Opponents of divestment from companies that sell fossil fuels argue that it is counter-productive in part because “…such a strategy would diminish the influence or voice we might have with this industry” (Faust, 2013). I have argued that shareholder advocacy and “engagement” don’t work when you are out to change core business practices. This is akin to asking Apple to stop selling iPads.
But are there any conditions under which shareholders, investors, and other stakeholders should actively engage with fossil fuel companies to mitigate the effects of climate change? In the context of divestment, what are the conditions under which a University can invest in fossil fuel companies without forsaking the role they have historically engendered as trustees of humanity’s capacities, values, and understanding?
Here are some criteria for making this judgement call, derived in part from Sachs and Sachs (2015) and Frumhoff et al. (2015), with my additions and modifications:
- Will the company publicly and clearly acknowledge that over the past several centuries there is strong and increasing evidence of long-term human-driven change in temperature that is superimposed on natural variability, and that the major factor underlying the increased human influence is the increase in greenhouse gas concentrations in the atmosphere, of which CO2 is the most important?
- Will the company publicly and clearly subscribe to the internationally agreed goal of limiting global warming to 2º Celsius above pre-industrial levels, and support state, federal, and international policies consistent with the 2 °C temperature target?
- Will the company ensure that its resources are not used to lobby against the effort to develop climate policies that are consistent with the 2 °C temperature target?
- Does the company have a history of minimizing risk to people and the environment throughout its supply chain?
- Does the company have a history of reasonable settlement for harm from its activities (or has it demonstrated a willingness to resist providing compensation)?
- Is the company now investing its rents from fossil fuel extraction in low carbon energy technologies and energy efficiency in appropriate proportion to the challenge of meeting the 2 °C temperature target?
- Can the company demonstrate that it remains a good investment, despite the transition to low-carbon energy sources? Examples here include full disclosure of the financial and physical risks of climate change to their business operations, demonstration of its own plans to make such a transition, or ending the research and development of unconventional fossil fuels whose carbon footprint science has shown to be inconsistent with the 2º limit (for example, oil sands, oil shale, and gas hydrates)?
University financial managers need to ask these hard questions, and objectively assess the response of companies. Fossil companies will form a continuum based on their response to these criteria. The University must draw a line somewhere that identifies companies that merit continued investment and those that do not. The line is subjective, but it must be drawn, because there is incontrovertible evidence that at least some fossil companies do no meet one or more of these criteria. Companies that fail to meet these criteria have no place in the portfolio of the University.
This approach will be antithetical to many in the divestment movement because it inherently assumes the possibility of “good” companies that sell fossil fuels. Here I am drawn to the work of John Hartwick, a resource economist at Queen’s University. Hartwick (and many other economists) tackled a vexing question: under what conditions can society be on a sustainable path while simultaneously being dependent on nonrenewable resources such as fossil fuels? The so-called Hartwick Rule holds that the answer is yes, provided that the rents from extracting the nonrenewable are invested in a manner that produces non-declining human welfare over time.
The analogy to the divestment issue is this: the scaffolding for the low-carbon energy system of the future is being built today with fossil fuels. In principle, fossil companies (including state-owned) contribute to sustainability if they invest their wealth earned from extraction today in helping to build the manufactured, social and natural capital that will sustain society in the future (and if they meet the other criteria). The criteria outline above form a means test in this regard, i.e., whether their investment behavior is sufficient in terms of quantity and quality.
Of course, consumers of fossil fuel energy also have an equally compelling obligation to reduce their carbon footprint.
- Faust, Drew. 2013. Fossil Fuel Divestment Statement, Office of the President, Harvard University.
- Frumhoff, Peter C. Richard Heede, and Naomi Oreskes. 2015. The climate responsibilities of industrial carbon producers, Climatic Change, 132(2),157-171.
- Hartwick, John M. 1977. Intergenerational Equity and the Investment of Rents from Exhaustible Resources, American Economic Review, 67, December, pp. 972-74.
- Sachs,Jeffrey D. and Lisa Sachs. 2015. The Responsible Investor’s Guide to Climate Change, project Syndicate, January 29, 2015.