Fossil Fuel Divestment Makes Financial Sense

By Calvin Beauchesne | Published: September 23, 2013

Source: Trent Arthur http://trentarthur.ca/fossil-fuel-divestment-makes-financial-sense/

It is morally wrong to make a profit off the fossil fuel industry. While violating indigenous and human rights all over the world, these companies are planning to extract 5 times more coal, oil, and gas than what scientists say we can afford to burn, and are blocking legislation that would set limits on greenhouse gas emissions.

That being said, many students say the immorality of investing in these companies is an even trade-off for the money being made from them, and that investments in the industry are necessary to pay for staff salaries, student scholarships, and infrastructure improvements. This argument, based purely on finance, might seem to be valid, given the financial success of the fossil fuel industry.

However, if we delve deeper into the issue, we can begin to see that there is much more to the story.

Surprisingly, fossil fuels make up only, on average, 5 percent of a college or university’s endowment, so divesting from those companies is not likely to have a significant impact on returns. In fact, investment management firm, Aperio Group, conducted an academic study entitled “Do the Investment Math: Building a Carbon Free Portfolio”, which showed that the “theoretical return penalty” of divesting from fossil fuels was only at 0.003 percent.

There is even academic literature to show that fossil fuel-free portfolios outperform those with fossil fuel investments. A report, “Beyond Fossil Fuels: The Investment Case For Fossil Fuel Divestment”, from Impax Asset Management Group, tracked the past seven years of international equity markets.

The results showed that if fossil fuel companies were removed from the MSCI World Index, then the resulting fossil fuel-free portfolio would have made 2.3% per year, while a portfolio with fossil fuel companies would achieve an annual net return of only 1.8% for the same period. Another paper published by index provider MSCI Inc. found results that almost mirror those in the Impax report.

In addition to investments, colleges and universities depend upon making money through tuition fees, as well as through fundraising efforts from alumni, corporate sponsorships, and research awards. The investment choices of an educational institution can have a great impact on both their fundraisers and future students.

“After we divested we started receiving donations online,” said Stephen Mulkey, President of Unity College in Maine, which was the first school in the United States to divest its holdings in fossil fuels. “We’ve seen an uptick in our inquiries from students. I think that will transform into an improvement in enrollment.”

Of course, money divested from fossil fuel stocks will be reinvested in something else. “You’re not divesting and then just forgoing those profits,” said Mulkey. “You divest from BP and invest in something else. You reanalyze your portfolio.”

Options for schools looking to reinvest will increase in the future. “The speed at which this campaign has spread is causing ripples in the investment community,” commented Andy Behar, CEO of the shareholder advocacy group As You Sow. “We anticipate more ‘carbon-free’ investment options coming onto the market over the coming months for endowments, foundations, and other institutional investors who want to move investment dollars to build a clean energy future.”

The best way for schools to reinvest would be to do so in their own campuses. Investing in solar panels, LEED-standard buildings, and efficient light bulbs, for example, would have significant environmental and long-term economic benefits.

In 2010, George Washington University in Washington, DC invested $141,000 to upgrade the lighting in their academic centre. Since completion, the project has been generating $100,000 per year in savings. It paid itself off in less than 2 years. With a projected lifespan of at least 8 years, the original $141,000 investment will generate about $800,000 in total savings.

A report published by Mark Orlowski, head of Sustainable Endowments Institute, showed that, on average, the annual return on investment for a thousand efficiency projects at campuses across the U.S. was just under 30 percent, much higher than any return rate on the stock market. The median payback was also shown to be just 3.5 years. “College trustees often think of a new lighting system as an expense, not an investment, but it’s not,” noted Orlowski. “If you invest a million dollars, and can expect to clear 2.8 million dollars over the next decade, then that’s the definition of fiduciary soundness.”

The writing is on the wall for fossil fuel divestment. Divesting would not only be a good moral choice for Trent University, but a sound financial one as well. What are we waiting for? You can find out more information about the Fossil Free Trent campaign by visiting facebook.com/fossilfreetrent.

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