The Golden State was in the midst of its worst drought on
record when University of California freshman Jake Soiffer took
the microphone during the public statement session of the UC
Board of Regents meeting in San Francisco last November.
The topic of his comments to the 26-person committee that
oversees the state university system: climate change.
Soiffer told the UC regents at that meeting which
happened to coincide with the United Nations Warsaw Climate
Change Conference that youth are challenging their
own institutions and communities to take action to halt the
devastating effects of climate change, spurred by the
inability of governments to deal with the issue.
The Berkeley freshman is one of about 100 students spread
across the University of Californias nine campuses who
are pushing for the institution to take a stand on climate
change. They want the UC system to divest its $86 billion
portfolio of the worlds 200 largest fossil fuel companies
to send a clear political message that the business of these
companies is not morally or financially sustainable. Addressing
the Board of Regents meeting was just the start. By the
time I leave Berkeley, I want to see UC divest from fossil
fuel, says Soiffer.
Three thousand miles away from Berkeley, at Middlebury
College in Vermont, student groups and faculty members also
have been pushing for their school to divest from fossil fuel
companies. With a nearly $1 billion endowment, Middlebury
is dwarfed by the UC system, but it has a reputation as a top
liberal arts college and a prestigious board and alumni
network. The school boasts the first environmental studies
program in the U.S., and many of its students identify closely
with Vermonts intense environmentalism. Middlebury junior
Fernando Sandoval Jimenez, who is majoring in environmental
studies and geography, is confident that he and his fellow
student activists will be successful in forcing
We know it is going to be a fight, but we are prepared
for the fight, he says.
Over the past two years, students at approximately 400 U.S.
campuses have been pushing their universities and colleges to
divest from the fossil fuel industry. The divestiture movement
has spread to municipalities and public pension funds. Not
since the campaign to make institutions divest from companies
doing business in apartheid South Africa a
three-decade-long effort, which the fossil-fuel-free movement
looks to as a model has one issue ignited such a
firestorm. To date, most institutions of any size have resisted
calls to divest, but the movement is challenging these
organizations to look seriously at how they allocate their
assets and to reconsider some of their most closely held
beliefs. For the student and environmental activists,
divestiture has a political objective: to get lawmakers in
Washington to put policies in place that will force fossil-fuel
companies to change their behavior.
The idea that you can build a movement that will
fundamentally alter the political context in which decisions
are made is proven by South Africa, says writer and
scholar Robert Massie IV, a champion of the carbon divestiture
movement and president of Boston-based think tank New Economy Coalition. With climate change,
he adds, the planet is facing a fundamental crisis that
our political and economic system does not seem capable right
now of addressing.
The ranks of respected investors
and economic thinkers concerned about the financial risk of
climate change are growing. In October longtime hedge fund
manager Thomas Steyer, former Treasury secretary and Goldman
Sachs Group CEO Henry Paulson Jr. and ex-mayor of New York
Michael Bloomberg announced they were forming an initiative
called Risky Business to assess the economic
impact of climate change. Another former Treasury secretary and
Goldman chief, Robert Rubin, is advising them on their efforts.
Robert Litterman, former head of risk for Goldman Sachs, has
long been concerned about the imminent danger of climate change
to corporate balance sheets. Hedge fund manager George Soros
and Microsoft Corp co-founder Bill Gates are among the
billionaire philanthropists alarmed by what is happening to our
environment, as are investors
Jeremy Grantham, co-founder of Boston-based GMO, and Christopher Hohn, founder of
London-based hedge fund firm The Childrens Investment
Fund Management (UK).
Concerns about a warming planet go back to the 1950s, when
scientists started developing tools to monitor the effects on
the atmosphere of carbon dioxide, a by-product of burning the
fossil fuels, such as coal and oil, that have powered
industrialization. Carbon dioxide is called a greenhouse gas
because it traps heat and causes the Earth to get warmer.
(Rising levels of methane and nitrous oxide have also
contributed to the problem.) In 1950 there were about 280 parts
per million (ppm) of carbon in the atmosphere. Scientists
estimate that 350 ppm is the maximum safe level. Today the
carbon in the atmosphere is at nearly 400 ppm. (See also
Climate Change and the Years of Living
In 2008, frustrated by the lack of change in Washington and
the slow pace of the environmental movement,
writer-turned-activist Bill McKibben, a scholar-in-residence at
Middlebury, used the 350 number as a rallying cry for where the
world needs to be: He co-founded grassroots nonprofit group 350.org. Since 2012, 350.org has moved to
the forefront of the carbon divestiture movement, with the
charismatic but aloof McKibben as its most valuable spokesman.
Most of the time, environmental activists are playing
defense against the fossil fuel industry, he says.
Divestiture is an opportunity to play offense.
McKibben builds his case for divestiture on three crucial
numbers: 2 degrees Celsius, 565 gigatons and 2,795 gigatons.
Two degrees Celsius is the broadly agreed-upon maximum amount
of warming that the planet can take before things get really
bad; 565 gigatons is the amount of carbon that, released into
the atmosphere, would get the world to that level; 2,795
gigatons is the amount of carbon deposits that energy companies
currently have on their books.
McKibbens math is troubling. Since 2011 the U.K.-based
nonprofit Carbon Tracker Initiative has published a
series of reports demonstrating that the fossil fuel reserves
currently owned by global energy companies exceed 565 gigatons.
In its most recent study, the group estimates that the 200
largest oil and gas and mining companies spent
$674 billion in the past year to find and develop new
fossil fuel reserves. If governments regulate carbon emissions,
the value of these reserves will drop significantly. The Carbon
Tracker reports have helped to popularize the term
stranded assets to describe the carbon risk that
energy companies have on their books suggesting that the
excess carbon is a bubble waiting to burst.
Yet for those investors
who take Carbon Trackers warnings to heart, what to do
about the problem is far from obvious. Although the arguments
about climate risk might be compelling, there is still plenty
of money to be made in energy companies. Attractive options
include investing in
emerging-markets energy securities and companies positioned
to benefit from the boom in hydraulic fracturing, or fracking,
which has the potential to make the U.S. energy-independent and
is already providing a boon to economically strapped states
such as North Dakota. In the same way that there was plenty of
money to be made in U.S. subprime mortgages before there
wasnt, many investors
see a lot of opportunities right now in the energy sector.
The way most institutions allocate their assets presents a
significant obstacle to divestiture. The endowment style of
investing was popularized during the past quarter century by
David Swensen, CIO of Yale Universitys $20 billion
fund. The Yale model favors active management and
diversification of revenue streams especially among
alternative assets such as hedge funds, private equity and real
assets like oil and other commodities. Endowment investment
professionals are very resistant to the idea of divesting from
any stock or sector. They believe that the markets and
professional money managers are the best judges of an
assets inherent value and that setting limits on where a
manager can invest will almost always lead to losses.
Paula Volent, a Swensen protégée who heads the
$1 billion endowment at Bowdoin College in Brunswick,
Maine, echoed the views held by most of her colleagues when she
told the Bowdoin school newspaper in February 2013 that
divesting from the 200 largest publicly traded fossil fuel
companies would have reduced investment returns by 5 percent a
year over the preceding decade, costing the school more than
$100 million. To the minds of such investors,
divestiture is fiducially irresponsible.
The endowment investment model is not infallible. Many of
its practitioners, including Swensen, stumbled in 2008, when
they failed to predict the profound economic impact of the U.S.
housing market crash. Joshua Humphreys, president and senior
fellow of Croatan Institute, a Durham, North
Carolinabased research center, contends that investors
are making an even greater mistake with carbon risk. Even at a
school like Yale, which is investing in green energy, Humphreys
says, they remain beholden to investing in the carbon
economy as part of their diversification strategy. He
adds that the analysis of the carbon bubble sounds
completely incompatible with their strategy. Some
foundations, however, are starting to switch their portfolios
out of carbon and reinvest those funds in green technologies.
Humphreys is hopeful that these foundations will become the
investment leaders of tomorrow.