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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 California’s 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 world’s 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 Vermont’s 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 divestiture.

“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 Children’s 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 Dangerously.")

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 Since 2012, 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.

McKibben’s 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 Tracker’s 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 wasn’t, 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 University’s $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 asset’s 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 Carolina–based 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.

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