Why We Said Goodbye to Fossil-Fuel Investments

Michael Morgenstern for The Chronicle

July 28, 2014

This spring, after considerable study, Pitzer College announced a comprehensive and ambitious climate-action plan, including a commitment to divest the endowment of substantially all fossil-fuel-company stocks by the end of 2014. It was not a decision made lightly, but one that we felt was a key step in more fully aligning the college’s actions with its mission and values.

Our deliberations began last October, when the Board of Trustees formed a working group, which I chaired, composed of students, faculty and staff members, and trustees. In the course of our discussions, we confronted a wide variety of objections to divestment, many raised by other colleges and universities that have rejected it. Taking the road less traveled required much research and soul-searching, but, personally, I can say it was well worth the journey.

As other colleges consider fossil-fuel divestment and confront those objections, I would like to share the objections and our responses, which helped shape Pitzer’s decision:

We would be violating our fiduciary duty as trustees to do anything that does not maximize our endowment’s performance.
A fiduciary is one who acts solely in the interests of another. For a college, those "interests" are multiple and often conflicting, requiring trade-offs. Nowhere is it written that interests exclude everything but endowment performance. Surely it is also in the institution’s interest to align its actions (investment decisions, for example) with its values and mission (environmental sustainability, for example).

The big fossil-fuel companies won’t stop producing fossil fuels because we divest. Our sale won’t cause even a blip in the stock market.
This is true, but beside the point. Divestment changes the public discourse on our collective energy future; it’s aimed not at oil companies, but at those who must craft a public policy consistent with a habitable planet.

We would look like hypocrites, selling our investments in fossil-fuel companies while tanking up our cars.
This misses the fundamental reality that while we are all embedded in the carbon economy to some degree, it is not really by choice. Do we choose to buy a particular car because it is powered by gasoline? Does anyone (other than a fossil-fuel company) care about the source of the electricity that powers our appliances? No.

The real hypocrisy is saying that you support a world largely free of fossil-fuel emissions, while at the same time betting on their producers to continue delivering a steady profit stream to your endowment. In the larger sense, we must divest ourselves of a carbon-based lifestyle. It won’t happen overnight, and the investment and consumption dimensions may not progress with equal speed. But let’s divest ourselves of a carbon-dependent existence where we can, as quickly as we can.

Selling those holdings from our endowment will deprive us of their investment returns.
Yes, the institution will no longer derive returns from those companies, but the proceeds from divestment will be reinvested in something. So the question really is whether fossil-fuel companies will do better or worse than the rest of the investable universe. Historically, the companies’ stock performance has been roughly in line with the rest of the stock market, and we see no reason to expect them to outperform the market in the future.

In fact, many people cite "stranded asset" risk—the idea that under a more stringent federal emissions policy these companies might have to leave reserves in the ground—as a reason that they could underperform in the future. A related question is whether divesting will materially reduce portfolio diversification. Our committee’s analysis and those of others suggest that any such effect will be negligible.

Divestment also creates a natural opportunity for targeted reinvestment in companies and projects that promote sustainability and other mission-consistent goals.

We invest in commingled vehicles such as mutual funds. We would have to sell those funds in order to remove the fossil-fuel companies that they hold, so divestment would force us to sell most or all of our investments, at great cost to the endowment.
There are two problems with this argument. First, it views divestment as a binary, all-or-nothing choice. Yet a ranking of direct and commingled assets by carbon intensity quickly reveals the low-hanging fruit. The institution may well discover that substantial, if not complete, divestment can be achieved with minimal portfolio disruption.

Second, this viewpoint assumes that endowments must passively accept whatever the asset-management industry offers. In fact, money managers are nothing if not adaptable to client demand, and are already offering funds free of fossil-fuel companies. Case in point: the recent joint announcement by the world’s largest asset manager, BlackRock, along with the index provider FTSE and the Natural Resources Defense Council.

The endowment should not be used to make political statements.
This incorrectly implies that climate change is a political issue. Without question, climate change is politicized daily, but at its heart climate science has nothing to do with politics; CO2 has no political leanings. On issues of great moral consequence—and climate change is surely one—the academy has a duty to educate not only its students but also society at large. Divestment is an educational statement, not a political one.

In sum, institutions considering divestment will need to tackle these and other objections to reach an informed decision. Having just gone through the process, I offer this advice: Look beneath the surface. Each of the arguments above is intuitively appealing­—but on closer inspection, we found that each one could be countered decisively.

Donald P. Gould is a trustee and chair of the investment committee at Pitzer College and president of Gould Asset Management.