A Deeper Look at Divestment

By Guest Contributor

A recent op-ed (“Divestment Creates Positive, Systemic Change”) argued that divestment is a valuable tool in the fight against global warming. While I wholeheartedly share in the author’s concern about climate change, I am not convinced that Middlebury College’s divestment from fossil fuel companies would constitute a step towards realizing this goal.

Divesting from a publicly traded company will not lower the company’s share price. Simple economic models tell us that if a stock is sold in sufficient volume to lower its price, non-ideologically motivated buyers will simply take advantage of the lowered price to buy stock until its price returns to the equilibrium point. While the pro-divestment op-ed noted this, the author suggested that if enough investors take action, the financial stability of the company could be jeopardized. Yet this misses the point entirely: it does not matter how many would-be divesters decide to sell — as long as there are non-ideological buyers somewhere, divestment will not impact the company’s valuation.

Far more importantly, the op-ed also fails to note the crucial fact that most of the oil industry is not controlled by publicly traded companies. According to the U.S. Department of Energy, national oil companies — not publicly traded international oil companies — control the majority of current production (55 percent as of 2010) and the vast majority of oil reserves (85 percent). Even ExxonMobil, the largest publicly traded oil company, accounts for only three percent of world petroleum production. Divestment would not have an economic effect on private or state-owned oil companies. Furthermore, because those companies are accountable to governments and not to shareholders, they are also far less likely to care about the moral or symbolic message that divestment could generate.

Even the much-lauded case of divestment from apartheid-era South Africa was not the unmitigated success that activists would have us believe. A London Business School paper titled “The Effect of Socially Activist Investment Policies on the Financial Markets: Evidence from the South African Boycott” found that divestment efforts had “little discernable effect” on either the financial valuation of corporations invested in South Africa or on South African financial markets themselves.

Perhaps one could argue that these criticisms of divestment are misguided, and that divestment is not merely an economic tool, but a social and a moral one. Even if this were the case, we owe it to ourselves to consider not only the benefits of divestment, but also the potential costs. Another study, “The Stock Market Impact of Social Pressure: The South African Divestment Case,” found that there was a negative impact on companies that divested: “Stock prices of firms announcing plans to stay in South Africa fared better relative to stock prices of firms announcing plans to leave [emphasis added].” Could divestment have a similarly negative financial impact on Middlebury?

Campus activists do not seem to consider this important point. In their rush to condemn oil companies, many activists do not appear to grasp the fact that their proposed divestment will have costs as well as benefits. While activist groups have done a remarkable job raising awareness, they have yet to publicly present a plan for how divestment could actually be implemented. Many crucial questions remain unanswered, and indeed, unasked. What are the potential costs of divestment? Who should bear these costs? How much are we willing to sacrifice? What do we want the purpose of our endowment to be? And above all else: is divestment the best way to accomplish our goals?

The best way to fight climate change is not through disruptive agitprop. The small number of students who reject community discussion and mutual respect in favor of radical direct action — who I recognize do not represent the entire divestment movement — should recognize that they are merely alienating potential supporters and weakening the claims of the divestment movement as a whole.

Dissimulation and disruption can only lead to distrust and polarization. Middlebury is better than that. The path to 350 parts per million runs not through the narrow halls of Old Chapel or the crowded seats of Dana Auditorium, but through the classrooms and laboratories of Bicentennial Hall.

So let’s use our skills as Middlebury students not merely to criticize the way things currently are, but to envision a better way forward. Rather than name-calling, protests and accusations, let’s see a concrete model of how the endowment should be managed. With this in mind, here’s an open call to the Socially Responsible Investment Club, Divest for Our Future, the so-called Dalai Lama Welcoming Committee and all students, faculty, staff, administrators, trustees and members of the Middlebury community who are concerned about the future of our endowment: let’s see a cost-benefit analysis of divestment by the end of this academic year.

Written be MAX KAGAN ’14 of Freeport, ME