Massachusetts Daily Collegian

Divestment’s value is symbolic, not financial

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(Cade Belisle/Daily Collegian)

(Cade Belisle/Daily Collegian)

Two years ago, I wrote a Massachusetts Daily Collegian column titled “Fossil fuel divestment: A misguided cause.” As one would infer, my column did not praise the movement; it described how divestment of university endowments — in particular that of the University of Massachusetts — from fossil fuel companies would have a negligible financial impact on fossil fuel companies while exposing endowments to unnecessary financial risk.

This still holds true, but I feel as though I should take the occasion of my column’s second birthday to both expand on this point and explain how, despite its financial issues, the fossil fuel divestment campaign has redeeming qualities.

For starters, it’s worth mentioning that the fossil fuel divestment campaign is not alone in its inability to financially affect companies — political divestment movements in general tend to exhibit this trait. In a New York Times op-ed, Ivo Welch noted that he and his co-authors “found that the announcement of divestment from South Africa, not only by universities but also by state pension funds, had no discernible effect on the valuation of companies that were being divested, either short-term or long-term.”

The primary reason divestment faces opposition from many universities, Harvard and Wellesley in particular, which supported other such campaigns, is that while apartheid, tobacco and other targets of divestment campaigns were political problems just as fossil fuel dependency is, fossil fuel dependency is also a massive economic problem.

After all, “we are extensively relying on those companies’ products and services for so much of what we do every day,” writes Harvard President Drew Gilpin Faust, so divestment not only seems ineffectual, but almost disingenuous. “The cost… (of divestment) would be high and the economic impact on fossil fuels companies inconsequential,” notes Kim Bottomly, president of Wellesley College. This is why many institutions will continue to refuse to divest.

There is, of course, one other financial argument some make in favor of divestment, this being that fossil fuels will rapidly become a bad investment due to changing attitudes and other factors that lower the value of extractive industries, and thus we must divest. This is, however, a poor justification for the campaign, seeing as if (and when) this turns out to be true, investors will divest of their own accord. You don’t need a political movement to point out a bad investment.

But even though divestment from fossil fuel companies won’t directly harm them their finances, the campaign may still be partially effective. While finance-based arguments for divestment are largely based on a fundamental misunderstanding of how the stock market works, the very act of divestment is a strong political statement, one that contributes to the stigmatization of fossil fuels due to the cultural significance we afford to money. Rick Cohen, writing for Nonprofit Quarterly, points out that “the targets of divestment in these companies are Congress and the White House, both getting them to finally act on the knowledge of climate change and pushing them to put substance behind their vocal commitments to strengthening green economy investments.”

This is a noble, valuable and worthy goal. Fossil fuels, their devastating effects on the environment and our society’s near-ubiquitous dependence on them for our day-to-day existence are important issues not just in the present, but for the future of humanity. Our generation is going to have to find solutions for these crises, and the stigmatization of fossil fuels will ultimately be an integral part of this process, and an integral part toward which fossil fuel divestment would contribute.

However, divestment isn’t the only method by which fossil fuels may be stigmatized, a fact of which I am reminded whenever I encounter public service announcements displaying in graphic detail the horrid effects of tobacco and methamphetamine use. The stigmatization process is about vividly acquainting consumers with the sordid effects of that which they consume, effects that the fossil fuel industry has done its best to obscure from the public eye. And divestment, while potentially helpful, is by no means a requisite part of this process.

Ultimately, it will be up to each investor, fund and university to decide whether the positive political statement of divestment — and the positive press that tends to follow — is worth the financial cost and risk associated with it. Some, like Hampshire College, will embrace divestment wholeheartedly; others, like Harvard, will reject it; and yet others, like Stanford, which chose to divest only from coal, will take a middle path on the matter.

While divestment is a flawed financial argument, it has at its core an indisputably strong moral grounding. The question that remains to be answered is whether society will decide the symbolic message of divestment is worth its cost.

Stefan Herlitz is a Collegian columnist and can be reached at [email protected][liveblog]

1 Comment

One Response to “Divestment’s value is symbolic, not financial”

  1. Filipe on April 7th, 2015 12:45 pm

    Speaking as someone simply interested in finance and not for anyone involved with UMass Divest, I would like to challenge some of the points made here. First, the risk that is gained from a loss in diversification is insignificantly small considering the size of the fund. Of course if UMass still wanted to diversify that risk away, while maintaining their returns, this could easily be done with the addition of other stocks, mutual funds, ETFs etc.

    With that said, the UMass endowment is already rather conservative even for an endowment fund which are generally long term funds with strict allocation policies for minimal risk. In fact, the average performance of the endowment fund in FY 11- 13 was 8.5%. This trails the average public institution’s returns of 10.3% and the S&P 500’s 18.5%. It could stand to gain from an increase in risk in order to achieve higher returns.

    Which brings me to reinvestment. Forbes created a global index of 187 companies that are doing their part to tackle climate change, receiving an A grade by Forbes’ criteria. The companies in this index outperformed the Bloomberg Global Index by 9.6% over a period of 4 years beginning in 2010. If we look at specifically socially responsible funds, we find that there are high performers that the endowment could benefit from. For example, the Ecclesiastical Amity International Fund has grown 188% in 10 years and the Kames Ethical Equity Fund has grown 199% in 10 years. In general, over a three-year period ethical funds averaged 36% growth while non ethical funds averaged to 31% growth with five year growth having very little performance difference, according to a report from 2013. Therefore, I believe it may be unfair to say that removing fossil fuel stocks from the endowment creates undue risk whereby the benefits of divestment are outweighed by the costs. If done properly, the divestment from fossil fuels with reinvestment to SRIs could bring an increase in return for the fund. Not to mention, the University would be providing an influx of capital to socially responsible companies and truly aligning its money to its mission of sustainability.

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