Letter to the Editor

With her Feb. 17th contribution to the Miscellany News, President Hill has done the College a service. The decision whether the College ought to divest from fossil fuel companies rests with the Board of Trustees. By articulating, in the public arena, some of the arguments which are likely to weigh with the Board, President Hill has given the larger College community the opportunity to consider these arguments and debate them openly – and she has herself helped to model the sort of good-willed and respectful debate which a liberal education aims to make possible. And by her leadership in working to reduce the carbon footprint of the College, President Hill has made it clear that her argument with those who favor divestment is not about ends, but about appropriate means.

In the spirit of open debate that President Hill models, I want to address two of the several arguments against divestment that she offers. I think that the first of these misses an important aspect of the argument regarding “stranded assets” to which it aims to respond. President Hill argues that by constraining the options of Vassar’s investment managers, divestment would reduce expected endowment returns while increasing volatility and risk. She devotes a paragraph to what she takes to be an argument for the opposite conclusion, offered by proponents of divestment:
“Some supporters of divestment argue that the reduction in returns or increase in risk would be small, or even that continued investments in fossil fuel companies will in fact lower returns, in part because of stranded assets (reserves of fossil fuels that will have no value because of the implications of their use for the environment). If this is the case, there is no need to argue for divestment, since rational investment committees and advisors would do this on their own.”

The argument regarding stranded assets, to which she refers, is the following. The most significant determinant of the expected earnings of a fossil fuel company, and hence of its stock price, is the company’s proven reserves and probable reserves – the coal, oil, or gas in the ground that the company has a legal right to extract and that there is a high likelihood that it can extract profitably. A 2015 study by McGlade and Ekins in the journal Nature estimates that in order for the earth to have a 50% chance of avoiding average temperature rises of more than 2°C above pre-industrial levels – the point at which global warming becomes truly catastrophic – during the 21st century, no more than one quarter of existing reserves of fossil fuels can be extracted. In the 2015 Paris climate accord, governments agreed to “aim” to keep average global temperature rises to 1.5°C. So, if the world succeeds in heading off truly catastrophic warming, three quarters or more of the reserves on the basis of which fossil fuel companies are valued will have to stay in the ground, as “stranded” (unextractable) assets – and the valuation of those companies can be expected to decline, precipitously, as a result. This is the risk that investors in fossil fuel companies face.

Does this mean that an investment in fossil fuel companies will necessarily lose money – and that, foreseeing this, “rational investment committees and advisors” would necessarily divest on their own, as President Hill suggests? No – and the argument about stranded assets does not presuppose this. It is possible that world governments will fail to take the necessary policy steps to limit climate change, and that the assets on which fossil fuel companies’ valuations are based will not become stranded. What the considerations regarding stranded assets make clear is that an investment in fossil fuel companies is a bet that this will be the case – a bet that world governments will fail to do what is necessary to prevent truly catastrophic climate change. If that bet is successful, investors will profit from our collective failure to stop catastrophic climate change. Conversely, if we succeed in stopping catastrophic climate change, assets will be stranded and investors in fossil fuel companies will lose (significant) money. (This is one reason why it is hard to envisage shareholder activism materially changing the behavior of corporations whose primary business is fossil fuel extraction: this would be to ask a majority of shareholders to vote for the destruction of the value of their own shares.) The argument from stranded assets is an argument that either investors in fossil fuel companies will lose money or we face catastrophe.

A second argument against divestment is the following. The world’s pool of investable wealth is enormous, and very little of it is controlled by institutions that care where their returns come from. So, while it might make us feel better about ourselves not to profit from fossil fuel companies, divestment by institutions like Vassar will not change the activities of those companies. It will merely change who has a share of their profits. (The same argument, of course, would apply to investments in munitions companies doing business with Sudan during the genocide in Darfur, purchases of conflict diamonds from Liberia and Sierra Leone, and so on.) I take it that this argument is what lies behind President Hill’s assertion that “[d]ivestment will not change incentives to reduce… consumption and production” of fossil fuels.
There are limits to this argument, even in its own terms: the movement for divestment from fossil fuels has been the fastest-growing divestment movement in history, with institutions worth $3.4 trillion now committed to some form of divestment. And, as a 2013 study by the “Stranded Assets Programme” at Oxford University outlines, while the capital markets on which large, integrated oil and gas companies rely are large and liquid, coal companies rely on debt markets that are smaller and more fragmented, and so the prospect of raising the cost of capital for coal companies, and so making it harder for them to extract coal from the ground profitably, is very real.

Proponents of divestment should grant that in the case of oil and gas companies, the direct, financial impacts of divestment on companies’ costs are, indeed, likely to remain small. But direct, financial impacts are not the only impacts. Perhaps the most important of the indirect impacts of divestment is stigmatization. Divesting from fossil fuel companies is a way for institutions of higher learning, foundations, state pension funds and others to say, unequivocally: a fossil fuel business, today, is not just another business, like any other. It is a business that can succeed, financially, in the short or medium term – but only at the cost of catastrophic suffering for millions of people. That is what the argument regarding stranded assets shows. In order for the political conversation around greenhouse gas policies in American and elsewhere to change, this must become a mainstream view. And in order for real, impactful policy changes, like a carbon tax, to make it through our political system, the political conversation must change. A similar process of stigmatization was a necessary step on the way to regulations on cigarette companies: it was only after the public came to see the sale of cigarettes as not just another business, like any other that cigarette taxes and restrictions on marketing, long proposed by policy wonks, were able to make it through the political system.

How likely is divestment, by Vassar and other institutions, to have effects like this? What are the odds that, by divesting, we will forego investment returns and yet have no impact at all on the course the world takes? I don’t know. But arguments around divestment need to begin from the fact that climate change in not like other moral challenges we face, or have faced. What we do, collectively, in the next two or three decades will determine the course of life on earth for tens of thousands of years. With stakes like that, our responsibility is incalculable. The appropriate response is to do everything within our power to avert catastrophe – not just what is guaranteed to succeed.

-Jeff Seidman
Assoc. Prof., Dept. of Philosophy

One Comment

  1. Professor Siedman’s letter to the editor represents exactly the kind of discussion we need to be having about fossil fuel divestment at Vassar College and other institutions. I hope that trustees and the president will pay close attention to his arguments: their responsibility is, indeed, incalculable. One cannot be committed to the education, the future, of younger generations while simultaneously refusing to speak out–yes, through your choice of investments–against businesses who will only succeed with “catastrophic costs to millions of people.”

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