Should you divest from coal and oil?
Students across the US are pushing college endowments to divest from fossil fuels. But endowments worry it will trim profits. Can you divest from coal and oil without hurting your portfolio?
When President Obama offered suggestions for how Americans could fight climate change in a major speech in June, he slipped in among his many ideas a six-letter word: divest.
It was a split-second statement in a lengthy discourse, but for a growing movement of activists on college campuses and elsewhere, it amounted to a full-blown White House endorsement. "I was watching the speech with fellow divestment activists, and when the president said 'divest,' our jaws dropped," recalls Daniela Lapidous, a student campaigner at Columbia University in New York. "If the president can recognize the facts about climate change and student power, we can make college presidents recognize them, too."
Like the divestment campaign against South African apartheid a generation ago, governments, institutions, and individuals today are pulling out of oil, gas, and coal stocks on ethical grounds. An investment in fossil fuel power companies, they say, is an investment in a risky, outmoded industry whose output accounts for 38 percent of US carbon emissions. Industry officials call the movement quixotic and, given energy's key role in the world economy, financially unwise. Even if individual investors wanted to decouple their portfolios from fossil fuels, is it too risky?
Traditional energy companies are among the world's most profitable and have long served as a stable foundation for retirees, pension funds, and endowments. Global demand for carbon-heavy coal and oil is rising, while global investment in renewable energy has largely plateaued recently. Pushing colleges – as well as other institutions – to divest from fossil fuels "is quite frankly an irresponsible activity," says John Felmy, an economist with the American Petroleum Institute (API), an industry trade group based in Washington. "The only folks who will suffer are poor students who won't have the returns."
Proponents of socially responsible investing disagree, saying that divestment doesn't have to hurt portfolio returns.
"It's a risk that can be managed easily," says John Streur, president of Portfolio 21, a boutique management investment firm in Portland, Ore., that specializes in environmentally and socially responsible investing. Stocks of fossil fuel companies account for just under 10 percent of global equity markets, leaving plenty of other options to assemble a well-diversified and attractive portfolio, he says in a telephone interview. "I can't match the market on a day-to-day basis, but over an intermediate and long term I can certainly find attractive replacement stocks that will do well and provide the same kind of exposure to economic cycles."
The divestment movement is spearheaded by environmentalist Bill McKibben and his organization, 350.org, which is working to convince colleges and cities to sell their holdings in 200 publicly traded companies that hold the vast majority of the world's proven coal, oil, and gas reserves.
More than 300 campuses in the United States have divestment campaigns, according to 350.org. Unity College in Maine and Hampshire College in Massachusetts have committed to divesting from fossil fuels. This past December, Seattle became the first US city to implement a divestment plan. The city council of Providence, R.I., voted 11 to 1 in June to do the same.
Such actions are drops in the bucket, industry officials point out. Fossil fuels are projected to make up 80 percent of world energy consumption through 2040, according to the US Energy Information Administration. "It's clearly an issue that is beyond something that can be affected by a campaign like this – one that's really a symbolic campaign," Alan Jeffers, a spokesman for ExxonMobil, a global oil company, says in a telephone interview. "Various organizations are being asked to divest from a company that produces a central product that is necessary for modern life."
Oil and gas stocks held by colleges and universities average 7.9 percent annual five-year returns, according to a study conducted by API last December. That's 172 percent higher than the average 2.9 percent returns on all US stocks and 68 percent greater than the average 4.7 percent returns on all college and university endowment assets.
Those numbers don't tell the whole story, divestment activists counter. The threat of future regulations, geopolitical instability, and overestimated reserves make fossil fuels financially risky, some investors say. "In a very realistic, investment-centric view, one should be concerned about owning fossil fuels," says Mr. Streur of Portfolio 21.
After hearing Mr. McKibben speak in Washington last fall, Krista Kurth and her husband took a hard look at where their own money was going. Within a few months, she had selected an investment manager who specializes in divestment and developed a transition strategy to move the Washington-area couple's investments out of fossil fuels.
It was the numbers – in her case, the nonfinancial ones – that made the case for Ms. Kurth, president of a family environmental-education foundation.
Most climate scientists say a safe level of atmospheric concentrations of carbon dioxide is 350 parts per million. In May, the number hit 400 p.p.m. "If that's the case, we've got to stop [fossil fuel companies]," she says via telephone. "We've got to get out of them now."