Starting in 2010 students on U.S. college campuses began to gain traction—and media attention—for protests trying to force their institutions to divest from oil and gas companies and shift into alternative energy. College endowments, along with pensions, can have enormous holdings and winding down holdings across an entire industry would have significant market impact. For example, as of November 2017, just 4 of the top ten U.S. college endowments (Columbia, Princeton, Stanford and the University of Pennsylvania) had reserves of $73.7 billion held offshore, which was revealed in the Paradise Papers. This is just a fraction of their total portfolio.
The students led a global trend and by 2016 a total of 688 institutions had sold off about $5.5 trillion of investments in fossil fuel sector.
The rationale for divestment mirrors the normal negative screening common to investors concerned about investing in companies that profit from “sin” including alcohol, tobacco and gambling. Fossil fuel companies, along with the arms industry, have been added to the screening list for many investors. The point of divestiture is to hit the company “where it hurts”—their balance sheet—and drive down the stock price. The hope is to hold the industry accountable for their outsized role in carbon emissions. A report from CDP indicated that only 100 companies, most of them oil and gas related, have been the source of more than 70% of the world’s greenhouse gas emissions since 1988. Unlike boycotting the industry, however, broad divestiture is unlikely to have lasting impact, and selling the stock doesn’t impact the company, which only makes money during the initial stock offering.
Oil and gas companies are among the most profitable businesses in the world, with the largest firms reporting annual revenue in the hundreds of billions. For more than a century most of these companies have relentlessly pursued new oil deposits, including offshore and arctic drilling, fracking and exploiting oil shale/sands, despite the knowledge that using already known oil deposits will have long-term environmental consequences. Titans like ExxonMobile have been aware for more than 40 years that the industry was the leading contributor to greenhouse gas emissions, and that it impacted the climate, but continues to intentionally mislead the public to the dangers of fossil fuel use. Despite the uneven growth of alternative energy, fossil fuels continue to make up approximately 90% of the world’s energy sources; this is not going to change any time soon. Big oil is only starting to invest in relatively bite-sized amounts into renewables.
Is divesting the right approach? Arguments have been made against it and here are some other considerations. Let’s start with two of the less controversial aspects of retaining the investments.
- Unwinding positions held by endowments and pensions involves selling—sometimes at a loss—to other entities that may not hold the same concerns about the environment. One study found that one college would lose up to 12% of the endowment’s value if it sold off their positions.
- The role of endowments and pensions is to protect the principal and invest for the long-term. Oil and gas stocks and bonds are lucrative, especially as prices are rising. Even some democratic-leaning states have blocked divestment in state pensions due to financial losses.
- It doesn’t decrease the demand for fossil fuels. Demand is growing as many developing nations aspire to adopt developed world lifestyles.
An better alternative would be to put pressure on the universities and pensions to use their large holdings in the industry to get a seat at the table. Shareholder proposals have been used for decades by concerned investors to steer companies toward more sustainable business practices. Progress has been made incrementally, but only shareholders have any influence; those without can only protest from outside the boardroom.
Another approach is to encourage companies to Keep it in the Ground, winding down oil exploration and put a cap on drilling as we begin the global transition to renewable sources of energy. There are estimates that we can only use one-fifth to one-third of known oil reserves before the planet’s average temperature rises over the 2C threshold, tipping our existence into uncharted territory.
Photo Credit: David L. Ryan, The Boston Globe