Why Endowments Should Resist Fossil Fuel Divestments

There is a movement afoot that would have university endowments and other investors divest their positions in fossil fuel industries (see, for example, 350.org). The logic at first blush is enticingly simple: The burning of fossil fuels causes climate change; climate change is bad; and therefore association with fossil fuels through investment is wrong. But beyond that deceptively simple logic lurks a tangle of more complex issues.

From what we have noted, the movement would have the debate begin with the question of whether divesting might hurt the risk-return profile of investors — a cost-benefit analysis, if you will, of divestment. We think this is the wrong starting point, but for purposes of discussion, let’s begin with two basic assumptions.

The first is outside our competency, but we readily accept the scientific consensus on it: that the burning of fossil fuels is, and will continue to be, a primary cause of climate change and, if severe enough, will be markedly deleterious to at least certain portions of humanity and to the earth’s ecosystems.

The second is well within our competency, and, having considered it carefully, we actually believe it to be highly unlikely. Nonetheless, let’s assume that fossil fuel divestments would have no adverse consequences on the risk-return profile of the typical endowment.

Even adopting these two assumptions, the threshold question remains: What would be achieved by divestment?

Modern civilization has been built on cheap and abundant energy, currently provided in large measure by the burning of fossil fuels. We live in a period that started about 200 years ago that has been aptly termed the “hydrocarbon age.” Billions of us — and fossil fuels are a big reason there are billions of us — enjoy standards of living and levels of health without historical parallel. Billions more aspire to longer, healthier, more comfortable and interesting lives. Fossil fuels are used extensively in agriculture; for heating and cooling, transportation and electricity; to produce plastics, chemicals,fertilizers and pharmaceuticals; and to manufacture nearly everything. Fossil fuels have been very good to humanity.

Thus, if anthropogenic climate change ends up having harmful effects on humanity, one could say humanity became a Malthusian victim of its own incredible success.

Let us concede that more should be done today to address the dangers. But what? Certainly there is no current option to turn the carbon spigot off — to “just say no.” Fossil fuels are deeply woven into the economic fabric and global infrastructure, and there are no similarly affordable, readily available renewable alternatives with associated infrastructure to replace them today. The dogmatic position is simply not pragmatic.

Certainly some progress has been made. Starting close to home, the University of Michigan in 2009 established a Sustainability Executive Council to elevate its multipronged commitment to environmental sustainability in teaching, research and operations (see sustainability.umich.edu). As president Mary Sue Coleman stated at the time, “We are going to leverage our many strengths to make significant contributions to an urgent and extraordinarily complex problem.”

As part of this effort, the university supports and collaborates with various institutes and research centers and teaches numerous sustainability-related courses. Very concretely, it seeks to reduce waste and energy usage and promote sustainability in operations through an Office of Campus Sustainability. The results are multiplied manyfold by initiatives at different levels: at other universities, supranational organizations, national and local governments, corporations and countries.

Research and investments in green energy continue to be funded, including by, for example, the University of Michigan and its endowment and by large energy companies likely to appear on any divestment list. Still, the world should do more in terms of conservation, sustainability, incentives for renewable energy, disincentives for using fossil fuels, and general reductions in greenhouse gases.

Is divestment by endowments among those actions? We are skeptical. In our discussions with students and colleagues, they concede that divestment would have no direct impact on fossil fuel demand, since it does nothing to reduce it, and would have no direct effect on supply, with investments attracting other funding as long as demand exists.

They also concede that divesting for “moral” reasons, is, at least in the case of fossil fuels, a specious rationale. Moralism implies a uniform, principled approach: Let’s all have a real impact and stop using fossil fuels. We will heat our homes, offices, classrooms and dorms with something else; stop driving cars propelled by fossil fuels; make sure every item we purchase is untainted by carbon.

Divestment advocates will agree that such dogmatism is unrealistic and not likely to be fruitful. Besides, if one is taking a moral stand, one should be consistent in principle and not single out endowments for special scrutiny because they appear easy, visible and appealing targets.

Moreover, is it morally right that some advocates of divestment have indirectly benefited from past university investments in fossil fuel ventures yet, at no foreseeable cost to themselves, are prepared to adversely affect future generations of students, faculty and staff?

In the end, advocates of divestment believe that the primary goal is to take aim at an appealing target in order to “make a statement,” a symbolic gesture that somehow positively contributes to shaping public debate on climate change and energy policy.

But what kind of statement would that be? The underlying message would seem to be, “Fossil fuels are evil, and we at the university are making a point of not associating ourselves with them — at least for the narrow purpose of investment.”

This message strikes us as a simplistic, arbitrary and unproductive condemnation of fossil fuels and associated industries. First, because it singles out fossil fuel enterprises for condemnation when in fact all of us — individuals, businesses and governments — use them. Second, if we exclude from our endowment all investments that in some way touched the carbon economy, we’d be left with precious little to invest in. Third, not all fossil fuels produced are used as fuel; they are also raw materials in the manufacture of many key products. And fourth, as discussed above, the burning of fossil fuels is in many ways important and good, and the practical reality seems to be that they must continue to be a significant portion of the global energy mix, probably for a significant period of time.

But what we find most unproductive about the divestment proposal and its embedded message is that they contribute to the politicization and polarization of the debate over climate change and the future of fossil fuels. Undoubtedly, there are some in industry who have behaved less than honestly and responsibly with respect to these and other issues. But there are also activists who dogmatically condemn fossil fuels while showing no interest in considering what the alternatives might look like and what the ugly effects of imposing substantially higher energy costs might have on humanity. Politicians across the spectrum have also exploited and contributed to the problem.

Politicization has probably not been conducive to thinking about the issue pragmatically, or even to advancing the cause, but we suppose that is part of the democratic process. More narrowly, we are highly skeptical that it would be productive or appropriate for university endowments to add to this politicization and polarization through a symbolic “statement” of divestment.

As we’ve said, we do not regard the message underlying divestment to be well reasoned or carefully considered. In connection with an earlier divestment campaign, Derek Bok, then president of Harvard University, wrote an open letter to the university community, in which he declared, “[Preserving our independence] does not mean that universities cannot influence events beyond the campus. It does mean that such influence should be exerted only by fostering the reasoned expression of ideas and arguments.” (Read more: Yale and Harvard and Losing the Fossil Fuel Divestment Game)

If this is a standard to be considered, we do not think the divestment proposal meets it. It contains an emotional message which may make some feel good. Whether it would actually do good is more doubtful.

Erik Lundberg is chief investment officer and Rafael Castilla is director of investment risk management at the University of Michigan. The views expressed herein are their own and do not necessarily reflect those of the University of Michigan. Investment policy decisions of the type discussed herein are ultimately within the purview of the Board of Regents of the University of Michigan.

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