DivestUVA is a student-led group urging the University endowment to divest from investing in fossil fuel companies. The group should be applauded for being proactive and taking action to address the real and urgent threat posed by the climate crisis. Student activism is not only beneficial in reforming University practices, but also engenders greater civic engagement in society. Nevertheless, this is a misguided effort which not only does not help the cause, but actively causes damage. Here is why.
The crux of things is in the difference between boycotting and divesting. Let us consider Exxon as an example. Suppose the divestment movement succeeds brilliantly, convincing many institutions to divest from Exxon shares. So brilliantly, in fact, that Exxon share prices are cut in half. Success! We showed them!
But this is divestment, not boycotting. We all keep happily pumping Exxon gas into our cars, feeling vindicated by our divestment efforts. Exxon profits have not decreased due to divestment. Exxon continues distributing dividends as before, but now, the return for owning Exxon shares — known as the dividend yield — has doubled. Exxon shares are an amazing bargain, delivering double the yield. We “good people” might not be swayed by profits. But “bad people” exist. They care little about the climate crisis — they believe it is all a hoax, and are happy to make a buck.
If Exxon shares are such a bargain, the “bad people” begin buying them — after all, they are yielding better returns than other shares on the market due to the divestment effort. As a result of that buying, Exxon share price rises, and the old normal is back. The only difference achieved in the world is that the “good people” lost money while selling Exxon shares, and the “bad people” earned money while buying Exxon shares. Divestment became a mere transfer of wealth from the “good people” who care about the climate crisis and want to do something about it, to “bad people” who do not.
Ironically, not a single dollar lost by the divestors has gone to dealing with the climate crisis — no carbon was captured and no emissions were decreased. Instead, we just gave free money to people who disagree with us, incentivizing them to continue harmful patterns. The common sense perception that divestment will somehow pressure companies to amend their "evil ways" fails due to a simple fact — investment money is fungible. Unlike your spending dollars which, if diverted to green spending, are lost to polluting companies, investment dollars are merely replaced by other dollars. This powerful notion, underlying modern finance, does not depend on you personally being greedy. It is sufficient that someone, somewhere, is.
But Exxon shares changing hands leads to a second, possibly more insidious effect — the impact on corporate governance. Owning shares in a company not only gives one rights to dividends, but also voting rights. Corporations are in essence dollar-denominated democracies. The more shares you own, the more votes you get. Shareholders — especially large institutional shareholders such as the University of Virginia Investment Management Company — hold significant sway over major corporate decisions. They regularly decide on appointing directors to the board, the Chief Executive Officer’s compensation and a plethora of impactful business matters.
A divestment push is in effect an anti-voting rights push. It harms voting specifically at forums in which voting has an exceptional impact on the climate crisis — namely, the shareholder meetings of polluting companies. We must ask ourselves — have we abdicated those powerful forums? Who do we want owning Exxon, deciding which directors to appoint to its board and by which metrics is its CEO compensated? I, for one, would rather UVIMCO call the shots in a shareholder’s meeting, not the representatives of a wealthy foreign despot. It is one or the other. Markets abhor vacuum.
Many organizations have committed to divestment as public pressure calls for it. It is easier to capitulate than fight popular demand, and there is marketing value in doing so. There is a one time loss when divesting, but the public-relations benefits keep accruing. Finance professionals who understand the considerations presented above, believe in their ability to positively influence misbehaving companies and stand up to populist pressure should not be vilified.
While divestment is a misguided strategy, the same argument does not apply to measures aimed at reducing the demand faced by polluting companies. Demand is not fungible — it is cumulative. An economist-favorite alternative strategy to reduce demand is the voluntary purchase of carbon offsets. The University could become carbon-neutral tomorrow morning if it so chose. At current carbon prices and based on the University’s estimates of greenhouse gas emissions, the cost to do so would be $13 million per year.
Carbon offsets have gained public clout of being financial green-washing. Intuition might suggest they serve to placate one’s conscience, enabling further polluting consumption. Rather, they create strong cost-cutting incentives — to retrofit buildings, use more renewable energy and accelerate the transition to becoming fossil fuel free. Humans in general, and university administrators in particular, will go to great lengths to avoid spending millions of dollars a year. Thus, voluntary purchase of carbon offsets serves to hit fossil fuel companies at the demand side where it really matters. The fact that offsets serve to pay for protecting rainforests, renewable energy projects and direct CO2 capture is almost a side effect.
Averting the climate crisis is a generation-defining challenge. Divestment, while intuitive, is in fact counter-productive when one carefully examines its cascading effects in a market-based economy.
Robert Parham is an assistant professor of finance at the McIntire School of Commerce. He can be reached at email@example.com.