Fossil Fuel Divestment: Not Whether But When


by Tim Hayward

[Re-blogged from the Just World Institute’s blog.]

Divestment from fossil fuels is the focus of a campaign among students and other civil society groups that is gathering momentum – and faster, it seems, even than previous campaigns that targeted apartheid, tobacco and arms manufacturers.  Universities are among the institutions to come under particular pressure to withdraw their investments in funds that yield profits directly from fossil fuel exploitation.  But should they do so?

People unpersuaded by the campaign suggest three sorts of reason why not.  The first is that a responsible institutional investor has to consider what would happen if we just were to eliminate all the fossil fuels whose energy we depend on in so many ways, and through so many intricate interconnections of the fabric of the socio-economic relations that sustain our lives and keep us in work.  For the time being, at least, and however much we might personally or even professionally regret it, we should recognize we depend as a society on fossil fuel power. Secondly, investment managers have fiduciary duties to protect returns on investment for their clients, and such duties cannot be subordinated to the political demands of campaigning groups that may not even have any direct stake in the funds.  Thirdly, to bow to the demands of those who do not bear the actual responsibilities for maintaining and powering society and its economy might set a disturbing precedent: is the investment policy of a university to be given over to the dictates of a vociferous element of the student body?

In short, to accede to the demands of campaigners could be considered socially, financially and institutionally irresponsible.  The manifestation of any one of these sorts of irresponsibility in a divestment decision would be sufficient reason to resist the demands.  The question, therefore, is whether an argument centring on any one of those concerns can, when carefully examined, actually succeed.  We’ll look at them in turn.

1. Social Responsibility

The first sort of concern is that it would be socially irresponsible to divest from companies in a sector that does currently, and will in the foreseeable future, provide a necessary service, as well as jobs and a contribution to wider economic well-being.  This informs the objection that it would be wrong to divest from a sector which, deprived of investment, would fail and leave us without certain very important social goods – in particular, sufficient and affordable energy.

Before assessing this objection, though, let us be clear what the campaigners are not demanding or assuming.  They are aware that: the modern global economy depends heavily on petrochemicals for products as well as for energy; most firms – and hence most of us – are implicated to some extent in the extraction of fossil fuels; and there are grave threats to both the environment and human rights other than can immediately be attributed to fossil fuel dependence.  The campaigners are not demanding a near instantaneous cessation of global economic activity, and they are not assuming that divestment by institutions like universities would anyway achieve that.  What they are asking for, as they see it, is more specific, limited and realistic: a tangible commitment on the part of socially responsible investors to accelerate the pace of change towards a post-carbon economy by divesting from those entities with the most deeply vested interest in arresting any such process.

The critical question, then, is whether even pursuing the aim of pressuring those extracting fossil fuels for burning is socially irresponsible since we need the power thereby generated.  Such an argument about the need for power would only support rebuttal of the campaigners’ demands, I suggest, if two implied premises were both true: a) that without fossil fuels we would fail to meet our energy needs; b) that without the university’s investment society would lack the needed fossil fuel energy.  Yet (b) is patently false: the largest of university investments is so small in proportion to the total value of the companies at issue that such divestment of itself would barely register.  As for the truth or otherwise of (a), this is something that the campaigners hope to influence by stimulating a shift of investment from fossil fuels to renewable alternatives, so proof here would depend on the political will that prevails rather than be a matter of establishing a pre-given fact.

But if the effect of divestment by a university is not going to have appreciable impact on fossil fuel companies, what is even its point?  The answer is that while an individual divestment taken in isolation may be an inconsequential move, in the real world actions are not so isolated, and this is why neither the campaigners nor their critics see divestment as merely a gesture of no material consequence. Although the direct immediate effect of divestment by one university, or even by the whole university sector, would not necessarily be great, it could have a combined effect that was greater than the sum of its parts.  It can contribute to an effect that has been highlighted in the report published recently by the Environment at Oxford on ‘Stranded assets and the fossil fuel divestment campaign’.  This is the process of stigmatisation that ‘could pose considerable reputational risk to fossil fuel companies’.  Serious public criticism can deter suppliers, subcontractors, potential employees, and customers; it can also provoke shareholders into activism; it can alienate political support, with firms even being barred from competing for public tenders, acquiring licences or property rights for business expansion. Crucially, if campaigners can create an expectation that government might introduce a carbon tax, this would depress demand and increase uncertainties about future cash flows of fossil fuel companies. ‘This will indirectly influence all investors…to go underweight on fossil fuel stocks and debt in their portfolios.’  Investors are ‘likely to begin by liquidating coal stocks. Storebrand—a Scandinavian asset manager with $74 billion under management—has taken precisely such as step.’ ‘Some banks, particularly multilateral institutions such as the World Bank, may stop lending to fossil fuel companies, particularly coal.’  (And we may note that Norway is currently considering divesting its sovereign wealth fund from coal.)  As confidence in the future of fossil fuel companies ebbs away they risk being left with stranded assets.

So the campaign can be expected to have real effects.  Should we therefore infer that a divestment decision by the university might be socially irresponsible?

I would suggest we get this into perspective.  The campaign can be expected to have some impact on society, but only if its substantive claims ring true amongst a whole range of social actors.  Markets are unlikely on their own to discount the value of fossil fuels as long as demand for them remains; governments are unlikely to regulate them out of use until other plans are in place or appear feasible.  What campaigners aim for is a concentrating of minds and an acceleration of processes. This is not obviously irresponsible.

2. Financial Responsibility

If the university does not have to imagine it has responsibility for the actions of all the other social and economic actors involved, it does have fiduciary duties to those with a pecuniary stake in its investments.  Would divesting not harm these?

The question can be viewed from at least two perspectives.  From one, the question is whether fund managers – as bearers of fiduciary duties towards their clients – have any permission, or obligation, to consider social impacts of their investment decisions, rather than focus on the single – financial – bottom line of investments.  There is a concern on behalf of fund managers that they could get on the wrong side of the law by divesting.  For the risk is, as Edinburgh University law lecturer Remus Valsan explained in a recent blog, that it may leave them with insufficiently diversified portfolios, since such stocks ‘tend to generate stable and predictable cash flows and are considered safe investments in declining markets.’  But as Valsan also points out, the current legal position, as it affects an institution like our own, is not entirely certain.  In fact, there is currently a consultation in process aimed at getting greater clarity in the matter for the UK: the Law Commission is mandated to assess the extent to which fiduciary duties may permit or require consideration of factors relevant to long-term investment performance that might not have an immediate financial impact, including questions of environmental and social impact as well as ethical views.  The Commission’s report, due in July 2014, is hoped to bring some clarification for the socially responsible investment movement.

A second aspect of the question, meanwhile, does not greatly depend on such clarification.  This is whether even on a narrowly financial understanding of fiduciary duties they are in fact consistent with the case for divestment.  A number of influential and well-informed voices are saying that to remain invested in fossil fuels could simply be a bad business decision.  Bevis Longstreth, for instance, a former Commissioner of the United States Securities and Exchange Commission, has recently blogged to the effect that if you know assets are going to become stranded then you should not wait until they are before divesting of them.  ‘A fiduciary holding fossil fuel equities in its endowment must come to terms with this risk factor, and do so before the risk materializes to cause permanent loss to those holdings.’ (‘The Financial Case for Divestment of Fossil Fuel Companies by Endowment Fiduciaries,’ Huffington Post, 2 Nov 2013)  Recognizing that fossil fuel investments will at some point become stranded assets means recognizing already, he believes, that ‘the largest 200 fossil fuel companies are vastly overvalued in their trading markets and, therefore, continuing to hold investments in any of them exposes our endowment to material loss.’  Longstreth also cites an address by billionaire asset manager Tom Steyer to the Trustees of Middlebury College earlier this year:

‘At the moment, other investors have not fully realized the risk that carbon reserves will become a stranded asset; if you acknowledge what your own science departments are telling you, this gives you an edge relative to those investors. I can tell you that in my own investments, I have directed my financial team to divest my holdings of fossil fuel investments so that I will have a fossil fuel free portfolio myself – in part because I am convinced it will outperform the market.’  (This is included on Middlebury’s useful set of resources on its divestment deliberations.)

In view of the current uncertainty about the legal position in the UK, an investment manager is in a rather unenviable position at present.  A substantive and ethical view of fiduciary duties could certainly be argued to include a duty to lift one’s eyes from contemporary market analysis and look at the wider world in which the markets are embedded.  In the short to medium term there is uncertainty about the performance of fossil fuel stocks relative to alternatives; but in the longer term, we know, fossil fuel investment will become incontrovertibly uneconomic.  So a difficult part of the question is how far into the future a duty of care allows or requires an investment manager to look; relatedly, a further part is how quickly to act in anticipation of future eventualities.  Right now, an investment manager could be asked: ‘Do you want to bet – with the money entrusted to you – that the stranding risk will not materialize or that you will know in good time when it is due to materialize?’  In view of the material uncertainty, and whatever the legal position is ascertained to be, it does not seem financially irresponsible to take an all-things-considered view that planning a strategy of divestment along the lines suggested by campaigners would be prudent.

3. Institutional Responsibility

Finally, it is the university that has responsibility to decide on its investments.  Its decisions need to be taken according to processes and procedures that have been properly established by and for the institution itself.  It is entirely right to resist any suggestion that its decisions might be dictated by campaigners.  The University does have a responsibility to hear what students think, though, and the student body is not necessarily the worst constituency for a university to appear to be in cahoots with.  This is made vivid in a letter to the President of Harvard about his decision not to disinvest written by the Mayor of Seattle, M. P. McGinn, on having taken the contrary decision for his city:

‘You argue that engagement with fossil fuel companies will yield greater benefits than divestment. These companies, with their corrosive influence on politics, funding of climate-deniers, and abhorrent human rights records, will “engage” on climate change, while continuing to extract fossil fuels that we cannot burn if we wish to avoid the worst impacts of climate change. Their valuation is based almost entirely on their carbon reserves — reserves that must remain untapped for the sake of our climate and our future. It’s wrong to wreck the planet, and it’s wrong to profit from the business model that is driving that wreckage.’

If the reputation of an otherwise great university like Harvard can be challenged in this way, then institutions with a less equivocal track record in Social Responsibility and Sustainability stand to benefit from the comparison.  The University of Edinburgh, for instance, publicly avows the aim of ‘taking ever more seriously our commitments as a socially responsible organisation’.  Its Social Responsibility and Sustainability Strategy cites the words of the Principal, Professor Sir Timothy O’Shea, on the criteria his University would have the world judge it by:

‘In 2083 the University will celebrate 500 years since its foundation.  How will our successors look back at our contributions to the world in the first half of the 21st century?  …   What roles will Edinburgh graduates have played in stabilising CO2 levels through technical solutions, policy development or business leadership? … The decisions we make now will determine the extent to which we help shape the future – or merely respond to events.’

The steer could hardly be plainer.  The University’s words articulate a commitment already to the goals that animate the divestment campaign.  Stabilising CO2 levels to shape a safer future – through leadership in policy as well as technology – is exactly its point.  The basic reasoning is summed up by the campaign’s founder, Bill McKibben: ‘we can emit 565 more gigatons of carbon dioxide and stay below 2°C of warming — anything more than that risks catastrophe for life on earth. The only problem? Burning the fossil fuel that corporations now have in their reserves would result in emitting 2,795 gigatons of carbon dioxide – five times the safe amount.  Fossil fuel companies are planning to burn it all — unless we rise up to stop them.’  The UK student movement, People & Planet, which is strongly represented at Edinburgh University sums up some key objectives of the campaign: ‘200 publicly-traded companies hold the vast majority of the world’s proven coal, oil and gas reserves. Those are the companies we’ll be asking our institutions to break their links with. Together they hold five times more carbon in their fossil fuel reserves than we can safely afford to burn to stop runaway climate change.’


On the basis of the arguments reviewed, it seems that divestment is consistent with the objectives of an institution like the University of Edinburgh – and more so than the alternative.  Ethically, financially and reputationally, the balance of argument seems to tell in each case for viewing the more responsible decision to be one in favour of divestment.

In fact, the question is not whether to divest; the only real question is when to do so.  We know as a matter of complete certainty that fossil fuels will not be a sound investment forever.  The question, therefore, is what are we waiting for?  Shall we hang on until the hardest headed profit maximisers among the big investors finally start to peel away?  (This is something they presumably might do quite suddenly if they at some point become seriously spooked?)  Would there not be real financial risk as well as very likely reputational damage in hanging on that long?  Or should we just wait until maybe some medium size players start to get twitchy?  (There are signs some already are.[1])   Or might we not be a little more independent of what other market players do?  The campaigners invite us to adopt a reasonable plan and a reasonable timetable – to ‘divest from direct ownership and any commingled funds that include fossil fuel public equities and corporate bonds within 5 years’. Their demand is not the unfeasible one that every tie to petroleum-based production processes should be severed ahead or outside of an orderly transition to a post-carbon economy.  Nor do they suggest that the specific process urged would be entirely simple or accomplished instantaneously.

There is certainly also the question of how.  The technicalities involved in divestment will likely be more complex than this discussion of pure principles can take account of.  What the balance of argument presented here suggests, though, is just that technical difficulties should be seen as challenges to deal with rather than as reasons to refrain from – or, more precisely, delay – starting the process of divestment.

Of course, in speaking of the balance of argument, and thus implicitly of weighing one set of concerns against another, I am tacitly acknowledging that reasonable people may reasonably weigh different concerns differently.  What I would assert a little more firmly is that it is in the public – and global – interest to get these questions of responsibilities openly and honestly discussed.  With the world’s land, air and water already heating up, and climate deniers still being sponsored to divert the discussion, the campaign does us all the service of pressing the question – echoed this week in the moving words of Yeb Saño of the Philippines Climate Change Commission – if not now, then when?

12 November 2013