Why the Fossil Fuel Divestment Movement Will Succeed

The recent Point/Counterpoint arti­cles by Bob Massie and Robert N. Stavins in Yale Envi­ron­ment 360 raised a num­ber of inter­est­ing points about the fos­sil fuel divest­ment move­ment that is gal­va­niz­ing stu­dent activism on more than 400 cam­puses around the coun­try. How­ever, the exchange between these two authors failed to high­light the fun­da­men­tal finan­cial issues that will lead to the movement’s even­tual success.

While admin­is­tra­tors at some of the nation’s most influ­en­tial col­leges and uni­ver­si­ties con­tinue to resist the stu­dents’ calls for divest­ment, the move­ment is gath­er­ing con­sid­er­able momen­tum else­where despite this push­back. A num­ber of cities around the coun­try, includ­ing Seat­tle and San Fran­cisco, agreed to divest last spring; the World Bank’s Pres­i­dent, Jim Yong Kim, announced his sup­port for divest­ment at the World Eco­nomic Forum sum­mit in Davos, Switzer­land last month; and Nor­way revealed a plan ear­lier this month to eval­u­ate the con­se­quences of divest­ment for its $920 bil­lion sov­er­eign wealth fund. This expand­ing and increas­ingly diver­si­fied suite of voices call­ing for divest­ment high­lights the com­pelling mes­sage of the move­ment. Based on the cur­rent trend, we pre­dict that divest­ment at the nation’s col­leges and uni­ver­si­ties will occur much more rapidly than any­body imag­ined at the start of the cam­paign just over a year ago.

Why are we so con­fi­dent that the divest­ment move­ment will per­suade reluc­tant admin­is­tra­tors and trustees to alter their views on divest­ment? The answer is sim­ple — because none of them wants to be on the wrong side of his­tory and see their insti­tu­tions finan­cially crip­pled by poor invest­ment deci­sions. The nation’s elite col­leges and uni­ver­si­ties rely on returns from their endow­ment invest­ments to oper­ate effec­tively and pro­vide finan­cial aid to their stu­dents. Any invest­ment deci­sions that might jeop­ar­dize these out­comes are going to meet resis­tance. How­ever, the ground is shift­ing beneath finan­cial mar­kets, and the fos­sil fuel industry’s strong per­for­mance in the past will no longer be a reli­able pre­dic­tor of its future per­for­mance. The movement’s trump card in the high-stakes game of endow­ment invest­ing is the fos­sil fuel industry’s increas­ing risks asso­ci­ated with stranded assets.

The assets at risk of becom­ing stranded are the many tril­lions of dol­lars of proven oil, gas, and coal reserves. In 2011, the Car­bon Tracker Ini­tia­tive con­cluded that pre­vent­ing global warm­ing beyond the inter­na­tion­ally accepted safe limit of 2 degrees C will make the vast major­ity of the world’s proven fos­sil fuel reserves unburn­able. This con­clu­sion raised major con­cerns among a promi­nent group of insti­tu­tional investors world­wide, includ­ing those over­see­ing pen­sion funds in New York and Cal­i­for­nia. In Octo­ber 2013, this group, rep­re­sent­ing $3 tril­lion in invest­ments, sent let­ters to 45 energy com­pa­nies ask­ing them to dis­close the likely finan­cial fall­out if cli­mate poli­cies pre­vent them from bring­ing their fos­sil fuel reserves to mar­ket by 2050.

Late last year, in a move under­scor­ing Wall Street’s grow­ing anx­i­ety about stranded assets and the industry’s unwill­ing­ness to alter its busi­ness prac­tices, Bloomberg L.P. released a new Car­bon Risk Val­u­a­tion Tool. This tool enables investors to quan­tify the risks if energy com­pa­nies are forced to aban­don the reserves under­pin­ning their share prices and future earnings.

Ulti­mately, the groundswell of resis­tance to cli­mate change among stu­dents will com­bine with the slower-to-respond mar­ket forces to drive the move­ment to suc­cess. Cur­rently, the con­flict pits the mil­len­nial gen­er­a­tion and its allies against a firmly entrenched indus­try, one that also hap­pens to be the wealth­i­est and most polit­i­cally pow­er­ful in history.

How­ever, this is not quite the David ver­sus Goliath story it first appears to be. While mar­ket cap­i­tal­iza­tion of the 200 largest oil and gas com­pa­nies is slightly more than $4 tril­lion, and total uni­ver­sity endow­ments world­wide are only 1 per­cent of this amount, the process of stigma­ti­za­tion can be a pow­er­ful force-multiplier that rapidly evens the odds. In pre­vi­ous cam­paigns to divest from the tobacco indus­try and apartheid South Africa, once the first wave of elite uni­ver­si­ties announced plans to divest, the flood­gates opened up for other aca­d­e­mic insti­tu­tions, cities, pen­sion funds, and sov­er­eign wealth funds in the United States and abroad to divest. Divest­ment by this sec­ond wave of investors, worth nearly $11.4 tril­lion today, rep­re­sents a much greater finan­cial threat to the fos­sil fuel indus­try con­tin­u­ing to do busi­ness as usual.

Cor­nell Uni­ver­sity, where one of us teaches and the other went to school, is the first Ivy League insti­tu­tion to pass a fac­ulty res­o­lu­tion in sup­port of divest­ment. In its res­o­lu­tion, Cornell’s fac­ulty sen­ate called on the university’s pres­i­dent and board of trustees to adopt a new invest­ment strat­egy, one that would pro­gres­sively divest its hold­ings in the 200 com­pa­nies pos­sess­ing the world’s largest fos­sil fuel reserves. Like other calls for divest­ment, the resolution’s goal is to draw atten­tion to the issues at stake for the earth’s cli­mate sys­tem and the global econ­omy. Unlike other calls for imme­di­ate divest­ment, Cornell’s fac­ulty res­o­lu­tion pro­poses phased divest­ment on a sched­ule match­ing a uni­ver­sity cli­mate action plan that tar­gets car­bon neu­tral­ity by 2035. Phased divest­ments like this can pro­vide time for investors to engage with indus­try and encour­age it to rapidly redi­rect funds cur­rently being used for fos­sil fuel explo­ration toward the devel­op­ment of renew­able, carbon-neutral energy resources.