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Commentary

Divestment As A Strategy To Fight Climate Change

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Flickr Creative Commons
The University of Dayton is one of several universities around the country to divest in fossil fuels

Several universities and other institutions around the country have made headlines in the past year or two by deciding to eliminate all investments in fossil fuels.  Is this action a serious step toward mitigating the effects of climate change, or just a public relations ploy?  University of Dayton professor Bob Brecha has more during this week’s climate commentary.

My institution, the University of Dayton, was one of the earliest and largest to make this move to divest from fossil fuels. Since that point I’ve thought about the symbolism versus the substance quite a bit.

Universities in particular usually live from their tuition income.  On the other hand, fundraising and cultivating donors is also important as a way to ensure stability and to allow construction of new facilities as well as funding research and other activities. Those efforts attract prospective students, who pay tuition to run the university, and then become donating alumni, thus completing the circle.  As a result of this activity, institutions build up endowments, which then must be invested.  This is much like what many of us do with our retirement savings with the hopes the investment returns are high.

The dynamics of investing raises some interesting questions, however.  Is it really true that we are only interested in maximizing our returns?   If so, we might search out some questionable or even illegal ways to invest – and some people do just that.  Many of us, however, might feel uncomfortable investing in something if we felt that we would be supporting something to which we are morally opposed.  But a lot of the time we really don’t know how our money is being invested when we work through a retirement plan.   Universities should be able to operate a bit differently.  They actually have professionals whose job it is to seek out suitable ways to make money.  Even more importantly, universities are different from corporations in that they have a core mission that goes beyond simply making money for stockholders – that’s why we have mission and vision statements that express high ideals for how we want to impact students and society.  Because of these higher goals and duties, and since a university is presumably going to be around for a long time, there are good reasons to think that we can weigh many different factors when investing money.

But what about the nuts and bolts of eliminating fossil fuel investments, or the effectiveness of this strategy to help mitigate climate change?  The real answer to both questions is that this isn’t really a big deal.  Fossil fuel based companies typically make up something like 5-10% of the investments, so divestment shouldn’t matter much, even if the financial advisor happened to take all of that money and put it into companies that performed particularly poorly.   But why would she do that, when it would be possible to at least invest in stocks gaining as much as the average of the rest of the portfolio?  A recent op-ed piece in the Wall Street Journal claimed that divestment made bad economic sense and would result in significant losses for those choosing to divest.  A bit of close reading of the report showed that it was filled with poor and unrealistic assumptions designed to scare readers looking at only the headline.

Another take on this issue is that a world interested in mitigating the worst of climate change is also a world that will be phasing out the burning of fossil fuels over the next few decades.  Therefore, those companies basing their own value on the amount of carbon “on the books” could very well be facing problems due to stranded assets – stuff they have that nobody wants.  From that point of view, gradual divestment from fossil fuels might just simply be a prudent financial strategy.  This can be seen as the reason behind the announcements by Stanford and the University of Washington to divest from coal stocks.

The second part of the question is more interesting – is divestment effective?  We shouldn’t discount the power of symbolism.  Since fossil fuels do not make up a big part of typical investment portfolios, by definition, divestment shouldn’t matter too much.  But, as more institutions decide that fossil fuels as a class have enough negative impacts, the industry itself will be stigmatized then nobody would want to invest in them.  

More importantly, a fairly straightforward, easy-to-understand rallying cry can be a way to start an important conversation about our energy system – that might be the most important contribution of divestment.

Bob Brecha is a professor of physics and renewable and clean energy. He is the coordinator of the Sustainability, Energy and The Environment program at the University of Dayton.