Investing With Foresight (The Dartmouth: 5/23/13)

By Ian Schneider, Guest Columnist

Last Monday, I attended a jam-packed “Dialogue on Divestment” with visiting Tuck School of Business professor Anant Sundaram, 350.org founder Bill McKibben and visiting environmental studies professor Terry Tempest Williams. 350.org’s “Fossil Free” movement has already succeded at encouraging six universities to divest their endowments from fossil fuel extraction companies. Dartmouth’s endowment is currently $3.5 billion, and its earnings help pay for scholarships, operations and more. In order for divestment to succeed, schools must experience minimal financial risk, results must help further environmental goals and there must be a strong argument for focusing on fossil fuel divestment.

A major concern is the financial impact on Dartmouth’s endowment, and a quick review of a recent Q&A published by Swarthmore College administrators suggests that divestment might portend unsavory financial impacts. However, Swarthmore’s dire estimate was panned for focusing only on the worst-case costs of divestment, according to investment analyst Christine Jantz. The authors made the base assumption that current managed assets, which may include fossil fuel companies, could not be replicated in a divestment scenario. Instead, they assume that Swarthmore would have to rely on passive index funds, and they measure lost revenue based on the above-market performance of Swarthmore’s managed assets compared to market indices.

However, this does not reflect the reality of the situation. First, not all managed assets include fossil fuel investments. Moreover, a manager would likely be willing to slightly adjust Dartmouth’s position rather than lose the revenue from management fees. As Julie Goodridge, the chief executive officer of NorthStar Asset Management, noted, many asset managers actively consider social issues when making investment choices. Notably, these issues do not involve the actual positions in fossil fuels companies, which make up only a small portion of Dartmouth’s portfolio and could be replaced by other assets with similar predicted returns.

Another problem voiced by those opposed to divestment is the effect of divestment on worldwide energy markets, which is especially relevant given the benefits of fossil energy to improving the standard of living worldwide. In fact, as Sundaram and McKibben noted, the opposite problem is more pertinent — a major criticism of divestment is that it will have little financial effect on fossil fuel companies due to the relatively small portion of university investment. Here, however, there is hope in the famous historical example of divestment in South Africa. While a 1999 studyconcluded that divestment in companies that operated in South Africa had no impact on their valuations, an article in the Harvard Political Review noted that “divestment greatly increased public visibility surrounding the injustices of South Africa’s apartheid government.”

Specifically, one hope for divestment today is that it might slowly decrease the lobbying ability of fossil fuel companies in the United States and attune a generation of college students to the issues surrounding greenhouse gas emissions. In particular, the ultimate success for activists in the United States would be a federal tax on carbon dioxide emissions. This tax is something that economists generally agree on, but that investors seems to be betting against, based on present valuations of fossil fuel companies.

For me, the most difficult issue to consider is what makes divestment unique among the many social issues worthy of our attention. In order to avoid a “slippery slope,” to borrow Sundaram’s phrase, of divestment considerations, requiring increasing attention and financial risk, it is necessary to distinguish climate change issues from other pertinent social issues as worthy of financial divestment. Initially, I was unsatisfied by McKibben’s rebuttal that these issues were uniquely intrinsic to the fossil fuel industry; as Sundaram mentioned, low wages are intrinsic to the success of the garment industry. However, I have come to see the issues raised by fossil fuels as particularly pertinent, for structural as opposed to moral reasons. In other industries, it can be difficult to draw a line of corporate responsibility and update investment decisions when companies respond to social criticism. By contrast, fossil fuel companies will continue to rely on extraction, regardless of a corporate social response. It would be impossible to actively divest Dartmouth’s position when any social issue arises, but it makes comparative sense to utilize divestment specifically when industry grievances are clear-cut and unalterable in the foreseeable future.

See the original article here.

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