October 16, 2019

Divestment Makes Sense for Universities

To the Editor:

Divestment is a powerful financial tool that reduces the flow of money to the fossil-fuel industry. The purchase of bonds directly finances the company’s exploration and development of new oil and gas reserves. These bonds are paid off by selling the oil and gas 10 to 30 years in the future. In the short term, the cost of borrowing for marginal projects such as Arctic oil may force their abandonment. Divestment also lowers the public’s demand for their stock, and thus decreases the company’s market value. The majority of executive pay is tied to the company’s stock price, and so top executives respond to the stock price in making decisions.

When investors invest in fossil-fuel companies whose value is partly based on proved reserves, shareholders will suffer losses when stock prices decline as they correctly incorporate the continually improved competitiveness of noncarbon energy and the impact of potential stranded assets on future company earnings. The stock market operates with imperfect information as investors and companies make decisions based on guestimates about the future stream of profits. Just as investors compete to be the first to find a new growth industry, they compete to be the first to jump out of a dying one. Divesting early protects our pension and endowment funds.

Market returns for the energy sector have been relatively low compared to other sectors. The cumulative total return to the energy sector from the market peak (Oct 2007) to Dec 31, 2018 is -4.8 percent, compared to the S&P 500 averaged return of 355 percent.  The outlook is ominous. A UK study predicts a global wealth loss of $1 trillion to $4 trillion resulting from continued investments in fossil-fuel discovery and extraction by countries, including the U.S., by 2035. Leaders of over 30 central banks endorsed a report warning that a massive reallocation of capital will be required to reduce greenhouse emissions dramatically.

For the past seven years, thousands of students, faculty, staff, and alumni have repeatedly urged UC to consider both the moral implications and financial dangers of continued fossil-fuel investments. Over the summer the UC faculty approved by 78 percent to recommend that the Regents divest the UC endowment from the top 200 fossil fuel companies. Consequently Jagdeep Bachher, Chief Investment Officer, and Regent Richard Sherman, Chair of the Investments Committee reported that after looking closely at their fossil-fuel assets, they decided that fossil-fuel assets are risky investments without compensating returns. The UC Regents announced divestment of all fossil-fuel investments, including stocks, bonds, and funds of all fossil-fuel companies and major suppliers, from its Endowment and Retirement portfolios, which total $83 billion. Plus UC has pledged to direct $1 billion in funding of alternative energy sources by 2020. At the Regent’s meeting, Bachher credited student activism for raising his awareness about the issue and said the students were his early warning system.

Divestment with reinvestment is one effective policy that universities can use to preserve a functioning biosphere for future generations. Students and faculty should continue their activities that inform their university leaders that divestment is imperative for financial, environmental, and moral reasons.

Clair Brown
Professor of Economics
University of California at Berkeley

Eric Halgren
Professor of Radiology
University of California at San Diego

Reprinted from: https://www.chronicle.com/blogs/letters/divestment-makes-sense-for-universities/