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.