Demystifying Divestment

The national movement for fossil fuel divestment has reached Washington University, and several groups on campus have begun an effort to publicize the cause. Divestment is a complex economic and political strategy to address important social issues, and there has already been some debate and confusion over what exactly “divestment” means. The basic idea behind the movement is that Washington University should invest the fraction of its endowment currently in fossil fuel stocks in other industries. By choosing to invest its money in a more socially responsible way, Washington University can use its social and economic influence to combat global climate change. Before discussing the why and how of divestment, though, we would like to make clear what divestment is not.

Divestment will not harm scholarships and financial aid.  Endowed scholarships and professorships have strict legal constraints, and cannot simply be revoked because the University would rather spend money on something else. There is strong reason to believe divestment is actually a cost-neutral activity (more on this later), and when the endowment performs below expectation, like it did after the 2008 recession, the University reacts by delaying new construction and the expansion of academic programs to compensate, not by cutting scholarships or aid.
It should also be understood that divesting from the fossil fuel industry does not mean investing in the renewable energy sector, any more than divesting from Coke means investing in Pepsi. There are many other industries that do not contribute to climate change, many of which have actually performed better than the fossil fuel industry over the last decade. Building a strong portfolio involves investing in a wide variety of companies and sectors, so pulling investment from a single sector does not require investing in some other riskier or lower performing sector.

In terms of cost, most evidence suggests that divestment will not have a significant negative financial impact on the university. Divestment does not call for investment in lower yield or riskier investments. This is the biggest point of confusion. There are three fundamental points to know about why divestment is cost-neutral.

First, it is essential to understand that fossil fuels represent only a fraction of investment possibilities, and there are dozens of other industries that have similar returns to those of fossil fuel companies. Wash U can transfer its holdings in fossil fuel companies over a period of time into equally risky, equally profitable investments.  Academicsfrom Ivy league universities (like Phoebus Dhrymes) and international journals (like theJournal of Accounting and Finance) have produced serious research that empirically demonstrates cost neutrality. The Aperio Investment Management Group estimates a 0.0044% difference on returns to divested portfolios, and an increased risk of .0005%. Since these figures are well below the margin of error for returns and risk, the estimates show zero-impact to divesting from fossil fuels.

Second, it is impossible to predict exactly how the stock market will behave. Anyone who tells you they know what will happen a year from now is misinformed or dishonest. What matters is risk. While fossil fuels have been historically stable, this is no guarantee of future success. There are mutual funds which have begun divestment from coal and oil simply because they think such investments are risky. Financial Times reported this year that there may be a bubble in industries that emit carbon, comparable to the housing bubble of 2007.

That is not to say that the fossil fuel industry won’t make a profit in the coming years–it will. But the stock market is based on expectations, not profit: if the fossil fuel industry makes less money than it expects, then it stock will go down. Because such risk is involved with all investments, there is no reason to believe that fossil fuel industry is any safer nor any riskier than other comparable, environmentally friendly investments.

Finally, divestment is not a request for the immediate withdrawal of all investments. It is a proposal that no new investments be made in fossil fuels, and that, over the course of the next five years, Washington University gradually phase out existing investments in the fossil fuel industry.

The Forum for Sustainable and Responsible Investment (USSIF) estimates that $3.74 trillion out of $33.3 trillion invested in the United States is already invested using socially responsible approach. This is evidence of the fact that other institutions have already made socially responsible investment a priority. In restructuring its resources, Washington University can have a positive social impact without sustaining great financial losses.

Divestment is activism through capitalism. Instead of protesting or making too much noise, the idea behind divestment is to make fossil fuels less profitable and politically un-cool. By limiting access to capital, divestment makes it more expensive for the fossil fuel industry to undertake new production and provides a financial incentive for companies to shift toward environmentally friendly operations. Large, influential institutions like Washington University have the potential to use their financial clout to combat climate change and provide incentives for responsible corporate behavior.  When public institutions divest, other institutions follow, sending  a strong signal to the government about public priorities. The fundamental point behind the divestment movement is that, when people and institutions around the country speak with their wallets, politicians and business owners start to listen.

Divestment works within the capitalist system to create a free-market solution to the climate change problem. The potential of this strategy is so large that there are hundreds of different, independent movements organized for divestment at universities around the world. 210 US universities have started official campaigns for divestment.  Where such campaigns exist, they are popular.  A survey conducted by the campaign at Harvard found that 72% of Harvard undergraduate students are supportive of their university divesting from fossil fuels.

The idea of divestment already has wide acceptance among economic and political leaders. The mayors of New York City, Seattle, and Los Angeles have publicly called for divestment efforts, and the secretary general of the United Nations, Ban-ki Moon, has also called for responsible investing on the part of large institutions. The idea is also beginning to cross political boundaries and gain credence in the financial world. Republican governor John Huntsman recently said of campus divestment campaigns, “I think it’s a good thing, and I can tell you, as serving on some big corporate boards, that when things like that happen, it’s taken seriously.” Thomas Steyer, a self-made billionaire on the Forbes 400 who founded and manages the Farallon Capital Management hedge fund, which currently has $20 billion in assets, has endorsed Middlebury’s divestment campaign and has divested his own personal funds from fossil fuels. The significance of these public calls show that divestment is a serious means of social action. Whatever your opinions on divestment, it should be clear that the concept is respected academically and politically.

The precise costs and impacts of divestment are as impossible to calculate as the return on other investments. There are arguments on each side, but the reality is no one can say for sure exactly what legislation, laws, or new technologies will emerge in the coming years, nor where the stock market will be. What is clear is that divestment represents a safe and significant way for Washington University to throw material support behind the movement to address climate change. Divestment will affect carbon emissions and will influence the political sphere, perhaps even moving the United States toward passing the long-awaited carbon tax.

If you want to learn more, or have questions regarding divestment, you don’t have to take our word for anything. We recommend this article, and would be happy to suggest additional sources of information.

To contact the authors or to find out more, please email Alex Kaufman ( or Maddy Salzman (

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