Fossil Fuel Divestment: Can We Divest Ourselves Out of Global Warming?

But educational institutions and their endowment managers will push back hard nonetheless. Part of this is cultural; aside from practitioners of responsible investing, fiduciaries resist any constraint upon their choices, especially where  “nonfinancial” considerations come into play.  Other stumbling blocks: endowments rely far more on outside consultants far more so than in the apartheid era, and a far bigger share of assets are allocated in vehicles such as hedge funds that are not required to be transparent as to which corporations they invest clients money in.
Mostly, however, trustees will balk – even laugh — at the audacity and scale of the demand. Energy stocks comprise about 11% of the S&P 500 index. How is it feasible that they could sell positions worth millions of dollars from some of the worlds most profitable (and high dividend-paying) fossil fuel companies, and find alternative stocks that would serve the endowment as well?
The answer to that is simply, those investments may be worth little or nothing in the long run anyway, when world leaders come to their senses and impose mandatory carbon constraints. As drily observed, “The investment consequences of using only 20% of [fossil fuel] reserves have not yet been assessed.”[1]
This is the students’ strongest argument. What is not a good argument is 350’s claim that campus divestment is a “really important way to shake up the financial markets,” and to make sure that the fossil fuel companies “hear us in terms they might understand, like their share price.”[2] The campaign refers to the estimated $400 billion in combined college endowments is a “huge” number. In fact, we estimate that the amount American colleges and universities collectively hold in stock was about $117.5 billion in 2011.[3] Suppose about 10% of this, or $11.75 billion, in order to track the performance of the S&P 500. The total market capitalization of the world’s largest fossil fuel companies is about $3.6 trillion[4]. Hence, campus divestment could succeed in reducing only the tiniest fraction of value held by these companies, even if the all divested simultaneously. This is because as soon as those stocks are unloaded into the stock market, they will be quickly snatched up by other eager buyers who will exist so long as the demand for fossil fuels remains high.
This is the hard truth about divestment: driving down demand for a stock does nothing in itself to reduce demand for the product. Another hard truth is that divestment won’t impact fossil fuel companies’ ability to finance their operations. As 350 co-founder Bill McKibben often points out, ExxonMobil makes more money than any other company in the history of money. The company generated over $24 billion in free cash in 2011, after their making $31 billion in capital expenditures. They don’t need to borrow, so it will take more than divestment to starve that beast.
Regardless of the obstacles, 350 is correct that this grand reallocation of capital has to take place, so we wish the students luck. The immediate strength of this campaign is that it can keep the urgent necessity of action on climate change a front-and-center campus issue, and appropriately demand that fossil fuel companies and the investment industry be accountable for the impact of our decisions. As 350’s web site states, “Calling for divestment gets people off the fence, and fast.”
As they pursue divestment, we urge students to retain their fervor for reducing their schools’ fossil fuel dependency. They should press campus administrators to set and meet targets for reducing carbon emissions by boosting energy efficiency, installing renewable power sources, offsetting emissions and taking conservation measures.  Critically, this generation’s voice is also needed to demand that fossil fuel companies either recuse themselves from lobbying and the political realm, or enthusiastically embrace serious measures like a carbon tax.
Fortunately, this is also reflected in 350’s vision. Let’s hope the campaign succeeds in forcing everyone back to school.

[3] Our estimate is based on data for 2011 collected by the National Association of College and University Business Officers.