This year’s Global Divestment Day(s) fall on February 13 and 14. The idea is for hip people to pressure universities and other institutional investors to divest themselves of any holdings related to fossil fuels. Yet even on its own terms, the divestment movement is symbolism with no substance. Even if we stipulate the projections in the leading climate models, the divestment movement wouldn’t affect global emissions and hence it would have no effect on climate change. Indeed, all it would do is make endowment funds suffer lower returns with higher risk.
Divestment: All Pain, No Gain
Even if major universities succumbed to the divestment peer pressure and dumped their exposure to fossil fuel-related stocks, this wouldn’t significantly affect the operation of the companies in question. In the first place, when existing holders sell their shares, this is only possible if someone else buys them. So it’s not as if shares of BP are going to end up in limbo; they are merely going to be transferred out of the hands of the divesting institution and into the hands of a buyer who hasn’t bought into the public relations campaign against fossil fuels.
Furthermore, the divestment movement won’t even lower the share price of the stocks in question. This is because the underlying “fundamental value” (related to the discounted flow of future dividends and share price increases) of a stock is unaffected by a public campaign. Even if a burst of selling temporarily lowered the share price of energy companies, for example, that would simply provide an opportunity for speculators to swoop in and snatch up the underpriced stocks.
Thus we see that even if we accept for the sake of argument that fossil fuel companies were doing something harmful, the divestment movement wouldn’t do anything on the margin to stop them. Unless the divestment movement incorporated large portions of the entire financial sector, the targeted companies will have little trouble raising new capital or lending by issuing new shares and floating bonds. Simply persuading universities and philanthropic organizations to “divest” won’t do anything except generate news stories.
However, even though the divestment movement won’t hamper the operation of the targeted companies, it will have negative effects on the endowments and other institutional investors who go down this path. In a newly released study, Daniel Fischel estimates that purging a portfolio of energy stocks would reduce average annual returns by 0.5 percent, after adjusting for the change in volatility. This represents a significant opportunity cost to those funds heeding the call for divestment. In addition to missing out on potential diversification (by restricting the universe of permissible stocks), the divestment strategy increases trading costs and management fees.
Thus we see that divestment would impose real costs on any investors succumbing to the activist pressure, without actually doing anything to alter the behavior of the companies in question.
To be sure, in these discussions the activists would come back and make the issue one of simple morality: Would you pick up the wallet from an unconscious man lying on the sidewalk, even if you knew that the next guy surely would? In a case like this, to keep a clean conscience, most people would say they would refrain from profiting in this fashion, knowing full well the guy was going to get robbed.
But even on its own terms, the alleged problem of human-caused climate change isn’t like this. Even the computer models selected by the Obama Administration to measure the “social cost of carbon” don’t say that fossil fuel use should stop—instead they simply conclude that humans ought to cut back on the margin to make the benefits and costs come into synch. This is a technical issue that I have debated elsewhere, but the point is that using fossil fuels isn’t “immoral” in the way that, say, taking a guy’s wallet would be.
To see just how confused it would be to transform divestment into a simple issue of morality, consider: Just about everyone at the universities in question, including the administrators, faculty, and students, drive cars and use electricity that were largely powered through fossil fuels. They will continue to do so for the foreseeable future, whether or not the university endowment holds the stocks of certain companies providing them with that energy. This would be an odd “moral stand against fossil fuels” indeed.
Even on the terms of the climate change debate put forth in some of the leading computer simulations, there is nothing “immoral” about fossil fuel use; the alleged problem is merely that humans are using such fuels too much on the margin, and should cut back. Within this context, the divestment movement makes no sense. It would hurt the financial goals of universities and other institutional investors, without even providing an incentive for the companies in question to change their behavior.