Fossil Fuel Divestment is Misguided: Focus on Investment Instead

Fossil Fuel Divestment is Misguided: Focus on Investment Instead

Divestment as a political strategy has no tangible effects. Instead of the focus on “divesting,” the Fossil Free movement could be more constructive if the rhetoric shifted towards “investing.”

Earlier this month, on the one year anniversary of coal divestment, Fossil Free Stanford gathered in front of President Hennessy’s office in the quad to pressure the administration to “#DivestTheRest.” Fossil Free Stanford lauded Stanford’s divestment from coal in May 2014 as a “courageous decision” that prompted waves of divestment among many other notable asset managers. An impressive movement that began in 2012, Fossil Free activism has become a popular cause on many college campuses. Certainly, the cause of combating climate change is an important one. According to a report by Fossil Free Stanford, “The scientific consensus is not only that ‘warming of the climate system is unequivocal,’ but also that the vast majority of proven fossil fuel reserves must stay in the ground in order to avoid catastrophic climate change.” Few people dispute the real and imminent dangers that climate change poses to our world.

However, while the science behind climate change is relatively uncontroversial, Fossil Free Stanford’s emphasis on divestment is misguided for two main reasons. First, the movement fails to economically pressure fossil fuel companies. This is because, as The Reviewpreviously discussed, divestment is ineffectual in actually weakening the companies targeted. Secondly, because divesting from fossil fuel companies achieves no real effect, Fossil Free activists are mistaken in believing divestment from fossil fuels to be our ethical obligation. This is not to say that fighting climate change is not a moral duty, but rather that divesting should not necessarily be its mandate.

To summarize The Review’s previous article discussing divestment, the total value of fossil fuel companies in today’s global economy is too large for a group of socially-conscious funds and investors to make a dent in fossil fuel enterprises. Any dips in the price of profitable fossil fuel companies created by socially-conscious divestment are immediately reversed by socially indifferent investors. While Fossil Free Stanford’s goal of fighting climate change is respectable, divestment from involved companies is no more than a symbolic disavowal of companies contributing to climate change.

The problems that Fossil Free Stanford identifies are certainly valid yet its approach to addressing them are misplaced. If divesting is only a symbolic move, then its potential costs to the endowment outweigh its symbolism. Because Stanford decided to divest from coal, proponents of Fossil Free Stanford might see this as an indicator that divesting from fossil fuels would not have a significant cost to the endowment’s performance. However, unlike divestment from companies operating in the West Bank, it just so happens that divesting from coal was also an economically prudent decision. The rise of hydraulic fracturing has led to a boom in shale gas, helping in part to displace coal. Combined with the recent decline in oil prices, this has made coal companies less attractive investment opportunities. It is not surprising that Stanford has not divested from other types of fossil fuel companies, which still have potential to be profitable, at least on a firm-by-firm basis. By remaining invested in these companies, the University is adhering to its fiscal responsibilities and, contrary to what Fossil Free Stanford believes, not providing direct support to fossil fuel companies, as the money from the sale of a company’s stock was raised long before Stanford began investing in its stock.

Fossil Free Stanford’s efforts would be better spent in other capacities. The fossil free movement has loudly championed divestment, an act that has little practical effect, but has heretofore not made any real suggestions in actively combating climate change through the financial system. Instead of divestment, Fossil Free Stanford should begin advocating for investment in alternative energy companies, research, and ventures. For real strides to be made in reducing the negative environmental effects of fossil fuels, we must empower economic entities developing alternative energy in the hope that one day they may drive fossil fuel companies out of business, not because of social pressure, but because alternative energy firms will possess superior business models. Instead of holding protests for a cause that ultimately has no real effect, make a case for investment in alternative energy companies: rigorously analyze the business models, economic profitability, and financial viability of clean power companies, and if they are developing promising technologies, suggest them to the endowment as potential investment opportunities. Help Stanford source investments in the next Teslas or Solar Cities. Encourage Stanford to deploy capital in a way that will not only catalyze the growth of alternative energy businesses, but also earn returns that will help finance the university. Indeed, major financial institutions such as Morgan Stanley and Goldman Sachs have seen this space as profitable enough to set up arms that invest in and enable the growth of these companies. And if the investment proposal has merit, then it would be in Stanford’s best interest to follow suit.

Let us stop patting ourselves on the back for symbolic divestment movements and begin setting the stage for capitalistic endeavors that actually have the potential to make progress on the most pertinent issues, including climate change.

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