Pros and cons of university divestment from fossil fuels

Citing the impacts of climate change, Harvard University President Lawrence S Bacow announced last week that Harvard Management Company, which runs the university’s US$42 billion endowment – the largest such fund in the world – would divest from oil and gas companies. The move follows more than a decade of effort by groups such as Divest Harvard.

“The last several months have laid at our feet undeniable evidence of the world to come – massive fires that consume entire towns, unprecedented flooding that inundates major urban areas, record heat waves and drought that devastate food supplies and increase water scarcity. Few, if any, parts of the globe are being spared as livelihoods are dashed, lives are lost, and regions are rendered uninhabitable.”

So wrote Bacow in an email to the Harvard community, in which he explained that America’s oldest and most prestigious university would divest from fossil fuel companies as quickly as prudently possible.

As did Harvard, many of the other colleges and universities that have either started to or pledged to divest – such as Middlebury College and Yale University in the United States and, in Canada, Concordia University in Montreal, the University of Victoria and the University of British Columbia in Vancouver – at first resisted calls for divestment.

Harvard had spent years shrugging off efforts by student and faculty activists. In 2016, for example, Harvard fought off the effort of the Harvard Climate Justice Coalition to force the university to divest, when the Massachusetts Appeals Court ruled that the students failed to show that they had a “personal right in the management or administration of Harvard’s endowment that is individual to them or distinct from the student body or public at large”. Nevertheless, over the last few years, Harvard has reduced its holdings in oil and gas companies to less than 2% of its total holdings.

One side of the story

Richard Masson, executive fellow at the University of Calgary School of Public Policy and a consultant in the oil and gas industry, argues that universities and colleges that divest from fossil fuel companies not only cut themselves off from a US$2.5 trillion industry but are looking at the problem of global warming from the wrong end of the telescope.

“Greenhouse gases in the atmosphere come from the consumption of hydrocarbons. We’ve got to address the consumption side,” he says.

Divestment focuses, instead, on the production side. And, since 80% of the world’s energy comes from fossil fuels, and since this is not about to change soon, students and other activists, and universities and colleges have this choice, says Masson: “Either the oil will come from Western publicly traded companies that divestment is targeting, or it will come from state-controlled oil companies like Aramco, Qatari or Russian oil companies that do not function under Western regulatory systems.”

Masson also addressed what student and other activists loudly note is Canada’s largest emitter of greenhouse gasses. Because the oil in Alberta’s oil sands – formerly called tar sands – is in sand, turning it into a barrel of oil requires heavy oil upgraders that, essentially, boil the oil-infused sands to free the oil.

According to Masson, the two largest of the three carbon capture plants sequester in rock formations underground, a total of 2.12 million tons of CO2 per year.

“Divestment,” Masson concludes, “is not really addressing the problem. It makes you feel good that you’ve done something.”

In a 2016 article Hendrik Bessembinder, financial professor at WP Carey School of Business and chair in competitive business at the University of Arizona, wrote: “I estimate a total cost to endowments over 20 years due to the frictional costs of divestment that range between approximately 2% and 12% of the endowment’s value, which, for a typical large university endowment, would translate to a decline in value of between US$1.4 billion and US$7.4 billion.”

In an e-mail to University World News, he elaborated. “These costs are ultimately borne by people – if the endowment is reduced in value, then the amount that can be sustainably spent from it is also reduced, which will translate into lower spending on a university’s teaching and-or research missions, or higher tuitions to compensate.”

Bessembinder echoed Masson: “Further, divestment does not directly affect greenhouse gas emission – it simply transfers (potentially at a discounted price) existing ownership share in companies to new owners.” Ultimately, he says: “Divestment is a symbolic act.”

By contrast, in their article “Examining the Impact of Fossil Fuel Divestment on University Endowments”, published in the New York University Journal of Law & Business, professors Christopher J Ryan Jr and Christopher R Marsicano found that the valuations of college and university endowments were not affected by divesting from fossil fuels.

“While this might seem like a null result, it isn’t. Given that many boards of trustees and presidents often suggest that the decision to divest would impair the short- and long-term value of the endowment, they have elected not to do so on economic grounds, not to mention a narrow reading of their fiduciary duty to the endowment.

“Our analysis suggests that there is no statistically significant effect – positive or negative – on the endowment values for divesting schools in our study,” Ryan wrote in an e-mail to University World News.

Ryan said that when they looked at the endowment of four universities that had divested and compared them to a counterfactual scenario, they found that three of the four endowments performed better than they would have without the divestment.

“This indicates to us that mileage may vary on this decision to divest, but it seems to be beneficial in the near term for many of the schools that have divested amidst a declining fossil fuels market these last two years,” he wrote in an e-mail.

The ‘seat at the table’ quandary

One of the arguments advanced for not divesting is that a university, by folding its hand, so to speak, gives up its ‘seat at the table’.

“A very commonly held argument in this debate is that you should stay invested, because you will have the opportunity to use your voice as a strong, large investor to influence the action of the companies you invest in,” says Professor Darlene Himick of the University of Ottawa’s Telfer School of Management.

But this, she quickly added, “begs the question of whether the college or university is engaging in greenwashing: What do you do to actively engage in the companies that you’re invested in.”

In January 2020 Denyse Rémillard, vice-rector of administration and sustainable development at Université de Sherbrooke, told the Canadian publication University Affairs why her university had no immediate plans to divest.

“People tend to underestimate financial leverage as a vector of change,” she said. “But we have a greater ability to influence things from the inside than you might think. By keeping a seat at the table in this industry, we hope to be actors for change.”

Robin Pollard, director of community relations at the student society that spent eight years pushing the University of Victoria to divest, dismisses the ‘seat at the table’ argument.

“They say, ‘Well why don’t we push for investments [in fossil fuel companies] to be more responsible.’ But that doesn’t capture the heart of divestment or the message of divestment or its values,” she says.

Marc Lee, senior economist at the Canadian Centre for Policy Alternatives, is pleased with Harvard’s decision and, closer to his British Columbia home, both the universities of Victoria and of British Columbia’s decisions to divest from oil and gas companies.

But he granted Masson’s point that selling shares in such companies does not remove a single barrel of oil from the marketplace and, after being burned, CO2 from the atmosphere. Divesting is, Lee hastens to add, much more than empty symbolism.

“The reality of divestment is that if the University of British Columbia decides to divest from fossil fuels, it sells its holdings of those stocks to someone else,” he says. “But I think what it does is give a focus for organising. It helps to catalyse climate change as an issue that needs to be addressed, and it takes away the social licence that these companies have. It delegitimises the holdings of those who own shares.”

This is particularly important, Lee says, in the university context, because they are about science and where climate and environmental science is taught. “Universities are where the engineering associated with the green economy is going to come from.

“So, they should be branding themselves as zero carbon, as leaders in taking actions that are consistent with what their academics and what their students are actually studying, not profiting off holding fossil fuels.”

From moral to financial focus

Harvard’s announcement was preceded by six months by a similar one from Rutgers University, which noted that the New Jersey university’s investments in fossil fuels amounted to approximately 5% of its US$1.6 billion endowment.

Five days before the Rutgers announcement, on 4 March, David Farrar, president of Canada’s McMaster University in Hamilton, asked the board of governors to put in place a strategy to divest from fossil fuels as soon as possible. A month earlier, the University of Victoria announced that its CA$256 million (US$200 million) capital fund would divest from fossil fuel companies.

As did Bacow, Farrar cited concerns over climate change as the main driver. “It is necessary, alongside our carbon reduction activities, to confirm that we want to be a leader in these areas and so today, I asked the university’s board of governors to work with us to put in place a strategy to divest fossil fuels from our institutional investment pool as soon as possible.”

Darlene Himick explains the accelerating pace of divestments, which also include Yale University and Columbia University, by pointing to the fact that the argument for divestment has shifted from a mainly moral one to one of financial risk.

There are two types of risk that move financial analysts, she says. Physical risk is easily understood: climate change, forest fires and floods. Transitional risk includes the cost incurred from moving away from a carbon dependent economy.

In a recent speech Mark Carney, former governor of the Bank of England and before that governor of the Bank of Canada, pointed to the infrastructure of the oil and gas industry – wells, pipelines, mines, tankers and the oil in the ground. He predicted that as the world moves away from carbon-based energy, these multibillion-dollar assets will become “stranded assets”, meaning they will become significantly devalued.

“The move to risk analysis makes it broadly acceptable in the financial community to argue for divestment in a way that allows financial experts to produce quantitative models and metrics. Once you start talking that language, then you can move things along in the language of the markets,” Himick says.

The success of Middlebury College’s students in helping to persuade the college’s board of trustees to agree to divest is emblematic of Himick’s point. For more than a decade, student activists made their point by loudly demonstrating outside board meetings.

In 2019 David Provost, executive vice president for finance and administration at Middlebury, convinced student leaders to adopt a different tactic. He explained how private equity investments work, how the endowment worked and why it was difficult to remove oil and gas companies from pooled funds the college was invested in. Accordingly, when the students appeared before the board, they spoke the language of most of its members, many of whom work in the financial industry.

Still, as there had been in 2012, Provost told University World News, there was “a lengthy conversation about whether divesting meant the board was shirking its fiduciary responsibility”.

Part of what swayed the board, he says, was the compelling argument made by the students who, in addition to speaking the language of finance, tied divestment to Middlebury’s mission statement. “It says that through a commitment to immersive learning, we prepare students to lead engaged, consequential and creative lives, contribute to their communities and address the world’s problems.”

Divesting is difficult

Divesting or even reducing a college or university’s holdings in fossil fuel companies is not an easy or quick process.

Middlebury’s board of trustees supported divesting as long as it wasn’t abrupt and allowed the private equity investments to reach their anticipated maturity dates, Provost says. The board did make the decision that no new dollars would go to fossil fuels as of January 2019.

Although fossil fuel companies make up a sliver of Harvard Management Company’s holdings, many investments are in ‘legacy’ holdings that will take many years to unwind.

The situation is similar at McGill University. After receiving the report from its Committee to Advise on Matters of Social Responsibility (CAMSR), McGill began removing investments in high carbon-intensive companies, including those in the fossil fuel industry, from its pool of more than CA$1.9 billion invested with more than 60 external managers and funds.

“As of the end of 2020, the university had already reduced carbon emissions of its endowment public equity portfolio, relative to the MIP public equity benchmark, by about 20%. This puts the university well on the way to reaching the CAMSR target of a 33% reduction by 2025,” wrote Katherine Gombay, senior communications officer, in an e-mail.

Three universities in Quebec have either pledged to fully divest from fossil fuel companies or have done so. Following a campaign by ULaval sans fossiles, in 2017, Université Laval in Quebec City became the first university in Canada to pledge to fully divest.

In January 2020, the board of the Fondation de l’Université du Québec à Montréal announced that it had fully divested from fossil fuel companies; though there were questions by students at at least one board meeting, the decision to divest is noteworthy because it was, essentially, an administrative one.

One of the reasons it is easier for Quebec universities to divest from oil and gas companies is because the province does not have a fossil fuel extraction industry; coincidentally, the day I wrote this article, the province’s government announced that it would be bringing in a law to forbid prospecting for oil, gas or coal. The vast majority of the province’s power comes from huge dams in the far north.

“When we made that presentation in 2019 to the university’s president about the 100%-0%-10% [100% sustainable, 0% oil and gas and 10% social impact investment] investment plan, we said that in Quebec we can easily meet the objective,” says Denis Cossette, Concordia University’s chief financial officer and president of the Concordia University Foundation.

“For other jurisdictions or provinces, it could be more difficult because oil and gas is a very important portion of their economy.”

Concordia’s horizon for divesting from fossil fuel companies is also 2025. However, as Cossette explained, while it is easy to divest from a company such as Shell or ExxonMobil, divesting completely from the industry is rather difficult because of the myriad of holdings in mutual funds, for example.

“It could happen that you can have a small portion, that’s 5% of a pooled fund in oil and gas. It's really difficult not to be exposed at all to the fossil fuel industry, because part of this portfolio is in oil and gas but 95% is okay, 5% is not. So do we decide not to invest in that fund notwithstanding the fact it is strongly managed, has good governance, makes positive investment and has positive returns?”

Accordingly, says Cossette, there has been an evolution in the Concordia University Foundation’s understanding of ‘0%’. Instead of it meaning a complete divestment from oil and gas companies, the foundation is focusing now on a ‘zero carbon neutral approach’ and working with fund managers to make sure they are compliant with ESG – Environmental, Social, Governance, which are based on the United Nations’ 17 Sustainable Development Goals.

“And within that global framework, you want to invest in activities that will produce sustainability. And again, by definition, you can decide not to invest in industries that do not comply with that.”

This autumn, Cossette will bring forward an updated investment policy that fills gaps in the current investment policy.

“We have X% of our investments that are not in full compliance and align with our 100%-0%-10% objective. We will give them five years to re-adjust the investment to become compliant with the policy. ”

Resource extraction and colonisation

For her part, as the new school year gets going, Pollard plans to keep pushing. First, for the University of Victoria Foundation, which manages an endowment of almost CA$500 million and is separate from the university, to divest from fossil fuel companies.

Second, Pollard, who is taking both indigenous studies and environmental studies, wants to continue to make the case that the very activity of resource extraction does more than despoil the land and water.

Pollard pointed to the Final Report of the National Inquiry into Missing and Murdered Indigenous Women and Girls that was released in June 2019. The report found that over a 30-year period beginning in 1980, 1,017 Indigenous women and girls were either killed or went missing, mainly in Western and Northern Canada.

According to Pollard, there is a strong correlation between the oil sands (most of which is in northeastern Alberta) and missing and murdered indigenous women and girls.

While the report did not directly link any of the deaths or disappearances to oil workers in Fort McMurray in Alberta, the commission called on “governments to fund studies to better understand the relationship between resource extraction and other development projects and violence against indigenous women, girls and 2SLGBTQQIA people”.

Also, the commission urged governments to “anticipate and recognise increased demand on social infrastructure because of development projects and resource extraction, and for mitigation measures to be identified as part of the planning and approval process”.

Said Pollard: “I think we should be drawing the connection between resource extraction and ongoing colonisation [of First Nations’ lands] and violence against indigenous lands and peoples.

“This is really important because the University of Victoria has committed to reconciliation. And, if they really want there to be any truth behind those words, then highlighting the fossil fuel investments will be key.”