i don’t think it’s a good one, really, being predicated on a lot of half truths and not-truths. I much prefer a carbon fee and rebate, as an economist, and most economist agree.

    How could you write this article without even mentioning a carbon tax? It seems like the elephant in the room, as the single most effective policy possible according to most economists who consider the question, for reducing greenhouse gas emissions.

  3. I have read the opinions by Lee Smithy, Timothy Burke, Peter Meyer, Mark Wallace and Gregory Brown. All make excellent philosophical points and as is Swarthmore tradition, both sides of the issue are well represented. I cannot really disagree with any of the points so eloquently made, which of course places me on both sides of the issue. The one thing I see as missing is any factual data on the impact of such a divestment on the endowment.

    I may be able to fill this void by looking at the Quaker investment fund, Friends Fiduciary, which is designed to hold the endowment assets of the various Quaker Meetings. Friends Fiduciary offers two investment options: the Consolidated Fund and the Green fund. Both are designed to satisfy Quaker values. The Consolidated Fund pays 4.5% return on investment not including growth. It is already structured to avoid tobacco, firearms manufacture, and other investments contrary to Quaker values, and so pays a somewhat lower return than an unrestricted fund on the open market. The Green fund excludes fossil fuel investments in addition. It pays 3.5% return on investment. Thus the loss due to exclusion of fossil fuel investments is about one percent. This may or may not be the experience if Swarthmore were to divest, but at least it’s a data point where there were none.

    I am retired from the Environmental Protection Agency since 2002. I was one of the reviewers of an internal document titled “Can We Prevent Global Sea Level Rise” by James Titus, who was also an EPA employee. The year was approximately 1983, and Jim was a voice in the wilderness at the time. A bit later, William Ruckelshaus wrote a prophetic forward to the document’s successor titled “Greenhouse Effect and Sea Level Rise: A Challenge for this Generation.” At the time, the only effect envisioned for global warming was sea level rise. Even then, the bottom line of my review was along the lines of “the bullet has already left the rifle.”

    Since then climate science has progressed dramatically, in part because of the availability of super-computers, weather satellites, and improved climate data. Projected effects now include a redistribution of rainfall which will make it necessary to abandon some farming areas and open others, as well as abandonment of many coastal cities. Peter Collings held an excellent Lifelong Learning course on the topic a few years ago, and I had the privilege of attending. I’m quite convinced that we as a world population are definitely headed the wrong direction and that there will be serious consequences – many of which we are already beginning to see. I have no doubt that climate change is a serious threat and that fossil fuel consumption is probably the primary contributor.

    The question is – of course – what to do about it. It becomes quite complicated because both the fossil fuels and the money invested in their production are fungible commodities. If oil production in US is reduced without a reduction in demand, then oil production in some other part of the world will increase to satisfy the demand. Similarly, if there were a large decrease in investment in fossil fuels by a large number of investors such as Swarthmore, the scarcity of capital would drive up the necessary return on investment in order to attract capital to the energy sector. The net result would be a small change in the price of the product. Thus, what Swarthmore can do in isolation is little more than a statement of our moral values.

    What CAN be done is to reduce demand for fossil fuels. The College is already well along on this path with its LEED certified buildings. We are already acting in a responsible manner. Yet I believe there is also another less recognized role of Swarthmore in reducing greenhouse gas emissions. It has more to do with our student body. We deliberately select students for their curiosity about the larger world and their motivation. (I am an alumni interviewer) Given the composition of our student body, our graduates have a very high likelihood of working in an occupation which will benefit society as a whole. Who knows, we may have in our current student body the person who makes a major contribution to mitigating the effects of global warming.

    At this point I find it necessary to point out that the central mission of Swarthmore is education. We have a unique student body with both a high level of capability and also a high level of social consciousness. Let me go back a few years when I was on the Alumni Council. I proposed to President Bloom a different take on solicitation of contributions. It goes like this: Let’s say you have $100 to give to charity. You can give it to your favorite non-Swarthmore charity and it will do $100 worth of good, less the administrative costs. Now, suppose you give it to Swarthmore and it contributes to the education of a Nobel Prize winner – or maybe just an Engineer who comes up with a new battery that makes electric cars practical. The ultimate good from your $100 is now much more than $100. I called it a “multiplier effect” similar to the economic effect of a new employer in a small town. Unfortunately, I was never able to put any numbers on it, so the concept didn’t go very far.

    So now I must look at the reverse of this concept. Suppose we divest in fossil fuels and lose 1% on our return on investment in the process. With $1.5 billion invested, this would amount to a staggering $15 million per year in lost income. Yes, that’s just a guess. But think of the lost opportunity if that loss prevents a student from getting the financial aid needed. I immediately think of the loan-free policy being unsustainable after that kind of income loss. If that then prevents the Swarthmore Engineer from later designing that new battery, then the net effect is not a benefit – it becomes a net loss to society.

    So my bottom line on divestment of fossil fuels is one of extreme caution. Back when we divested in South Africa, I don’t believe it made up a significant part of our portfolio and so could be done as a social statement with little pain. I don’t think the same is true of fossil fuel investments. There is a major potential for lost income. We must remember that the main goal is to educate, and that the overall good our graduates can do must be weighed against the immediate social benefit of divestiture. I see it mainly as a heart-felt position on who we want to be, but which can have little practical impact in the real world. Let’s not rush into it.

    Bill Belanger

  4. Companies such as Altria, Ruger, etc appear to be doing remarkably well despite already being substantially divested. I believe it is as much a fallacy that divestment of stock harms profits as investment helps profits. The dot com companies were highly supported by investors, yet the majority failed.

    Let’s leave Swarthmore’s endowment to the professionals and keep our own expert investment advice to ourselves. There are better and more courageous ways to advance this social agenda than on the backs of students already drowning in tuition costs.

  5. I disagree with the central premise of your argument. If it makes economic sense to divest, great. Go for it. But the reason to divest is because you wish to take a moral stand. Otherwise it is not divestment but an investment strategy.

    “Should Swarthmore put its money where it’s mouth is?” That is 100% the question. We argued in the 80s that you can’t educate Black people and invest in slavery. Black people got it. Many white people did. The Swarthmore Board (and most famously Eugene Lang) did not.

    It sounds like the more things change, the more they stay the same. You either take a moral stance – or you don’t. It really is that simply and no amount of hand waving is going to change the facts.

    Yes, the Investment Committee is charged with maximizing returns to make sure Swarthmore has a bright financial future. I know. I sat with this same committee in the 80s as we tried to move some small portion of the endowment into South African-free investments. It wasn’t easy then. Divesting from fossil fuel is much more challenging. But so what?

    “You cannot simultaneously prevent and prepare for war. The very prevention of war requires more faith, courage and resolution than are needed to prepare for war. We must all do our share, that we may be equal to the task of peace.”

    Swarthmore needs to answer; “What are we doing and why are we doing it?” The Board is content to answer; “We are securely investing our endowment to maximize returns in order to ensure the financial well-being of the College. All other concerns are secondary.”

    I don’t agree with this answer. I would prefer the following: “Swarthmore provides educational opportunities to assist students as they endeavor to create a better world. All other concerns are secondary.”

    They don’t teach the following little gem in Econ (I know, I took plenty of courses over 15 years on 3 different continents) but… money is not the end all and be all. Sometimes the making of money actually kills that which you are trying to build. Swarthmore, what are you trying to build?

    • People taking moral stands rather than actually solving problems is a large part of why we have so many unsolved problems. Making a show of your virtue when you could be actually helping is not virtuous. Student divestment activists seem to recognize this, which is why they have largely moved from focusing on the purity-based moral arguments to emphasizing the claimed political and financial benefits of divestment.

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