Harvard and Brown Fail on Climate
Some have claimed that divestment from the FFCs would lead to immediate and damaging cuts in campus budgets. It is hard to understand why that should be so. When a university sells stock, it has the same amount of cash as the market value of the stock at the time of sale, minus transaction costs (estimated at 0.4 percent in a study of South African divestment). Skilled university investment managers can use that cash to buy other promising stocks. Divestment would phase in over several years, reducing any potential effect on annual budgets. And, in any case, universities tend to have only a small percentage of their highly diversified portfolios in FFCs.
During the apartheid divestment debate, many trustees worried that divesting might lower the long-run endowment return. This concern was reasonable, since some of the American companies doing business in South Africa—including Chevron, Citicorp, Control Data, Ford, General Electric, General Motors and IBM—were regarded as blue-chip stocks, the bulwark of a sound portfolio. But those fears proved unfounded: a 1986 study reported that, based on “historical returns since 1959,” the South Africa–free portfolio, “diluted with Treasury bills to bring its risk in line with the [New York Stock Exchange], would have outperformed the NYSE by 0.187 per cent annually.”
Would selling stock in FFCs harm long-run endowment returns? One way to judge is to look at recent stock market performance. Suppose that ten years ago, a university had invested $1 billion in a “fossil free” portfolio. Today that investment would be worth $2.26 billion, while the S&P 500 pool of stocks, which includes FFCs, would be worth $2.14 billion. A study by Deutsche Bank found that investment funds using environmental, social and governance factors have performed as well or better than other funds.
Though FFCs have yielded no better than average returns in the recent past, might they be superior investments in the decades ahead? Many experts doubt it. These companies are valued primarily on the basis of their reserves: the amount of extractable oil, coal and gas they have discovered but have yet to exploit. But once the effects of burning carbon have become intolerable, whatever reserves the FFCs have in the ground will stay there. These “stranded assets” will come off the corporate books, and the value and stock price of those FFCs that have failed to develop other businesses will fall. A report by Oxford University’s Stranded Assets Program lists several other factors that threaten the value of FFCs, including water scarcity, new government regulations such as carbon pricing and air pollution restrictions, rising competition from clean technology, and legal challenges. Add to that list the techniques that must increasingly be used as oil becomes harder to extract—techniques like fracking and steam injection, which consume large amounts of energy and water and damage the environment.
The Economist headlined its recent article on the subject “Yesterday’s Fuel: The world’s thirst for oil could be nearing a peak. That is bad news for producers, excellent for everyone else.” No one can predict how the stock market will perform, but there appears to be no particular financial reason to hold stock in FFCs.
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A nationwide divestment movement will arise despite the decisions of presidents Faust and Paxson—it is inevitable. Remember that even though American students had no personal stake in South Africa, their determined protests shook many campuses and helped to end apartheid. Students, parents, alumni and all of us have not only an altruistic interest in combating climate change, but our own self-interest and that of our children and grandchildren. University presidents may declare the consideration of divestiture over, as Paxson did, but that will not make it so. Just the opposite: as the effects of climate change become ever more dire, college students and their parents and supporters will ratchet up their protests until divestment from FFCs becomes the most contentious issue in American campus history. Some institutions will decide to divest early in order to stand on principle. College of the Atlantic, Green Mountain College, San Francisco State University and Unity College are among those that have already done so. Others will reject divestment initially, only to adopt it later. But delay is not a neutral act. Scientists believe that we have one or two decades at most in which to act to limit global warming to the 3.6°F (2°C) already in the pipeline. But as Justin Gillis of The New York Times recently pointed out, that target “would still mean vast ecological and economic damage.” To delay action that might help prevent the worst effects of climate change has the same consequences as the denial of climate change science.
Divestment now allows universities and their presidents and trustees to take a principled stand on the greatest threat in human history while there is still time to make a difference.
When, a few decades hence, our grandchildren judge today’s colleges and universities, do we want them to say, “They knew the most, yet chose to do nothing?”
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