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Divesting: Profitable, Ethical, and Simply Common Sense

Since 350.org’s Fossil Free campaign ignited the nationwide movement for divestment from fossil fuels, calling on city and state governments as well as educational and religious institutions to quit profiting from climate wreckage, many have answered the call and are shifting investments away from fossil fuels into clean energy and energy efficiency stocks.

Now, significant evidence from both the public and private sectors continues to mount against fossil fuel investments, and a growing movement to divest is gaining serious traction among city governments, leading universities, and even among investment and asset management firms.

The movement also has the support of the White House, as President Obama made clear in his June speech at Georgetown University outlining a new plan to fight climate change.

“Invest. Divest. Remind folks there’s no contradiction between a sound environment and strong economic growth.” — President Obama

With a rhetoric that has myriad financial, ethical, and common sense reasons to divest from fossil fuels, we should remain optimistic that the movement will continue to see cities, states, and large institutions divesting from fossil fuels.

Though it still may be too early to tell whether or not the political impact of the movement will be strong enough to loosen the stranglehold the fossil fuel industry has on our government, evidence keeps mounting in favor of divestment because it’s the right and financially-smart thing to do.

Ten Cities Lead the Way With Fossil Fuel Divestment Commitments

Though the Fossil Free movement is just over a year old, already ten U.S. cities have committed to divesting from the 200 publicly-traded companies that hold the vast majority of the world’s coal, oil, and gas reserves. Last fall, Seattle started the trend when Mayor Mike McGinn committed to keep his city’s funds out of fossil fuels and to push the city’s $2 billion pension fund to pursue divestment as well.

Since then, some of the most innovative cities in the country including San Francisco, CA, Boulder, CO, Eugene, OR, Madison, WI, and Ithaca, NY have all agreed to divest from fossil fuel companies.

These leading cities are sending a powerful message to the fossil fuel industry, but they also are sending an equally important message to other cities and states: it’s wrong to benefit from the destruction of the planet, and there should be no excuse for other cities to keep dragging their feet on fossil fuel divestment.

College Campuses Pressure Endowment Funds to Divest

The Fossil Free movement originated with a focus on getting large educational institutions to divest from fossil fuels, and now more than 300 college campuses are taking the lead. The movement at the college level is largely being driven by student chapters that are dedicated to getting their school’s endowment funds to immediately freeze new investment in fossil fuel companies and to divest existing holdings in these companies over the next five years.

Students are ramping up pressure on their schools in the hopes that doing so will show the world that if powerful institutions on the cutting edge of science are divesting, so too should other organizations and institutions.

Despite pressure from students, many university administrations have rejected divestment as a viable option because the purpose of the endowment is to generate returns that help pay for running the campus, and restrictions on specific investments require a compelling case that the company is engaged in practices opposed to the moral and ethical principles of the university.

Yet that is precisely why many students believe universities should divest–because climate change is a serious, moral issue.

Besides, the financial risk associated with divesting may not be as dangerous as some university leaders assume. In some cases, divesting may even benefit an endowment’s bottom line.

According to a study commissioned by the Associated Press, a $1 billion endowment that includes investments in fossil fuels companies would have grown to $2.14 billion over the past decade. If the endowment had excluded fossil fuel investments, it would have increased to $2.26 billion.

Assuming an average tuition of $35,000, the difference would have been enough to fund 850 four-year scholarships.

And college endowment managers argue that fossil fuel investments are necessary to pay for running the campus? Students find that logic hard to buy into when they continue to hear how divestment in fossil fuels is a financially smart move to make. It’s no wonder Fossil Free student chapters keep popping up on college campuses across the nation.

Leading Investment Firm Shows Funds Divested From Fossil Fuels Will Perform Better

The final piece of the divestment puzzle–what may really be behind the surging divestment movement–is reports from investment and asset management firms as well as prominent economists that investment funds divested from fossil fuels will simply perform better.

Just recently, Impax Asset Management, which won the Sustainable Investor of the Year accolade at the FT/IFC Sustainable Finance Awards last month, assessed the relative performance over the last seven years, in terms of returns and volatility, of four alternative portfolio structures.

Its analysis found that eliminating the fossil fuel sector from a global benchmark index would, over the past seven years, have actually had a small positive return effect.

Furthermore, it shows that in place of fossil fuel stocks, energy portfolios consisting of energy efficiency and renewable energy stocks would have improved returns with limited additional tracking error.

This conclusion supports a call issued last Friday by Lord Nicholas Stern, author of the influential Stern Review on the Economics of Climate Change, who said

“Over the next four decades, Europe, like all parts of the world, must, if future prosperity is to be protected from the threats of a hostile physical environment, turn off a high-carbon economic path that is heavily dependent on oil, coal and gas. It must instead create a new sustainable growth story built on clean sources of energy.” — Lord Nicholas Stern

With last week’s news of two more reputable financial institutions–Norwegian financial services group Storebrand and Dutch bank Rabobank–announcing they will pull out of fossil fuel investments, it’s clear that divestment from fossil fuels is smart investment strategy–not just the ethical thing to do.

What remains to be seen is whether or not the stream of financial advice and mounting public pressure in favor of divestment will be able to convince even more institutions to quit benefiting from the coal, oil, and gas industries.

But with the increasing risks of tighter regulations on carbon dioxide emissions and falling demand for fossil fuels, these reserves could become substantially less valuable, or even “stranded,” and rendered worthless. If (or when) that happens, there’s no question that public and private institutions will divest.

 

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