NEW YORK (Project Syndicate) — Around the world, institutional investors — including pension funds, insurance companies, philanthropic endowments, and universities — are grappling with the question of whether to divest from oil, gas, and coal companies.
The reason, of course, is climate change: Unless fossil-fuel consumption is cut sharply — and phased out entirely by around 2070, in favor of zero-carbon energy such as solar power — the world will suffer unacceptable risks from human-induced global warming. How should responsible investors behave in the face of these unprecedented risks?
Today’s students make cogent arguments that the case for fossil-fuel divestment looks similar to the case for tobacco divestment. Both represent massive risks to human well-being.
Divestment is indeed one answer, for several reasons. One is simple self-interest: the fossil-fuel industry will be a bad investment in a world that is shifting decisively to renewables. (Though there will be exceptions; for example, fossil-fuel development in the poorest countries will continue even after cutbacks are demanded in the rich countries, in order to advance poverty reduction.)
Moreover, divestment would help accelerate that shift, by starving the industry of investment capital — or at least raising the cost of capital to firms that are carrying out irresponsible oil, gas, and coal exploration and development, despite the urgent need to cut back. Though no single institutional investor can make a significant difference, hundreds of large investors holding trillions of dollars of assets certainly can.
Indeed, divestment by leading investors sends a powerful message to the world that climate change is far too dangerous to accept further delays in the transition to a low-carbon future. Divestment is not the only way to send such a message, but it is a potentially powerful one.
Finally, investors may divest for moral reasons. Many investors do not want to be associated with an industry responsible for potential global calamity, and especially with companies that throw their money and influence against meaningful action to combat climate change. For similar reasons, many investors do not want handgun manufacturers or tobacco companies in their portfolios.
Yet there is also an ethically responsible and practical alternative to divestment that can help steer fossil-fuel companies toward the low-carbon future. As active, engaged shareholders, institutional investors can use their ownership (and, in the case of large investors, their public voice) to help persuade companies to adopt climate-safe policies.
American universities are on the front line of this debate, pushed by their students, who are young enough to face the brunt of climate change in the coming decades. The students are right to be frustrated that most university endowments have so far been passive on the issue, neither divesting nor engaging as active investors.
For example, Harvard University President Drew Gilpin Faust sharply rejected divestment in 2013; the purpose of Harvard’s endowment, she argued, is to finance the university’s academic activities. Though she did say that Harvard would be an active and responsible shareholder, she offered no details about what such engagement might look like.
Harvard and many other universities (including our own, Columbia University) have long been committed to acting as responsible investors. Several have committees that advise university trustees on environmental, social, and governance (ESG) issues in their portfolio, most commonly when proxy votes in support of ESG proposals are to be held. Yet few so far have applied the ESG principles to their endowment’s fossil-fuel holdings.
Despite Faust’s rejection of divestment, Harvard and other universities have long accepted the principle that divestment is the correct choice in certain circumstances. In 1990, Harvard divested completely from tobacco companies. Harvard’s president at the time, Derek Bok, said that the university’s decision “was motivated by a desire not to be associated as a shareholder with companies engaged in significant sales of products that create a substantial and unjustified risk of harm to other human beings.” Many other universities, including Columbia, have done the same.