Divestment 101

Why divest from the fossil fuel industry?

  1. We, as an international community, have agreed that we must limit global warming to 2°C above pre-industrial levels.

  2. To stay under 2°C of warming, scientists and economists have shown that 80% of proven fossil fuel reserves must stay in the ground.

  3. If it is wrong to fuel climate change, it is wrong to profit from the wreckage. By withdrawing our investments from the fossil fuel industry, we revoke the “social license” of the industry and show that fossil fuel extraction is incompatible with a safe, just future.


FAQ

What, exactly, does divestment look like?

Our campaign has a three part ask, as you can read in our official proposal for divestment submitted to the Board of Trustees and the Advisory Committee for Socially Responsible Investing (ACSRI). The Board of Trustees must:

  1. Immediately implement a freeze on all new investments in the top 200 publicly traded fossil fuel companies currently holding the vast majority of the world’s proven coal, oil, and natural gas reserves, as defined by the Carbon Underground 200 list.
  2. Publicly commit to divesting the Columbia University endowment from direct ownership of fossil fuel holdings and from any commingled funds that include fossil fuel equities and corporate bonds, in advance of the COP-21 conference taking place in December 2015.
  3. Ensure the divestment of these funds within 5 years’ time after the initial commitment, allowing for fund managers to evaluate reinvestment strategies and minimize transaction costs in a gradual process.

Update: in March 2017, Columbia announced it will be divesting from thermal coal producers.

Why divest from the top 200?

The Carbon Underground 200 list was created by Fossil Free Indexes – founded by Columbia alumnus, adjunct associate research scientist at the Lamont-Doherty Earth Observatory, and financial services professional Stuart Braman, Ph.D. The list identifies the top 100 public coal companies and the top 100 public oil and gas companies globally ranked by the potential carbon emissions content of their reported reserves. Fossil Free Indexes have assessed that “the reserves of these companies total 555 gigatons (Gt) of potential CO2 emissions, almost five times more than [their proportion of the carbon budget that] can be burned for the world to have an 80% chance of limiting global temperature rise to 2°C (3.6° F).”

Our campaign’s focus on divesting from the Carbon Underground 200 list is echoed by hundreds of fossil fuel divestment campaigns around the globe. Using a list of pre-selected companies to define the “fossil fuel industry” makes the task of divestment clearer for fund managers.

Some institutions have recently committed to divesting from the coal industry, including Stanford and Norway’s sovereign wealth fund. Divesting from coal is clearly important; coal is the most carbon-intensive fossil fuel and the industry is undergoing structural decline. However, the science makes it clear that an end to coal would not keep us within 2°C of warming – we must leave the majority of all fossil fuel reserves in the ground if we are to ensure a stable climate system. Divesting from coal sends the wrong message about the change that we need on a societal level.

As Fossil Free Stanford has written to their Trustees as they continue to advocate for full fossil fuel divestment, “No amount of action against coal can mitigate the impacts of oil and gas enough to protect the hundreds of millions of people, countless species, and trillions of dollars threatened by climate change.” This is why we urgently call for divestment from the top 200 fossil fuel companies. Columbia has the opportunity to lead, rather than follow, other major educational institutions by divesting from the Carbon Underground 200 list.

How much does Columbia have invested in fossil fuels?

The short answer is: we don’t know for sure, because Columbia is not transparent with its investments. According to socially responsible fund managers, the average endowment has 4-5% invested in fossil fuels. Out of our $9.2B endowment, that could represent $368-$460M!

Update: in March 2017, Columbia announced it will be divesting from thermal coal producers.

Won’t divestment hurt the endowment?

Most importantly, President Bollinger has told us that the impact of divestment on Columbia’s endowment would be negligible.

The more technical answer is – divestment may or may not lead to positive returns, as continued investments in fossil fuels may or may not (i.e., past performance is not indicative of future returns). However, there is significant evidence that points to divestment as a financially sound choice.

There are a variety of studies of what a portfolio would have looked like had it divested from fossil fuels years ago, under certain assumptions. Relevant assumptions include the timeframe examined, projections for renewable energy demand, political decisions, etc. Here are some of the major studies that have shown conditions under which going fossil free outperformed fossil fuel investments:

  1. Most significantly, MSCI, the world’s largest stock market index company, completed a study in April 2015 which concluded that investors who divested from fossil fuel companies would have earned an average return of 13% a year since 2010, compared to the 11.8%-a-year return earned by conventional investors. The data shows that this outperformance was also happening in 2012 and 2013, even before the fall in oil prices that drove down company share prices in 2014. The data acknowledges that before the financial crisis in 2007, indexes that included fossil fuels would have outperformed others. A file with the data on the ‘MSCI ACWI ex Fossil Fuels Index’ can befound here, and there’s more info at this Guardian article.
  2. Fossil Free Indexes US (FFIUS) is based on the capitalization-weighted S&P 500 index negatively screened for the Carbon Underground 200. In 2014, the FFIUS outperformed the S&P 500 by 1.5% – a “strikingly large number.” At the link, there are some interesting thoughts about the significance of this – essentially, the FFIUS can’t be guaranteed to outperform the S&P 500 every year, but that “future policy moves to reduce demand for fossil fuels can induce a dramatic reduction in the value of underground reserves.”
  3. In a study by Impax Asset Management, analysis of historical data showed that eliminating fossil fuel stocks from a global benchmark index over the past 5-7 years would have had a small positive return effect (0.5% annually). They also found that the economic effect of excluding fossil fuel stocks could be replicated with improved returns by investing in a ‘fossil free’ energy portfolio of energy efficiency and renewable energy stocks. That goes to show one of the structural arguments with many arguments against divestment that say excluding “energy” decreases the diversification (basically, investment into different sectors as a security measure) of a portfolio – that argument conflates “energy” and “fossil fuels” as an investment and opportunity for diversification.
  4. In another study by Sustainable Insight Capital Management  (SICM), the three fossil fuel free portfolios they constructed outperformed the S&P 500 Index over one-year, three-year, and five-year time periods, all ending in December 2013. The analysis essentially showed that performance of a fossil fuel free fund comes down to the skill of the asset manager – “investors in fossil free funds could have made superior returns to some well-known benchmarks, but unintended risks could easily have eroded these investor returns if portfolio construction was ineffective.” It is not only a question of the inherent harm of divestment, but where to reinvest the money that will impact the portfolio (also addressed in the Impax study).
  5. Another study by the Aperio Group examined the effects of removing from the Russell 3000 index the 13 listed members of the ‘Filthy 15’ group of US coal companies singled out by some divestment campaign groups as most harmful to the climate. Using a multi-factor model, they found that excluding the Filthy 15 from the Russell 3000 index generated tracking error of 0.14% and an increase in risk of just 0.0006% (statistically irrelevant). Excluding the entire fossil fuel sector increased tracking error by 0.60% and risk by 0.01%.

Again, financial considerations are not the primary justification for divestment. Divestment is a tactic that is justified on moral reasoning; and if it is wrong to fuel climate change, it is definitely wrong to profit from the wreckage.

More FAQ answers to come… Feel free to reach out with questions to columbiadivest (at) gmail (dot) com.