Originally posted on my Instablog on SeekingAlpha.com.
The Scripps Institution of Oceanography has been investigating CO2 concentrations at the Mauna Loa Observatory; they have found that concentration levels have risen from 310ppm to 400ppm through 1960 to 2013. Environmentalists, as well as the International Energy Agency and The World Bank, argue that levels of 400ppm and above are dangerous to the environment.
In light of the rise in carbon emissions a number of initiatives have been created, such as http://www.carbontracker.org/, to educate investors on the risks of fossil fuel investments. The group hopes to tap into the financial sector’s insatiable desire for information in order to align expectations of capital return and highlight the future reality of an industry likely to be nullified if climate change transpires.
Before divestharvard.com the idea of universities divesting from investments, a process of selling investments based on moral and social reasoning, was rather muted. It is now commonplace debate, with the topic becoming a particular focus for higher education facilities worldwide. The University of Leeds recently rejected a petition from students to divest from fossil fuels, after an overwhelming vote to sell-off these investments.
The case for divestment is a strong one. Fossil fuels likely cause climate change and in turn this affects the globe’s poorest citizens, who are less equipped to deal with changing and extreme environments, as well as putting the entire planet at risk of ruin. As a result public institutions (i.e. universities) are pressured to divest, an argument well placed considering their position as moral beacons of education and society. Not only this, but there are also financial reasons to divest. Oil declined as low as $28 in January and there has been a global movement towards sustainable energy. As a result the fossil fuel sector is suffering from lower returns, for example Royal Dutch Shell (A) saw earnings per share fall to 0.22 in March 2016, compared to 1.22 a year earlier (-81%).
It is a difficult case to argue against, however it is important to explore both perspectives. There are still reasons why universities and public institutions should keep their investments in fossil fuels. In fact I argue there are cases where they have an obligation to do so.
Let’s look at some prominent investors to help explain why.
Warren Buffett, Carl Icahn and Bill Ackman share a common objective, the pursuit of capital gains for their investors and themselves. Whilst Buffett is well known for his long-term approach, he has started to move towards an activist style of investing; one championed by the likes of the patrician hedge fund managers Icahn and Ackman. This style involves investing large stakes into corporations and then using shareholder voting to influence how a firm operates. Icahn did a job on Apple in the early 2010s, which helped lead to larger dividend payouts for investors.
Activist investors are important, they often have experience dealing with many different types of corporations and, being outsiders to the management team, they have a keen eye for inefficiencies and corporate wrongdoings. I understand that one might view these activists as vultures, seeking to leech the life from a corporation and then running away with the profits, however this is not (necessarily) the case. Activists are important in upholding principles of corporate structure, such as pressuring a firm to separate the chairman and CEO position, encouraging fair and legal accounting, or in Icahn’s case, implementing a more efficient set of dividend payouts for the vast amounts of cash Apple has stored abroad (~$70bn). Activists can propose shareholder resolutions and are encouraged to maintain corporate engagement with the firm; akin to sending a letter to your local MP.
This is the first reason why public institutions should not necessarily divest. With often-substantial investments in fossil fuel companies ($12bn+ from universities in the US) public institutions are in a unique position compared to the ordinary investor – they have the ability to influence management and are backed by the voices of thousands of students.
The stark reality is that fossil fuels are still a very large part of our lives and they are not going anywhere in a hurry. Large institutional investors have an opportunity to implore change in these firms, such as promoting more efficient production and sustainable technology. Divesting simply means someone else to picks up the tab, however by maintaining the investment and engaging with management you are given the opportunity to encourage insightful change in the fossil fuel industry, which may well still be around in 100 years time.
Now of course there is the other side, pioneered by divestment advocates. Public institutions do indeed have large investments in fossil fuels, and they can talk with their feet. By selling off their investments they are speaking volumes, in an economic sense, of their thoughts on the fossil fuel industry.
I am, however, a proponent of the pragmatic approach. Although it can be argued that if enough people divest then we would see change, realistically it is a debatable tactic. I believe our public institutions are in a better position to create meaningful change through their voting power. That power, if the shares are sold off, is given to another investor who may not care in the slightest for climate change. I do not advocate outright purchasing of fossil fuel investments, however I do believe activism can be a suitable compromise for those already invested.
There are of course the financial arguments as well. The energy sector is an important part of a broadly diversified portfolio, allowing investors to balance risk across the business cycle. There have also been studies (please note, funded by the petroleum industry) that find portfolio performance is significantly damaged by divestment from the fossil fuel sector. A study on Harvard’s endowment fund finds the university would lose $108mn a year. That’s tuition funding for 2160 future cancer curers, social philanthropists, university professors or innovative entrepreneurs.
It may be too easy to treat social and environmental issues as a one-sided moral argument for divestment. However a certificate of share ownership may well have more power in tackling these issues, over and beyond walking away from the table empty-handed.