Divestment: The Financial Argument

By Guest Contributor

This January is set to be a big month for the Middlebury Divestment from Fossil Fuels Campaign, otherwise known as DivestMidd, as we lay the groundwork for a presentation to the members of the Board of Trustees in the spring, when we will ask them to once again to consider and vote on divestment. In order to achieve success in the spring, the Middlebury community must unite in support of divestment to signal to the Board of Trustees the necessity of our ask.

We as DivestMidd realize, however, that in order to unite in support of divestment we must all understand the reasons for divestment, at least to the extent that one feels he or she can have an informed decision on the subject. Thus, in pursuit of an “educated electorate” on divestment, we are holding three “teach-ins,” or information and discus- sion sessions, each one focusing on a different pillar holding up the argument for divestment, which include financial, political and social justice reasons.

The subject of this article and of the first teach-in, which was held yesterday, is the financial argument for divestment. In many ways, this is a great place to start in launching Divestment 2.0, for the financial argument proves the surprising and well-substantiated reasons why we’re advocating for divestment. To those who think supporters of divestment are just ignorant tree-hugging environmentalists whose sole goal is to save the Earth, be warned: the financial argument for divestment is sound, even independent of environmental concerns. So listen up. We know our stuff, and we think you should too; we just might save the planet in the process.

For starters, one of the great myths surrounding divestment is that the elimination of investments in the top 200 fossil fuel companies from our endowment would necessarily result in lower returns and subsequent budget cuts in areas such as financial aid. In fact, the investment literature repeatedly shows that fossil free portfolios have higher risk-adjusted returns.

So, what does this mean? Essentially, fossil fuel companies generally have more risk due to their presence in often politically and economically volatile countries. Additionally, the increased costs fossil fuel companies would have to incur as a result of new legislation placing a price on carbon would prove substantial in adding costs to production. And, a price on carbon sometime in the near future is not farfetched considering recent advances in discussions related to climate change and international agreements on carbon emissions, not to mention the growing urgency due to climate impacts.

Yet we don’t even need a price on carbon for divestment to make financial sense. As a matter of fact, one of Blackrock’s numerous iShares ETFs (with the ticker DSI) is composed of 400 companies with positive environmental, social, and governance practices (compared to industry competitors), includes only one of the top 200 fossil fuel companies, tracks the S&P 500 Index, and, since inception in 2007 has outperformed the S&P 500 by over 3 percent. This is sub- stantial, as the S&P 500, which includes 14 of the top 200 fossil fuel companies, is considered to be one of the broadest benchmark indexes of large U.S. publicly traded companies. In this way, DSI has steadily demonstrated high returns in spite of, or rather because of, a lack of reliance on the most impactful fossil fuel companies.

Furthermore, we are not advocating divestment because of some antiquated obsession with peak oil. Of course, fossil fuels are a finite resource and thus a theoretically unsustainable resource, but we’re not kidding ourselves. We know that recent technological advances have shed light on enormous reserves of oil. Total reliance on this fact, however, may lead us into dangerous territory. Oil companies are valued by their proven or predicted reserves, which means that if these reserves cannot be burned or taken out of the ground for a variety of reasons, such as carbon pricing or water constraints, the value of these compa- nies would see a significant negative impact. For oil companies, reserves in the ground are future revenue streams, and if reserves cannot be drilled, refined, and sold, revenue will be hurt. Shocks to revenue would lead to changes in profit- ability, which impacts stock prices and returns to shareholders.

Just because oil companies have the knowledge that reserves are available, that doesn’t mean that they’re easily accessible or necessarily worth the cost of extraction. This could be due to a number of factors including the changing resource landscape to shale gas and phosphate or the falling costs of clean technology costs, especially for solar PVs and onshore wind. In this way, we may be grossly over-evaluating fossil fuel companies, an idea commonly known as stranded carbon asset theory, which essentially predicts the presence of a carbon bubble that when it breaks, could result in severe losses for owners of long positions in fossil fuel companies.

If that’s not reason enough to divest from fossil fuels, let’s consider the fact that fossil fuel companies are still vehemently spending enormous amounts of money on capital expenditures (CAPEX) to develop and discover new reserves that have the potential to become unburnable, a prospect which, according to a 2013 Carbon Tracker Initiative report, could result in up to $6.74 trillion in wasted capital investments by the top 200 fossil fuel companies over the next decade. Why, you ask, are fossil fuel companies not investing more into research and development of clean technologies? One would assume fossil fuel companies are rational actors and would obviously want to increase efforts at developing clean technology sources that, given our concerns above, are most likely to prove profitable in the energy market of the future. These companies, however, are also stuck in their ways and have a hard time imagining a world not dependent on fossil fuels. But we at Middlebury, on the other hand, should certainly have within our capacity the ability to imagine a world powered by clean technologies and should therefore have the foresight to divest from fossil fuels and reinvest in clean technologies.

Finally, if we were to divest, the process of selling off our holdings would not be done in a haphazard manner that could in any way endanger our financial performance. In all likelihood the process would take between two and five years, which proves even more reason to announce divestment from to top 200 fossil fuel companies as soon as possible.

In sum, it makes clear financial sense to divest from fossil fuels. If you agree please sign the petition at go/divestmidd and come to the next divestment teach-in on Wednesday, Jan. 21 at 4:30 p.m. in BiHall 438!

SOPHIE VAUGHAN ’17 is from Oakland, Calif.

NATE CLEVELAND ’16.5 is from Devon, Pa. 

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