Divestment from Fossil Fuels: Is "cost" even an issue, or just a red herring to defend the fossil fuel industry?

The “Cost” of Divesting from Fossil Fuels: 

What Would it Be? Does it Even Matter?

Bret Gustafson

March 1, 2015

*This reflects my evolving understanding of this question. Comments welcome.
Modified 3.2.15: 87% of Penn students vote for divestment, added more tips for admins on how to just "own it" if you are looking for the best way to do nothing.
Modified 2.10.17: We are still fighting for some enlightenment from our university leadership.

I was sitting in a meeting of deans and fellow faculty members last Friday when the question of divestment from fossil fuels came up.  Somebody suggested that there would be a significant “cost” to the university if we divested from fossil fuels.  This prompted me to look into the question of “costs.”  What follows is what I found.

Spoiler: Costs of divestment from fossil fuels are greatly exaggerated, would be trivial over time, and talk about “cost” is a political strategy. In short, "cost" is a red herring, but read on if you want the whole story…

Opponents of fossil fuel divestment have two main arguments: (1) That divestment will have no impact on the industry or on attempts to reduce our dependence on fossil fuels, move faster to alternatives, or take steps to address climate change; and (2) That divestment will financially hurt university endowments. That is, it will cost too much.

Argument (1) is nothing more than a political defense of a destructive industry.  Powerful interests will always be the first to dismiss activist efforts as pointless.  That is to be expected.  The idea that divestment will not work is belied by the fact that the fossil fuel industry is spending a lot of money trying to discredit the divestment movement.  In their very defensiveness, the fossil fuel industry reveals the impact that divestment is already having.  These companies are desperate to put off the inevitable.  As one student said of divestment, the question is not whether we will all divest from fossil fuels, but when.

Just own it 

A bit more cynically, some variations on this argument include – as Harvard President Drew Faust said – a call to “engage” the fossil fuel industry.  This is absurd. Do we really believe that shareholder activism or some other unspecified engagement would actually change destructive industries whose very existence (and stock value) relies on digging for fossil fuels, burning them, and emitting the CO2 that causes global warming? 

This just shows how smart people can be made to say dumb things (or, perhaps, disregard their own principles) to defend the positions of those who pay them. A suggestion to administrators might be: Don’t make up silly justifications. People aren’t stupid and that’s disrespectful. And, tip to university leadership: Disrespect of faculty and students just generates disrespect of administration.  So let's just be clear. Let's just own up to it.  

Here are some suggested responses:

Own your ignorance or climate denialism, and say:  “Global warming is caused by solar activity, and fossil fuels are good for the planet.  Nothing should be done because markets and technology will take care of everything.” 

Own your ownership: “Global warming is real, and scary, but the fossil fuel industry has a grip on me and the university and I don't have the principles or fortitude to resist.” 

Own your inaction: "Well, burning fossil fuels does cause global warming, but we believe doing nothing is better than taking the symbolically and practically important step of divestment."

Own your dependence: "Well, I don't know... the coal company gave a lot of money to the university – they even gave money to United Way and the Cardinals – so maybe they are not so bad.  I'd hate to do anything to upset them."

Own your addiction: (Faust said a variation of this too): "Well since we use fossil fuels, it would be a mistake to divest. So I guess we should just keep on burning them and make some money off it while we're at it."

In whatever case, as I hear my students say, “Just own it.”

Is financial cost (or gain) even relevant?

As for argument (2), on the question of cost:  Is cost even relevant?  Were divestment costly for universities – and this is up for debate – it would be mitigated by a gradual shifting of investments to other industries.  There may even be gains, given the decline in coal and oil stocks and the uncertain and risky future of environmentally destructive projects like tar sands and fracking, where much speculative investment capital is going today.  The costs incurred by the planet, in whatever case, are much greater than any losses that might be felt in an investment portfolio. 

Activists point out that divestment is about addressing climate change and improving the environment and public health.  Divestment by universities, they say, would have a real and symbolic impact.  Cost is not the issue.  Perhaps we should incur some costs to make the planet a healthier place. What kind of ethics do you have?  But the conversation should be about science, health, the environment, and morality, not to mention the destructive impact that the fossil fuel industry has on public politics and public knowledge.  It is not about money, but about about values and principles. 

If the logic of “cost” justified our investments, then a public health-centric institution like Washington University should probably also invest more in the lucrative tobacco industry.  (Maybe we are, but would that be right?). 

They say divestment is “political”.  But given the stakes for the climate, and the fact that the fossil fuel industry is deeply politicized in its war on science and government climate protection measures, investment in the fossil fuel industry is equally “political.”

Scientists say that 80% of all known fossil fuel reserves (and all of any future discoveries) should stay in the ground to avoid catastrophic climate impacts.  Should we be profiting from companies whose continued existence will inevitably exacerbate global warming?  

Fossil fuel industries have spent millions fighting against climate science and eroding the integrity of public and private scientific institutions.  Should an institution that claims to be dedicated to real science be profiting from companies that are involved in the corruption and distortion of science?

These are the kinds of debates that divestment should spark.  Raising the issue of cost is merely an attempt to distract the public from the reality of global warming.  The word “cost” itself is a cunning distortion.  The phrase “impact on returns” might be more acceptable. But we should be talking more about “impact on the planet.”

Despite these concerns, the “cost” argument will be made by those whose private financial and political interests (i.e. greed and power) are more important than the public moral and scientific concerns about global warming.  And, some fair-minded members of the university community, who otherwise might be concerned, may be easily swayed by shrill declarations about great financial losses.  Surely, they will say, tuition will rise, my pay will be cut, scholarships will go down, etc. etc.  But is any of this true?  The short answer is no. 

The cost of fossil fuel divestment has been greatly exaggerated

The New York Times recently published a story on a report that argued that divestment from fossil fuels might lead to a 0.7% decrease in returns per year.  (Yes, it doesn’t sound like much).  The report argues that when adjusted for volatility risks (portfolios with fossil fuels have higher volatility), the decrease was .5%. The author argues that there might also be other management costs and that this small percentage could mean millions of dollars to a large endowment.  Yet the report does not acknowledge that investments could offset the decrease when they shift to other sectors that may generate equal or higher returns.  A considerable portion of the report was also dedicated to preemptively dismissing the impact of the divestment movement (Argument 1, above).  Unsurprisingly, the report was paid for by the Independent Petroleum Association, a business chamber that represents the US domestic oil and gas industry.[1]  

The same NYT article makes reference to two other reports that suggest that losses may be even smaller, or even trivial.

The first, prepared by a socially conscious investment company, Northstar Asset Management, came to a much lower figure of .15% decrease on returns, which would be a “worst-case scenario.”  The report concluded that “the cost of fossil fuel divestment has been greatly exaggerated:”

“Even if the entire energy sector in an actively managed global portfolio were divested, the expected cost is only 0.15% annually in a 250 stock portfolio with an average annual expected return of 8%. And, if shareholders limit divestment to the top 200 fossil fuel companies by carbon in proven oil, gas and coal reserves, then the estimated annual cost falls by half again to 0.07% even with no assumption of any other mitigating factors (e.g., fewer holdings, lower expected return, substitution for divested securities, and so on). (p. 10).”

The Times also cites another report, by the Aperio group, which also concludes that the financial risks of divestment have been highly exaggerated:

“When the idea of fossil fuel screening gets floated, the first thing an endowment committee would want to know is the impact on return, especially whether screening imposes any penalty. The research data on a wide range of social and environmental screening show no such penalty (nor any benefit either), although the results are mixed.[2]”

It’s not about cost, it’s about the power of a polluting industry

In another article, Paul Lehner of the National Resources Defense Council, discusses a factsheet prepared by the FTSE on their North American ex Fossil Fuels Indices (those indices free of fossil fuel investments).  He points out that over the past five years this fossil fuel-free index has actually outperformed the same index with fossil fuel investments.  (The FTSE is a global stock-market indexing firm). This is short-term data, and as they say, does not predict future outcomes.  But it suggests that there is no convincing argument to be made that divestment from fossil fuels will inevitably have some devastating financial impact on the university.  As with the doubt-mongering that the fossil fuel industry pursues in its attempt to distort science and public knowledge (see: Willie Soon affaire), the fear-mongering about financial catastrophe of divestment is untrue. To wave it is a banner is unethical.

As Lehner points out, it is not about cost, but rather about the distorted influence that the industry has over the universities and other institutions:

“If universities and other institutions are still afraid to divest, despite the facts, it suggests to me that the worry is really about breaking faith with the oil and gas industry and its very deep pockets. If fossil fuel interests are really so deeply entwined in our educational--not to mention political and financial institutions--then the movement to divest becomes even more important. We must start to disentangle ourselves from this polluting industry that has such a hold on our lives--and our futures.”

In sum, “cost” is a red herring, a distraction. 

Washington University in St. Louis: Nothing to lose, everything to gain

Student bodies all over the world are rapidly joining the call for divestment.  This includes the student body of Washington University in St. Louis, whose Student Union passed a pro-divestment resolution in 2014.  It is in good company with students at many institutions, like the London School of Economics, most recently, which just voted overwhelmingly (432-36) to call for divestment.  Just in on March 2, 2015: 87% of University of Pennsylvania students voted to divest, in a high turnout referendum.  Faculty as well, at many universities – 150 at Columbia, 360 at Stanford, the list goes on – are joining this call.  Stanford and the New School, and a number of other universities have already taken divestment steps.  Young people get it.  It's their planet, their future. For Washington University there is nothing to lose and much to gain. 

We should not be wasting our time talking about costs of divestment.  Nor should we be publishing platitudes about our commitment to climate change research, when we are giving a platform to the distorted messages of the fossil fuel industry – such as “solar activity” may cause global warming or that there will ever be “clean” coal.  To say that this kind of campus corporate sloganeering is unethical is gentle. 

Instead, we need to be having serious discussions about integrity, science, public health and the kind of planet that our children and their children will inherit.

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[1] The author of the document was Daniel Fischel, a U Chicago emeritus law and economics professor. For context, Fischel is best known for his defense of various Wall Street figures convicted of crimes during the 1980s financial crises: Michael Milken (convicted for insider trading), Ken Lay & Jeffrey Skilling (Enron securities fraud & felony indictments), Charles Keating (convicted for racketeering re: savings and loan collapse).  Fischel's book Payback, written in support of Michael Milken, seeks to justify unregulated markets by defending the free-wheeling white collar criminal activity on Wall Street during the 1980s.

[2] The report cites a UNEP document that summarizes much of this research.