It has been over a year since the Board of Managers announced it would not divest from fossil fuel stocks, and two classes of seniors have graduated since the ill-fated Board meeting that witnessed the death of the divestment movement’s last veneer of credibility. Yet the idea persists, driven by the passion of campus activists who misrepresent the costs and benefits associated with divestment. The passion is admirable—but ultimately misguided.
While Mountain Justice, the Phoenix and other divestment advocates emphasize the simplicity of the concept—let’s just divest from fossil fuel stocks and put that money into assets that satisfy our particular moral constraints—the reality is more complicated. It’s not as straightforward as making a trade on the floor of the New York Stock Exchange. Swarthmore’s $1.5 billion endowment outperforms the market by using a special asset class called commingled funds. This involves lumping together funds with other investors and sharing a common portfolio. With more investors comes more access to financial expertise, and thus a greater likelihood that the commingled fund will offer a higher return.
The flipside of this is that Swarthmore cannot divest from a particular stock—say ExxonMobil—without divesting from the entire commingled fund. Divestment would thus cause Swarthmore to lose its edge over the rest of the market, costing the College $10 to $15 million per year (the equivalent of full tuition for 150 to 250 students). Swarthmore’s generous financial aid policy and other important line items would be at risk.
Weighed against this should, of course, be the benefits of divestment. But these are small and come mostly in the form of cleaner consciences for Mountain Justice members. When an individual sells stock in a particular company, someone else will almost immediately buy it. As long as the companies are profitable, there will be plenty of willing buyers.
Divestment advocates like to cite that $50 billion has been “divested” from fossil fuel stocks. An important note: that number refers to the total wealth pledged to be fossil-free, not the actual amount divested; that number is much smaller. Regardless, though, other investors have almost certainly rebought the entire sum. The market value of the ten biggest oil and gas companies is $1.8 trillion. Over the last five years, the market capitalization of a single fossil fuel company—ExxonMobil—has increased $70 billion. The stock price has gone up by 41 percent, showing that demand for the stock is robust. Divestment is not only costly, but also ineffective.
The fundamental flaw in using divestment to fight climate change is that it ignores incentives. Fossil fuel companies are simply responding to demand—demand for transportation, demand for electricity, demand for diesel buses to attend climate marches in New York. It is we, the consumers, who create the demand. As long as we are willing to pay for oil and gas, fossil fuel companies have an incentive to meet our needs. And investors with an eye for profit will always supply financing to help them do it.
Taking the fight to fossil fuel companies is a feel-good strategy that will accomplish little in the fight against climate change. As consumers of fossil fuels, we are also responsible for carbon emissions. We derive enormous benefits from fossil fuels; our standard of living has grown exponentially since their advent during the Industrial Revolution. To deflect the responsibility for their environmental costs onto others is careless and hypocritical.
To clean up the environment, we have to change incentives so that our goals as economic actors cooperate with the needs of the planet. The best way to do this is to make pollution more expensive to incentivize the private sector to develop energy alternatives, such as nuclear power. “Making pollution more expensive” implies a range of policy options, each with their own benefits and drawbacks. These include a carbon tax swap or assigning property rights to the atmosphere.
Fossil fuel companies cannot be our enemies in this. After all, fossil fuel companies already have access to the capital necessary to make investments in sustainable energy. For better or worse, established energy companies are a major sector of the economy, and they must be part of the solution. If we enact policies that disincentivize pollution, Chevron and ExxonMobil will seek to protect their bottom line by plowing capital into alternative energy research rather than oil exploration, benefitting all of us.
Divestment is not a solution to climate change, nor is it part of any reasonable solution. Fossil fuels will not stop burning because Swarthmore has divested and put its finances in jeopardy. The divestment movement is a way for activists to clean their consciences without actually doing anything to help the planet. It implies intense pessimism—the message is that instead of trying to fix the environment, we should try to go down righteously on a sinking ship. I think our society can do better than that.